sequence of returns risk
The danger that the timing of withdrawals from a retirement account will negatively impact the overall rate of return, particularly harmful when markets drop early in retirement.
Example
“Retiring in 2008 just before the financial crisis illustrated sequence of returns risk — early losses devastated portfolios that never fully recovered.”
Memory Tip
Sequence of returns RISK = bad returns EARLY in retirement can permanently damage your nest egg.
Why It Matters
This concept is crucial for retirees because withdrawing money during market downturns can force you to sell investments at low prices, reducing your portfolio's ability to recover. Understanding sequence of returns risk helps you plan withdrawal strategies that protect your retirement savings from being depleted by poor market timing.
Common Misconception
Many people believe that as long as their average annual investment return is positive, they will be fine in retirement. However, the order in which returns occur matters significantly, and a series of negative returns early in retirement can permanently damage your portfolio even if markets recover later.
In Practice
Consider a retiree with a $500,000 portfolio withdrawing $25,000 annually. If markets drop 30 percent in year one, they are forced to sell $25,000 from a now $350,000 portfolio, locking in losses. If markets then return 10 percent annually for the next decade, their portfolio will be much smaller than it would have been if those same returns had occurred in reverse order, demonstrating how early market downturns compound the damage.
Etymology
SEQUENCE (order, timing) OF RETURNS (investment performance) RISK. The RISK from the SEQUENCE in which returns occur.
Common Misspellings
Build your retirement portfolio with low fees
Related Terms
More in retirement
Other retirement terms you should know
See Also
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.