Sequence of Returns Risk Visualizer

What is Sequence of Returns Risk?

While the average return of the stock market over the long term might be positive, the timing of those returns matters immensely when you start withdrawing money. Sequence of Returns Risk (SRR) is the danger that a market downturn occurs early in your retirement. For a plain-English walkthrough of why "average" returns can mislead you, read our sequence of returns risk guide. Considering a specific withdrawal rate? Check our 4% Rule Calculator.

If your portfolio drops significantly just as you begin withdrawals, you are forced to sell more shares (at lower prices) to meet your income needs. This permanently depletes the portfolio's ability to recover when the market eventually bounces back, dramatically increasing the chance of running out of money.

How This Visualizer Works (Monte Carlo Simulation)

This tool uses a Monte Carlo simulation to model this uncertainty. Instead of assuming a steady average return every year, it runs thousands of randomized simulations based on your inputs:

• Average Return (Geometric Mean): The expected long-term compounded performance. Not sure what return to expect? Our Investment Fee Analyzer can help you account for costs.
• Volatility (Standard Deviation): How much the returns typically vary year-to-year. Higher volatility means wider swings (bigger booms and busts) and increased SRR.

Each simulation represents one possible "retirement story," with a unique sequence of returns. By analyzing the outcomes of all trials, we can estimate the probability of success.

Comparing Withdrawal Strategies

The visualizer compares two approaches to managing withdrawals in the face of market volatility:

1. Strategy A (Fixed Withdrawal): This is the classic approach. You withdraw the initial amount in Year 1, and increase that amount by inflation every subsequent year, regardless of market performance. This provides steady income but is highly susceptible to SRR.
2. Strategy B (Flexible Guardrails): This approach adjusts spending based on portfolio performance. We use "Guardrails":
   • If the portfolio does well, you get a raise.
   • If the portfolio struggles, you take a pay cut.
   This flexibility helps protect the portfolio during downturns (by spending less) and allows participation in upturns, generally leading to a higher probability of success, though with variable income.

Note that with typical inputs, the guardrails strategy can show both a higher success rate and higher average spending than the fixed strategy. That isn't a free lunch: because markets rise more often than they fall, the "raises" compound in most simulated retirements, while the occasional cuts do the heavy lifting of protecting the portfolio in bad sequences. The price you pay is income that varies from year to year — including real cuts to your standard of living mid-retirement in the scenarios where things go badly.

Interpreting the Results

The key metrics are the "Probability of Success" (the percentage of trials where the portfolio lasted the entire duration) and the "Median Final Balance." Average annual spending is reported in today's dollars (each year's withdrawal is deflated back by your inflation assumption), so it can be compared directly to the initial withdrawal you entered. The chart shows the range of potential outcomes, illustrating the uncertainty inherent in retirement planning.