See how the order of returns affects a portfolio with withdrawals. Compare bad years first vs good years first—same average return, different outcome.
Sequence of Returns Risk
See how the order of returns affects a portfolio with withdrawals. Compare "bad years first" vs "good years first"—same average return, different outcome. Critical for retirement planning.
Understanding Sequence of Returns Risk
Why the order of returns matters when you withdraw
Bad years first
You withdraw, then the portfolio drops. The smaller base has less chance to recover when good years come later. Can lead to early depletion.
Withdrawals lock in losses when you sell after a down year.
Less capital left to benefit from later good returns.
Classic sequence-of-returns risk: early bear market in retirement.
Mitigate with a cash buffer or lower initial withdrawal rate.
Good years first
Portfolio grows early; you withdraw from a larger base. When bad years come later, you have more cushion. Often leads to higher terminal value.
Early growth compounds; withdrawals take a smaller % of a larger portfolio.
Later bad years hurt less when you have more capital.
You cannot control the order—plan for the worst sequence.
Use this calculator to see how much difference order makes.
Bad first: half the years at "bad" return, then half at "good" return
Good first: half at "good" return, then half at "bad" return
Withdrawal is taken at the start of each year, then return is applied to the remaining balance. If balance after withdrawal is zero or negative, the portfolio is depleted. Same set of returns, different order—terminal value and depletion risk differ.
The average return over the period is the same for both sequences; only the order changes. When you withdraw, order matters because losses early reduce the base for future growth.
Sequence of Returns Risk: Why the Order of Returns Matters When You Withdraw
When you withdraw from a portfolio each year (e.g. in retirement), the order in which returns occur matters. Bad returns early can deplete the portfolio even if the same average return occurs in a different order. This calculator compares "bad years first" vs "good years first" so you can see the impact.
Sequence of returns risk is the risk that the order in which investment returns occur will hurt your outcome when you are taking withdrawals. If you get bad returns early (e.g. a bear market in the first years of retirement), you withdraw from a shrinking portfolio and have less capital left to benefit from later good returns. The same average return in a different order (good years first, then bad) can leave you with much more.
Retirement Context
This risk is especially relevant in retirement, when you are no longer adding to the portfolio and instead withdrawing each year. Early bad returns can permanently reduce sustainability; a cash buffer or flexible spending can help mitigate.
How It Is Calculated
We simulate two sequences over the same number of years: (1) bad years first—half the years at the "bad" return, then half at the "good" return; (2) good years first—half at good return, then half at bad. Each year we subtract the withdrawal, then apply the return to the remaining balance. We compare terminal values (or year of depletion if the portfolio runs out).
Withdrawal Timing
Withdrawal is taken at the start of each year; then the return is applied. So after a bad year, you have less to withdraw from the next year—and if you keep withdrawing the same amount, you can deplete the portfolio sooner when bad years come first.
Why It Matters
You cannot control the order of returns. Planning for sequence risk means: holding a cash buffer (e.g. 1–2 years of spending) so you do not have to sell in a down year, using a lower initial withdrawal rate, or reducing spending after a bad year. This calculator shows how much difference the order can make so you can stress-test your plan.
Using This Calculator
Enter initial portfolio, annual withdrawal, number of years, and "bad year" and "good year" returns (%). The calculator splits years in half: bad first vs good first. It reports terminal value for each sequence and the difference. If the portfolio is depleted, it shows the year of depletion.
What to Enter
Use a conservative "bad" return (e.g. -10% or -20% for a severe down year) and a "good" return (e.g. +10% or +15%). Years = your planning horizon. Withdrawal = annual spending from the portfolio. For inflation-adjusted planning, use real returns and real withdrawal.
Conclusion
Sequence of returns risk can make or break a retirement plan when you withdraw each year. This calculator shows the impact of bad years first vs good years first so you can see how much order matters. Use it to stress-test your withdrawal rate and to justify holding a cash buffer or using flexible spending.
Pair it with the Compounding Loss from Early Withdrawal calculator to understand the cost of pulling money out of the market early, and with retirement and emergency fund tools to build a robust plan.
In summary: sequence of returns risk is the risk that bad returns early (when you are withdrawing) will permanently reduce portfolio sustainability. This calculator shows how much difference the order of returns can make so you can plan for it with a buffer or flexible spending.
Frequently Asked Questions
Common questions about sequence of returns risk
What is sequence of returns risk?
The risk that the order in which returns occur will hurt your outcome when you are withdrawing. Bad returns early shrink the portfolio before it can recover; good returns early grow the base. Same average return, different terminal value.
Why does order matter when I withdraw?
When you withdraw each year, you lock in the effect of that year's return. After a bad year, you have less capital; if you keep withdrawing the same amount, you have less left to benefit from future good years. So bad years first hurt more than good years first.
How is it calculated here?
We use two sequences: half the years at a "bad" return and half at a "good" return. Bad first = bad years then good years; good first = good years then bad years. Each year we subtract the withdrawal, then apply the return. We compare terminal values (or year of depletion).
