Sequence of Returns Risk:
The Retirement Killer

You can get your average return right and still run out of money. It’s not about what you earn, but when you earn it.

The Flaw of Averages

When planning for retirement, most people plug an "average return" (like 7% or 8%) into a calculator and assume a smooth ride. But the stock market doesn't move in straight lines.

Sequence of Returns Risk (SRR) is the danger that you experience bad investment returns specifically early in your retirement when you start withdrawing money.

If the market drops 20% the year you retire, and you are simultaneously selling stocks to pay for groceries, you are digging a hole your portfolio may never climb out of. This is called "reverse dollar-cost averaging."

Scenario A: The Lucky Retiree

Returns: +20%, +10%, -10%

The portfolio grows early, creating a buffer. Withdrawals are taken from gains. The portfolio survives easily.

Scenario B: The Unlucky Retiree

Returns: -10%, +10%, +20%

The portfolio shrinks early. Withdrawals deplete the principal. Even with the same average return later, the money is gone.

Stress Test Your Portfolio

Don't rely on averages. Run thousands of market simulations to see your probability of success in worst-case scenarios.

Run Monte Carlo Simulation

The "Retirement Red Zone"

The most critical period is the 5 years before and the 5 years after retirement. This is the "Red Zone." During this decade, your portfolio is at its largest (so percentage losses are huge in dollar terms), and you have the least amount of time to recover.

Once you make it past this decade without a major crash, the risk of running out of money drops significantly. This is often why the 4% Rule is considered safe for 30-year horizons, but riskier for 50-year horizons.

Strategies to mitigate SRR

  1. Flexible Spending (Guardrails): The most effective defense. If the market drops, you tighten your belt and withdraw less. If the market booms, you give yourself a raise. Our SRR Visualizer lets you model this exact strategy.
  2. The Cash Cushion (Bond Tent): Hold 1-3 years of living expenses in cash or short-term bonds. If the market crashes, spend the cash. Do not sell stocks while they are down.
  3. One More Year: Working just one extra year can drastically reduce SRR by shortening the withdrawal period and allowing the portfolio to recover or grow. See the impact with the "One More Year" Calculator.