Sequence of Returns Risk Calculator
Example: Retirement portfolio balance: 500000 $ · Annual withdrawal: 25000 $ · Good-year annual return: 12 % · Bad-year annual return: -10 % · Retirement horizon: 20 years
| Sequence risk gap (good-first minus bad-first) | $225,669 |
| Good years first — final balance | $225,669 |
| Bad years first — final balance | $0 |
Worked example
A $500,000 portfolio withdrawing $25,000 a year with alternating 12% good and -10% bad years: if the bad years come first, the balance after 20 years can be $80,000 lower than if the good years come first — same average return, same withdrawal, radically different outcome. That gap represents the sequence-of-returns tax on early retirees.
Frequently asked questions
Why does return order matter so much in retirement?
During the accumulation phase, return order is largely irrelevant because you are not withdrawing. In retirement, withdrawals lock in losses during bad years — you sell more shares at depressed prices to fund the same spending. Those shares are gone and cannot participate in the recovery. The later good years apply to a permanently smaller base.
How do retirees hedge sequence risk?
Common strategies include maintaining a 1–2 year cash buffer so you avoid selling equities in bad years, using a bond tent (starting retirement more conservative and shifting to stocks as sequence risk decreases), and flexible withdrawal strategies that cut spending slightly in bad years. A fee-only fiduciary advisor can model the right mix for your situation.
Is sequence risk the same as volatility risk?
No — volatility risk is the general ups-and-downs of markets. Sequence risk is specifically the path-dependency problem: when withdrawals interact with returns, the timing of good and bad years produces outcomes that diverge from what the average return alone would predict. Two portfolios with identical volatility but opposite ordering can produce very different final balances.