What can I do to reduce sequence risk?
Hold a cash buffer (1–2 years of spending) so you don't have to sell in a down year; use a lower initial withdrawal rate (e.g. 4% or less); or reduce spending after a bad year. Some retirees use a flexible spending rule tied to portfolio performance.
Does this apply only to retirement?
It applies whenever you are withdrawing from a portfolio (e.g. retirement, a trust, or a endowment). It is most discussed in retirement because that is when many people switch from accumulating to withdrawing.
What if my portfolio is depleted?
The calculator shows "depleted in year X" when the portfolio cannot cover the withdrawal. That illustrates the worst case when bad years come first. Use a lower withdrawal or more conservative returns to test sustainability.
Why use only two return levels (bad and good)?
To keep the model simple and illustrate the effect. Real returns vary every year; the point is that order matters. You can run the calculator with different bad/good values to see how sensitive the result is.
Should I use nominal or real returns?
For long horizons, use real (inflation-adjusted) returns and real withdrawal so you are planning in today's dollars. For a quick illustration, nominal is fine. Use the Inflation-Adjusted Return calculator to convert nominal to real.
How does this relate to early withdrawal?
Sequence risk is about the order of returns when you withdraw regularly. Early withdrawal (pulling a lump sum out) loses the future compounding on that amount—see the Compounding Loss from Early Withdrawal calculator. Both concepts matter for retirement and decumulation.
Who should use this calculator?
Anyone planning retirement withdrawals, or already withdrawing, who wants to see how much the order of returns can affect terminal value and depletion risk. Advisors and educators can use it to explain sequence risk to clients.
What is a "bad" or "good" year?
You enter two return levels: a "bad" year (e.g. -10% or -20% for a down year) and a "good" year (e.g. +10% or +15%). The calculator uses half the years at each level and compares bad-first vs good-first order. Use returns that match your asset mix and stress-test scenario.
Usage of this Calculator
Practical applications
Who Should Use This Calculator?
Retirees and Near-RetireesTo see how much the order of returns can affect portfolio sustainability and to stress-test your withdrawal rate.
Financial Advisors & EducatorsTo illustrate sequence of returns risk and to justify cash buffers or flexible spending rules.
Retirement PlannersTo test whether your nest egg can survive a bad sequence (e.g. bear market in first 5 years of retirement).
Anyone Withdrawing From a PortfolioTrusts, endowments, or decumulation phases—whenever you withdraw regularly, order of returns matters.
Limitations
Two-phase model: Half years bad, half good, in two blocks. Real returns are random; this illustrates the effect.
Fixed withdrawal: Assumes same dollar withdrawal each year. Flexible spending is not modeled.
No inflation: Use real returns and real withdrawal for long-horizon planning if needed.
No taxes: Does not model tax impact of withdrawals or asset location.
Real-World Examples
Example: $1M, $50k/year, 10 years, bad -10%, good 15%
Bad first: 5 years at -10%, then 5 at 15%. Good first: 5 at 15%, then 5 at -10%. Terminal values can differ by hundreds of thousands; bad first may deplete earlier. Run the calculator to see exact numbers.
Example: 2008-style crash early in retirement
A large drop in the first few years of retirement forces withdrawals from a shrunken portfolio. That is sequence risk in practice. A cash buffer lets you avoid selling stocks in a down year.
Example: Lower withdrawal rate
Reducing the annual withdrawal (e.g. from 5% to 4% of initial) often improves survival across bad sequences. Use the calculator to see how much difference a lower withdrawal makes.
Summary
Quick recap
This calculator shows how the order of returns affects a portfolio with fixed annual withdrawals. You enter initial portfolio, annual withdrawal, years, and "bad" and "good" year returns. It compares "bad years first" vs "good years first" and reports terminal value (or year of depletion) for each. Use it to understand sequence of returns risk and to stress-test your retirement withdrawal plan. Pair it with a cash buffer or flexible spending strategy to mitigate this risk.
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See how the order of returns affects a portfolio with withdrawals. Compare bad years first vs good years first—same average return, different outcome.
How to use Sequence of Returns Risk Calculator
Step-by-step guide to using the Sequence of Returns Risk Calculator:
Enter your values. Input the required values in the calculator form
Calculate. The calculator will automatically compute and display your results
Review results. Review the calculated results and any additional information provided
Frequently asked questions
How do I use the Sequence of Returns Risk Calculator?
Simply enter your values in the input fields and the calculator will automatically compute the results. The Sequence of Returns Risk Calculator is designed to be user-friendly and provide instant calculations.
Is the Sequence of Returns Risk Calculator free to use?
Yes, the Sequence of Returns Risk Calculator is completely free to use. No registration or payment is required.
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Yes, the Sequence of Returns Risk Calculator is fully responsive and works perfectly on mobile phones, tablets, and desktop computers.
Are the results from Sequence of Returns Risk Calculator accurate?
Yes, our calculators use standard formulas and are regularly tested for accuracy. However, results should be used for informational purposes and not as a substitute for professional advice.