Sequence of Returns Risk: The Hidden Threat to Your Retirement Portfolio
CORE INSIGHTS
- Timing is Everything: Market losses early in retirement are one of the biggest threats to whether savings last 25–30+ years.
- The Depletion Trap: Withdrawals during downturns lock in losses, leaving less capital to recover later.
- Mitigation Strategy: A cash buffer and flexible spending rules are the most reliable defenses against SORR.
You did the hard part—saving and investing for decades. But once withdrawals begin, the order of market returns matters far more than the average return. This is Sequence of Returns Risk (SORR): the risk that a bad market early in retirement permanently damages your portfolio’s ability to last.
The Critical Sequence Scenario:
Two retirees each start with $1 million and earn the same 5% average return over 20 years.
• Retiree A: suffers a deep crash in Year 1.
• Retiree B: suffers the same crash in Year 18.
Even with identical averages, Retiree A may run out of money because early withdrawals lock in losses, while Retiree B likely survives due to strong early returns.
Two retirees each start with $1 million and earn the same 5% average return over 20 years.
• Retiree A: suffers a deep crash in Year 1.
• Retiree B: suffers the same crash in Year 18.
Even with identical averages, Retiree A may run out of money because early withdrawals lock in losses, while Retiree B likely survives due to strong early returns.
Visualizing the Impact of Timing
The chart below shows how two portfolios can end in completely different places, even when their long-run average return is the same.
*Illustrative example to demonstrate sequence risk. Not a forecast.*
“The highest-risk window is usually the first 5–10 years of retirement. If you must sell stocks at low prices to fund spending, you shrink the base that needs to rebound.”
Strategic Defenses Against SORR
| Defense Mechanism | How It Mitigates SORR | Account/Asset Type |
|---|---|---|
| Cash Buffer (Bucket 1) | Holds ~1–3 years of essential expenses to avoid selling stocks in a bear market. | Savings, HYSA, CDs, short-term Treasuries |
| Dynamic Withdrawals | Sets spending “guardrails.” If portfolio drops, withdrawals reduce automatically. | Works across all accounts |
| Balanced Allocation | Bonds provide stability to sell when stocks are down. | Bond ETFs, individual bonds |
Actionable Steps for Managing Sequence Risk
1
Build your cash bucket first
Before pulling from stocks, cover the next 12–36 months of essential spending with safe liquid assets. This buys time for equities to recover.
Before pulling from stocks, cover the next 12–36 months of essential spending with safe liquid assets. This buys time for equities to recover.
2
Plan for “go-lean” years
Pre-decide which discretionary expenses can pause during downturns (travel, big purchases). Flexibility is a real asset.
Pre-decide which discretionary expenses can pause during downturns (travel, big purchases). Flexibility is a real asset.
3
Use Roth conversions strategically
Roth assets can fund bear-market withdrawals tax-free, which helps avoid selling depressed stocks in traditional accounts.
Roth assets can fund bear-market withdrawals tax-free, which helps avoid selling depressed stocks in traditional accounts.
The Bottom Line: How to Defend Your Nest Egg
- Primary goal: avoid being forced to sell stocks at a loss early in retirement.
- Best toolset: a cash buffer + flexible/guardrail withdrawals + bonds as ballast.
Frequently Asked Questions
Q. What is Sequence of Returns Risk (SORR)?
Sequence of Returns Risk (SORR) is the danger that poor market returns early in retirement can deplete a portfolio faster than expected because withdrawals lock in losses. The timing of losses becomes more important than the average return.
Q. How does SORR differ from market volatility?
Volatility measures price swings. SORR is the risk that those swings occur when you are withdrawing money, leaving less capital to recover later.
Q. What is the best way to mitigate Sequence Risk?
Common approaches include keeping a cash/short-term bond buffer for 1–3 years of spending and using flexible or guardrail withdrawal rules to reduce spending during downturns.
Disclaimer: This article is for educational purposes only. Sequence of Returns Risk varies by market conditions, portfolio mix, and spending needs. Consult a qualified professional for personalized planning.