What Is Sequence of Returns Risk, and Why Did Two Retirees With the Same $800,000 Portfolio End Up $700,000 Apart After 5 Years?
Sequence of returns risk is the reason retiring at the top of a bull market can permanently damage a portfolio even if the long-term average returns are identical to someone who retired three years earlier. Two retirees who both start with $800,000, withdraw $40,000/year, and achieve similar average annual returns over 20 years can end up with portfolios separated by $700,000 after just five years — purely because of the order those returns arrived. Here's the math, a real historical example, and five specific strategies that reduce this risk.