Sequence of returns risk, explained with numbers

The short answer

Sequence of returns risk is the risk that bad market years come at the wrong time, usually right after you start withdrawing. Two retirees with exactly the same average return can end up worlds apart: in our example, one runs out of money in year 25 and the other finishes 30 years with more than they started.

The order of returns only matters when money flows in or out of your portfolio. That's why it hits hardest in early retirement and in Barista FIRE, and why it matters less, but still matters, once you reach Coast FIRE and stop saving.

When order matters, and when it doesn't

Start with a surprising fact. If you invest a lump sum and never add or take out a dollar, the order of your returns makes no difference at all. A 20% loss followed by a 25% gain leaves you exactly where a 25% gain followed by a 20% loss does. Growth multiplies, and multiplication doesn't care about order.

In the example below, $1,000,000 left untouched for 30 years grows to $3,172,724 whether the bad years come first or last. The two paths look very different along the way, but they end at the same number.

Order starts to matter as soon as cash moves:

• When you're adding money, early losses help a little. Your contributions buy in at lower prices, and the losses hit a smaller balance.
• When you're taking money out, early losses hurt a lot. You sell investments at low prices to pay the bills, and those dollars aren't there for the recovery.

Two retirees, same returns, opposite order

Here's an illustrative example we built for this guide. These are made-up returns, not a forecast or a slice of real history. Two people retire with $1,000,000 each and withdraw $40,000 a year, a 4% withdrawal rate. Everything is in today's money: the returns are after inflation, so $40,000 always buys the same amount.

Both get the same 30 yearly returns, which average 4.2% a year (3.9% compounded). Retiree A gets them in one order, starting with three losing years: −19.5%, −11.5% and −7.5%. Retiree B gets the same list reversed, so those three losses come at the very end. Each withdrawal is taken at the start of the year.

Retiree A's money runs out in year 25. At the start of that year only $22,991 is left, not enough for a full withdrawal. Retiree B never comes close to trouble. Even after taking the same three losses at the end, B finishes with $1,546,551. Same returns, same spending, same starting balance. The only difference is the order.

The full list of A's yearly returns, in order: −19.5, −11.5, −7.5, 2.5, 6.5, 1.5, 7.5, 3.5, 5.5, 8.5, 0.5, 4.5, 6.5, 2.5, 9.5, 3.5, 1.5, 5.5, 7.5, 4.5, 6.5, 2.5, 8.5, 4.5, 10.5, 3.5, 5.5, 11.5, 13.5 and 15.5 percent. B's list is the same, backwards.

Why the early years do the damage

In year 1, Retiree A takes out $40,000 and then loses 19.5% on what's left. After three bad years, A has $562,888. The $40,000 withdrawal is now 7.1% of the portfolio instead of 4%. Even when good years arrive, they compound on a much smaller base, while the withdrawals stay the same size. The portfolio never catches up.

Put the same three losses side by side. For Retiree A, the first three years take the portfolio from $1,000,000 to $562,888, a 44% drop, with 27 years of withdrawals still to fund. For Retiree B, the same three losses at the end take the balance from $2,478,945 to $1,546,551, a 38% drop, with nothing left to pay for. The losses are the same size. What differs is how much future they eat into.

Retiree B spends the early years withdrawing from a growing pile. By the time the losses arrive, $40,000 is less than 2% of the balance, and the losses barely matter.

This isn't only a textbook risk. In the historical data from NYU Stern, US stocks (the S&P 500 with dividends, before inflation) lost money four years running from 1929 to 1932, including −43.84% in 1931. They fell 14.31% in 1973 and 25.90% in 1974, lost money in 2000, 2001 and 2002, and fell 36.55% in 2008. Someone who retired just before one of those stretches lived Retiree A's story. The classic research on the 4% rule was built around surviving exactly those bad starting years.

Sequence risk while you coast

Once you reach Coast FIRE, you stop adding money but you don't withdraw any either. So does the order of returns still matter? Less than you might think, but the timing of a crash still changes what you can do about it.

We ran our calculator engine on our standard example. Alex is 32, has $185,000 invested, saves $1,500 a month, plans to spend $40,000 a year from age 60, and expects a 7% return with 2.5% inflation (4.39% a year after inflation). Alex reaches Coast FIRE in 7 years 7 months, at 39, with about $417,000, which grows to about $1,003,000 by 60. Now add a one-time 25% fall, with every other year earning the expected return:

Three things stand out:

• While coasting, the timing doesn't change the end balance. A 25% fall at 40 or at 59 leaves the same $752,516 at 60, because no money moves in between.
• Early is easier to fix. A fall soon after you stop saving gives you 20 years to notice and respond. A fall in your last year leaves only one option: work longer or spend less.
• Just before the coast date, the fall is absorbed by saving. Alex simply keeps contributing, buying at lower prices, until the portfolio catches the coast line again.

