Definition
Sequence-of-Returns Risk
Sequence-of-returns risk is the danger that poor investment returns early in retirement — when you are withdrawing money — can permanently damage your portfolio, even if average returns are fine.
Two retirees can experience the same average return yet end up very differently if the order differs: a crash in the first few years of withdrawals forces selling assets at low prices, leaving less capital to recover. The same average with bad years late causes far less harm. Timing of returns, not just their average, decides whether a corpus survives.
Defences include holding a few years of spending in cash (a bucket strategy), keeping withdrawals flexible (spending less in down years), and using a glide path so the portfolio is less volatile near retirement. This risk is the main reason early-retirement plans need a margin of safety.
Related terms
- Safe Withdrawal RateThe safe withdrawal rate is the percentage of your retirement corpus you can take out each year with a low risk of running out of money over your expected lifespan.
- Bucket StrategyThe bucket strategy is a way of organising retirement or goal savings into separate 'buckets' by time horizon — short, medium and long term — each invested according to when its money is needed.
- Glide PathA glide path is a planned, gradual shift in your asset allocation from higher-risk to lower-risk investments as you approach a financial goal or retirement date.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.