RETIREMENT
What Is Sequence-of-Returns Risk in Retirement?
From the Book
Two-Comma Wealth: Investment, Tax, and Estate Strategies to Consider When Your Net Worth Exceeds a Million Dollars
By George Stefanou, CFP®, CPWA®, CEPA®
Chapter: Chapter 3: Assess for Success
Section: The Impact of Sequence of Returns
Excerpted from Two-Comma Wealth: Investment, Tax, and Estate Strategies to Consider When Your Net Worth Exceeds a Million Dollars, published April 15, 2025.
The planning principles discussed here are intended to be enduring, but tax laws, retirement rules, Medicare thresholds, estate and business laws, investment conditions, and other regulations can change over time. Any specific thresholds, limits, ages, tax brackets, or regulatory references should be understood in the context of the book’s publication date and verified against current rules before being applied. Ellipses indicate where portions of the original text have been omitted for length, relevance, or durability. This material is for educational purposes and is not individualized investment, tax, legal, insurance, Medicare, valuation, or transaction advice.
“The impact of sequence of returns risk is an essential consideration in investment income distribution planning, especially for retirees. This concept demonstrates how the timing of market returns—not just the overall returns—can significantly affect the sustainability of a portfolio during retirement. Consider two retirees, Alice and Bob, who each start with a $1 million portfolio and plan to withdraw $40,000 in their first year, increasing by 3 percent annually to account for inflation. Although the market returns they experience are identical over time, the order in which those returns occur creates vastly different outcomes. If there were no withdrawals, the ending portfolio values would be the same, regardless of the sequence. However, once distributions are introduced, the sequence of returns can profoundly impact long-term results, as we’ll see in their examples.”
Hypothetical illustration from Two-Comma Wealth; not actual investment performance. Results are based on the assumptions shown and are not a prediction of future outcomes.
Alice: Positive Returns Early (Fixed Withdrawal)
| Year | Return | Balance Start | Withdrawal | Portfolio End |
|---|---|---|---|---|
| 1 | +20% | $1,000,000 | $40,000 | $1,160,000 |
| 2 | +15% | $1,160,000 | $41,200 | $1,292,800 |
| 3 | +12% | $1,292,800 | $42,436 | $1,405,500 |
| 4 | +8% | $1,405,500 | $43,709 | $1,474,231 |
| 5 | -10% | $1,474,231 | $45,020 | $1,281,787 |
| 6 | -15% | $1,281,787 | $46,371 | $1,043,148 |
| 7 | +10% | $1,043,148 | $47,761 | $1,099,701 |
| 8 | +12% | $1,099,701 | $49,195 | $1,182,470 |
| 9 | -5% | $1,182,470 | $50,671 | $1,072,676 |
| 10 | +6% | $1,072,676 | $52,191 | $1,084,846 |
Total Withdrawn: $458,554 | Portfolio Value after Ten Years: $1,084,846
“Alice’s early gains help her portfolio withstand later downturns and continue growing.”
Bob: Negative Returns Early (Fixed Withdrawal)
| Year | Return | Balance Start | Withdrawal | Portfolio End |
|---|---|---|---|---|
| 1 | -15% | $1,000,000 | $40,000 | $810,000 |
| 2 | -10% | $810,000 | $41,200 | $687,800 |
| 3 | +12% | $687,800 | $42,436 | $727,900 |
| 4 | +8% | $727,900 | $43,709 | $742,423 |
| 5 | +20% | $742,423 | $45,020 | $845,887 |
| 6 | +15% | $845,887 | $46,371 | $926,399 |
| 7 | +10% | $926,399 | $47,761 | $971,277 |
| 8 | +12% | $971,277 | $49,195 | $1,038,635 |
| 9 | -5% | $1,038,635 | $50,671 | $936,033 |
| 10 | +6% | $936,033 | $52,191 | $940,004 |
Total Withdrawn: $458,554 | Portfolio Value after Ten Years: $940,004
“Bob’s early losses, combined with steady withdrawals, leave him with $144,842 less than Alice at the end of ten years despite experiencing the same overall returns.”
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About George Stefanou, CFP®, CPWA®, CEPA®
George Stefanou is the author of Two-Comma Wealth and founder of Stefanou Wealth Management. A financial advisor since 2009, he helps families navigate investment strategy, retirement income, tax considerations, and estate and legacy planning. Through his writing, George helps readers make more informed decisions about preserving, using, and transferring the wealth they have worked hard to build.