Sequence of Returns Risk: Why the First 5 Years of Retirement Matter Most
Two retirees, same average return, very different endings
Both retirees below start with $500,000, withdraw $30,000 a year, and earn the exact same set of returns over their first 10 years — a 7% average either way. The only difference is the order. Retiree A hits their bad years early; Retiree B hits the same bad years late.
| Year | Retiree A return (bad years early) | Retiree A balance | Retiree B return (bad years late) | Retiree B balance |
|---|---|---|---|---|
| Start | — | $500,000 | — | $500,000 |
| 1 | −15% | $395,000 | +22% | $580,000 |
| 2 | −10% | $325,500 | +15% | $637,000 |
| 3 | +22% | $367,110 | +22% | $747,140 |
| 4 | +15% | $392,177 | +15% | $829,211 |
| 5 | +22% | $448,456 | −10% | $716,290 |
| 10 (end) | same 7% avg | ~$430,000 | same 7% avg | ~$980,000 |
Illustrative only. Both retirees average roughly 7% per year across the decade, yet Retiree A — who took losses while withdrawing from a large early balance — ends with less than half of Retiree B. Same math, different order.
Why early losses plus withdrawals compound against you
When the market falls in year one, you're taking your $30,000 withdrawal out of a shrinking balance. To raise that cash you have to sell shares at depressed prices — and those shares are gone for good. When the market recovers, you own fewer shares to ride the rebound. That's the trap: a downturn early in retirement lands on your largest balance and is made permanent by the withdrawals you're forced to take through it.
The same 15% drop late in retirement is far less dangerous. By then your balance is smaller, you've had years of growth behind you, and you're closer to the finish line. This is why the first five years matter most — they set the base that every later year compounds on. A great start builds a cushion that carries you for decades; a rough start you're withdrawing through can shadow the entire plan.
How to defuse sequence-of-returns risk
You can't control when the bad years come — but you can control whether they force you to sell. Two tools do most of the work:
| Defense | What it does | Why it helps |
|---|---|---|
| Cash buffer (1–3 years of spending) | Holds near-term withdrawals in cash or short-term reserves | Lets you pause selling investments during a downturn and spend the buffer instead, giving the market time to recover |
| Guaranteed income floor | Covers essential expenses with income you can't outlive (Social Security timing, pensions, lifetime-income tools) | Market drops no longer dictate whether your bills get paid, so your invested money can stay invested and rebound |
The goal isn't to predict the market — it's to make sure a bad early stretch doesn't force a sale at the worst possible time. When your essentials are covered and you have cash to draw from, a down year becomes something you wait out rather than something that permanently shrinks your future.
See how a rough start would hit your plan
Enter your balance, age, and withdrawals — our free calculator shows how the order of returns could change your outcome, and how much a cash buffer or income floor cushions the blow.
See my sequence risk →Frequently asked questions
What exactly is sequence of returns risk?
It's the risk that poor returns early in retirement, while you're withdrawing money, do permanent damage — even if your long-term average return is fine. Because you're selling shares to fund withdrawals during the drop, those shares can't recover in the rebound. Two retirees with the same average return can end up far apart based only on the order of good and bad years.
Why do the first five years matter more than the rest?
Early losses hit your largest balance and are locked in by the withdrawals you take through them. The same loss later lands on a smaller balance after years of growth, so it does far less damage. The first few years set the base everything else compounds on.
How can I protect myself from it?
Keep a cash buffer of one to three years of spending so you're not forced to sell in a downturn, and build a guaranteed income floor that covers your essentials no matter what markets do. Together they let your invested money recover instead of being liquidated at the worst time.
The Retirement Literacy Foundation is a 501(c)(3) non-profit. This guide is general financial education, not individualized investment, tax, or insurance advice. Figures are illustrative and change with market conditions and your personal situation. Consider speaking with a licensed professional before making decisions.