Sequence risk on $1.5M: what happens if the bad years come first?
Two retirees start with $1,500,000, withdraw $75,000 a year, and earn exactly the same ten annual returns. The only difference is the ORDER. After 10 years the one who met the losses first has $1,129,489 and the one who met them last has $1,951,904, a gap of $822,415. Take no withdrawals and both end with exactly $2,685,108, because order alone changes nothing.
Sequence-of-returns risk is the reason two people with identical portfolios, identical withdrawals and identical average returns can end up in completely different places. It is not about how much the market returns. It is about WHEN.
The proof is the row in the table where you withdraw nothing. Both orders end with exactly $2,685,108, to the cent, because multiplying by the same set of numbers gives the same answer whatever order you multiply them in. Order is genuinely irrelevant while you are accumulating. The moment you start taking money out, it becomes one of the largest risks you face.
The mechanism is simple and unforgiving. A withdrawal taken in a down year sells more of the portfolio to raise the same cash, so fewer shares are left to recover when the market does. At $75,000 a year on $1,500,000 that is 5% of the starting balance, and after a 18% fall in year one the same withdrawal is a materially larger share of what remains. The damage compounds in exactly the way the gains were supposed to.
This is why the risk is concentrated in a narrow window: roughly the five years either side of your retirement date. Before it, a fall is an opportunity, because you are still buying. After it, once the portfolio has survived the early years, a fall lands on a balance that has already grown. It is the transition that is dangerous, and it is dangerous regardless of how good your long-run average turns out to be.
What actually helps, in rough order of how much difference it makes. Holding one to three years of spending in cash or short bonds, so a bad year can be funded without selling equities. Being willing to cut spending temporarily, which is the single most effective response and the one most plans assume away. Retiring with a lower withdrawal rate than you think you need, since the table above shows how sharply the outcome turns on it. And having income that does not depend on the portfolio at all, which is the strongest argument for delaying Social Security.
What this page deliberately does not do. It does not predict returns, and the ten used here are a stated set chosen to average the same 7.0% assumption used everywhere else on this site, not a forecast. It holds withdrawals flat rather than inflating them, which understates the strain. It ignores tax. And it runs ten years rather than a full retirement, because the point is what the FIRST years do, not what the whole period does.
Withdrawal each year vs outcome
The same question at every withdrawal each year, so you can use the one you believe.
| Withdrawal each year | After 10 years: losses first, against losses last |
|---|---|
| nothing | $2,685,108 either way, identical |
| 3% ($45,000) | $1,751,736, against $2,245,186 |
| 4% ($60,000) | $1,440,612, against $2,098,545 |
| 5% ($75,000)this page | $1,129,489, against $1,951,904 |
| 6% ($90,000) | $818,365, against $1,805,263 |
The same ten annual returns in both columns, reordered. Their arithmetic mean is 7.0%, which is the return assumption used across this site. Withdrawals are taken at the start of each year and held flat; inflation, tax and any change in spending are excluded so that ORDER is the only variable.
Assumptions
- Starting Portfolio
- 1500000
- Annual Withdrawal
- 75000
- Withdrawal Rate Percent
- 500%
- Time horizon
- 10 yr
- Average Return Percent
- 7
- Ending Balance Losses First
- 1129489
- Ending Balance Losses Last
- 1951904
- Ending Balance No Withdrawals
- 2685108
Frequently asked
What happens to $1.5M if the market falls right after I retire?
On these ten returns, withdrawing $75,000 a year, meeting the losses first leaves $1,129,489 after 10 years against $1,951,904 if they had come last. That is a gap of $822,415 from ordering alone.
Does the order of returns matter if I am still saving?
No, and this is the part worth internalising. With no withdrawals both orders finish at exactly $2,685,108, because the same returns multiplied in any order give the same result. Sequence risk is created by taking money out, not by the market.
How long does sequence risk last?
It is concentrated around the transition, roughly the five years either side of retiring. Once the portfolio has come through the early years intact, a later fall lands on a balance that has already grown, and the plan absorbs it far more easily.
What is the best protection against it?
Flexibility, first: a plan that can cut spending in a bad year survives sequences that a rigid one does not. Then a cash buffer of one to three years so withdrawals need not be funded by selling equities that are down. A lower withdrawal rate helps most of all, which the table on this page shows directly.
Are these returns a prediction?
No. They are a stated set of ten annual returns whose average is 7.0%, the same assumption used across this site, arranged worst-first and best-first. The purpose is to isolate ORDER as the only variable, not to forecast a market.
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