A real crash is often followed by some recovery, which this example deliberately leaves out. Our guide to life after Coast FIRE walks through how to decide when to start saving again after a bad year.

Who it hurts most

• Early retirees. A 40- or 50-year retirement has more years of withdrawals for a bad start to ripple through. Research on long retirements from Early Retirement Now finds safe withdrawal rates for 60-year horizons are more than a percentage point below those for 30 years.
• Barista FIRE. You start withdrawing years before full retirement, so a crash in the first few years hits a portfolio that's already being drawn down. See Coast FIRE vs Barista FIRE.
• People just past their coast date. Your portfolio is right on the line, with no cushion. In our simulations, stopping exactly on the coast date reaches the goal in only about half of markets.
• Anyone in the last few years before retirement. Your balance is at its largest, and there's little time to make up a loss before withdrawals begin.

It matters least for young savers far from retirement. If you're 25 and adding money every month, a crash mostly means your contributions buy more for a while. Your balance is small compared with what you'll add over the coming decades, so a bad early sequence is closer to a sale than a disaster. That's little comfort in the moment, but it's why the same 30% fall means very different things at 25, at 39 and at 59.

Ways to soften it

You can't choose the order of your returns, but you can make your plan less fragile. Most fixes work the same way: they take less money out of the portfolio in the years right after a fall, so fewer investments are sold at low prices. Here's what a few changes would have done for Retiree A, the unlucky one from the illustrative example:

A lower withdrawal rate

The most reliable fix is a bigger margin. Dropping from 4% to 3.5% saved Retiree A. The catch is a larger target: at 3.5%, $40,000 of spending needs about $1,143,000 instead of $1,000,000. The FIRE number calculator shows your number at several withdrawal rates.

Flexible spending

Trimming spending by 10% when the portfolio is down kept A's money going for 30 years, though with almost nothing left. In this sequence the portfolio never got back above $1,000,000, so A spent $36,000 from year 2 onward. Knowing which costs you could cut is a real safety net.

Part-time income early on

Earning $20,000 a year for the first five years halved A's withdrawals exactly when the losses hit. Doing it for only three years helped less: the money ran out in year 29. The first years count most.

A cash or bond buffer

Some retirees keep one to three years of spending in cash or short-term bonds, and draw on it after a bad year so they don't have to sell stocks low. It works by avoiding forced selling, not by earning more. Over long periods cash usually earns less than stocks, so a large buffer has a cost. We didn't model this one, because the result depends heavily on the rules you choose for refilling it.

Saving a little longer before you coast

For coasters, the simplest buffer is time. Each extra year of contributions after the coast date raises the share of simulated markets in which the plan works. Our guide to Monte Carlo simulations shows by how much, year by year.

Sources

The two-retiree example is illustrative: we chose the returns to show the effect, and computed the balances with a simple year-by-year loop. The Alex figures come from our calculator engine, explained on our methodology page. Historical returns and research:

1. Historical returns on stocks, bonds and bills (annual data from 1928). Aswath Damodaran, NYU Stern School of Business, updated January 2026. Our calculations from this data: from 1928 to 2025, US stocks (the S&P 500 with dividends) returned about 10% a year, and a mix of 75% stocks and 25% 10-year Treasury bonds returned about 9% a year with yearly swings (standard deviation) of about 15%.
2. Determining Withdrawal Rates Using Historical Data. William P. Bengen, Journal of Financial Planning, 1994. The original 4% rule: a 4% first-year withdrawal, raised each year with inflation, lasted at least 30 years in every historical US period studied.
3. Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable. Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz, AAII Journal, 1998. The “Trinity study”: withdrawals of 3% to 4% rarely ran out of money over periods of up to 30 years with a mix of stocks and bonds.
4. The Ultimate Guide to Safe Withdrawal Rates, Part 1: Introduction. Early Retirement Now, 2016, updated 2024. Safe withdrawal rates for 60-year retirements average more than a percentage point below 30-year ones; it concludes that “3.5% is the new 4%.”
5. What’s a Safe Retirement Withdrawal Rate for 2026?. Morningstar. Puts a safe starting withdrawal rate at 3.9% for a 30-year retirement, with a 90% chance of success.