Sequence of Returns Risk

Contents

1. What the phrase means
2. Why the years around retirement carry the weight
3. What the planning literature does with it

Brent O’Mara has celebrated retirements with clients, and retirement is the transition in which the timing of events matters as much as their size. The idea has a short written history. In October 1994 a financial planner named William Bengen published in the Journal of Financial Planning the research behind what became known as the 4 percent withdrawal rule, CNBC recounts, having set out to answer a question his clients kept asking, how much they could spend once they stopped working, and found no expert guidance to give them.⁵ In January 2011 a New York Times blog carried a planner’s argument that the conventional savings plan quietly depends on the market in the final decade before retirement.⁴ By September 2024 a continuing education listing at the CFP Board named sequence risk among the key retirement risks, calling it newly emergent.⁷ In July 2025 the Times reported that only 22 percent of retirees followed any kind of withdrawal plan at all,³ and in April 2026 Money published the worked example that most explanations of the subject now use.¹

What the phrase means

Money defines sequence of return risk as the danger that withdrawals during a period of poor market results early in retirement can hurt a portfolio for years afterward.¹ The mechanism is simple once withdrawals are in the picture. A second Money article explains that a retiree has to withdraw money for living expenses regardless of whether the market is up or down in a given year, so a notable decline in the first or second year of retirement forces the sale of more shares to raise the same amount of cash, and fewer shares remain to participate in whatever recovery follows.² Bengen puts it in one sentence in a later CNBC interview: a substantial market decline early in retirement drives down the sustainable withdrawal rate because it takes a lot out of the portfolio at the same time the retiree is drawing from it.⁶

The worked example that Money reproduces comes from a large investment firm. Two investors retire with one million dollars each; one experiences a 15 percent decline in the first two years of retirement and the other experiences the same 15 percent decline in the tenth and eleventh years; after eighteen years the first portfolio can be depleted while the second still holds about 400,000 dollars.¹ The averages are identical. What differs is the order, and the order is something no one chooses.

Figure

How retirees handle withdrawals

of retirees follow any kind of withdrawal plan

22 percent

of Americans say they worry more about running out of money in retirement than about dying

Nearly two thirds

of retirement age Americans say they have to work for financial reasons

About 10 percent

Why the years around retirement carry the weight

The 2011 argument explains why the exposure begins before the first withdrawal. Michael Kitces, then director of research at an advisory firm, observed on his blog that the conventional advice, save a respectable share of income and invest in a diversified portfolio, is more speculative than it sounds, because the plan relies on compounding to push the saver to the finish line, with savings expected to double in real terms during the last decade of work.⁴ The problem, he said, is insidious because it happens regardless of whether a person saves for twenty, thirty, forty or fifty years, since recommended saving is always calculated in a way that requires the portfolio to double in the final stretch; a poor decade just before retirement therefore misses the target by a wide margin.⁴ The last ten working years therefore carry a disproportionate share of the plan’s outcome, and the same exposure follows the retiree into the first ten years of withdrawals, which is why the phrase names a sequence rather than a single bad year.

On the other side of the retirement date the exposure continues. The New York Times reported in 2025 that taking withdrawals during just a few years of down markets early in retirement can put a retiree at risk of running out of money, that almost two in three Americans say they are more afraid of running out of money than of dying, and that about half of retirees follow no system at all when drawing down their savings.³ Bureau of Labor Statistics data cited in the same piece show people aged 65 and older leaving the workforce when stocks rise and rejoining it when markets drop, while about 10 percent of retirement age Americans say they work because they have to.³ Bengen’s original research, as the Times summarizes it, looked at market results back to 1926 and found that even across the thirty worst years for stocks, beginning in October 1968, a retiree who withdrew no more than 4 percent of the balance in the first year and adjusted later withdrawals for inflation would still have had money after thirty years.³ Inflation is the other half of the danger: Bengen calls it the enemy retirees should fear most, and says that either a deep market decline or high inflation early in retirement can shorten a portfolio’s life.⁵ That side of the subject has its own entry on a long retirement under inflation.

Figure

An order of withdrawals the article describes

1. 01
   FirstThe taxable brokerage account, where gains are taxed as capital gains
2. 02
   SecondTax deferred accounts, withdrawn gradually to soften the required distributions that begin at age 73
3. 03
   ThirdRoth accounts, from which withdrawals are tax free

What the planning literature does with it

The responses in the sources are of three kinds. The first is a reserve. Money describes retirees holding cash to cover one to two years of expenses so that they are not forced to sell during a downturn, reducing withdrawals in poor years where possible, and selling positions that have gained before those that have lost.¹ The second Money piece suggests enough cash for at least a year of living expenses and a written withdrawal strategy for the first five years of retirement.² That article lists an unaddressed sequence risk as one of three signs that a retirement may be in trouble even when the account balance looks fine, the other two being more inflation exposure than the retiree realizes, since the usual rate of 2 to 3 percent can jump, as it did to 9 percent in 2022, and too much reliance on one source of income among Social Security, a pension and an investment account.² Its practical point is that the holdings a retiree will not need to sell for several years can stay invested, since the article regards them as the part of a portfolio meant to grow over a long retirement, rather than being moved wholesale into cash.² The second response is the order in which accounts are tapped. Money lays out a general sequence, taxable accounts first, then tax deferred accounts whose withdrawals count as ordinary income and whose required minimum distributions begin at 73, then Roth accounts last, while noting that the right method comes down to each person’s tax situation and that lower taxes early in retirement give money more time to compound.¹

The third response is the framework. The CFP Board listing describes two schools of thought in retirement income, probability based approaches and safety first approaches, and names longevity, market and sequence risk and personal spending shocks as the risks each must handle with different tools.⁷ Bengen himself, in the 2025 interview, urges retirees to weigh their whole financial picture, the length of the planning horizon, whether assets are taxable, whether money is meant for heirs, how often the portfolio is rebalanced and when withdrawals are taken, rather than apply one number.⁵ The rule itself, its assumptions and its critics are covered under the four percent rule, and the question of how long a plan must last under longevity and planning horizons. Because the order of withdrawals touches income tax, the taxation of Social Security benefits and the treatment of inherited accounts, the choice rests with qualified professionals in finance, tax and law rather than with any general sequence, since it depends on individual circumstances.

The comparison that every account of the subject comes back to is the one in the figure below, two identical portfolios, two identical losses, and eighteen years that end in very different places because of the year in which the loss arrived.

Figure

The same loss in two different years

	A 15 percent decline in years one and two	A 15 percent decline in years ten and eleven
Starting balance	One million dollars	One million dollars
Balance after 18 years	Depleted	About 400,000 dollars
Why	Withdrawals and losses arrive together, leaving fewer shares for any recovery	Years of withdrawals from a growing balance came before the decline