Sequence-of-returns risk: when the losses land matters more than how big they are

Take one set of yearly returns and reorder it. The average is identical, the arithmetic is identical — but if you're drawing an income, the order alone can decide whether your money lasts. This is the single most under-appreciated risk in retirement.

Your retirement

Starting portfolio

Withdrawal in year 1

Rises with inflation each year. Currently — of the starting balance.

Years in retirement

yrs

Market assumptions

Average annual return

% p.a.

Volatility

% s.d.

A broad share portfolio has historically run near 15–18%. Higher volatility means wilder individual years — and a bigger penalty for a bad start.

Inflation

% p.a.

Return sequence

Change this to draw a different set of yearly returns. All three orderings below always use the same set.

Take no withdrawals (prove the point)

With no withdrawals, all three orderings finish at exactly the same number. Order only matters once you're taking money out.

The same returns, three different orders

Bad years first As drawn Bad years last

What if the crash lands in a different year?

One bad year, everything else at your average return. Only the timing changes.

Size of the crash

% drop

Can you recover?

A loss and the gain needed to undo it are not the same number. And if you're withdrawing while you wait, the maths gets worse.

Probability of getting back to where you started

After a 35% drop in year one, across 3,000 simulated paths — how often does the portfolio claw back to its original purchasing power?

These are model results, not history: returns are drawn from a lognormal distribution using the average and volatility you entered. Real markets have fatter tails and don't shuffle independently year to year, so treat these as directional.

Making sense of this one

The idea behind this calculator is genuinely surprising the first time you meet it, so it's worth a few minutes.

What it actually tells you

If you leave money invested and never touch it, the order the good and bad years arrive in makes no difference whatsoever. A 20% gain and a 20% loss produce the same result whichever comes first. You can prove this yourself by ticking the "take no withdrawals" box — all three lines finish on exactly the same number, to the dollar.

The moment you start drawing an income, that stops being true. Now a bad year doesn't just shrink the pot, it shrinks the pot you're also taking money out of. Sell some of a portfolio that's down 30% and those units are gone for good — they can't participate in the recovery. Do that for two or three years running and you can end up in a hole that a decade of good returns won't fill.

An example: Margaret and Tom, both 65

They retire in the same month with $1,000,000 each and plan to draw $45,000 a year, rising with inflation. Over the next 30 years they happen to experience exactly the same set of yearly returns — the same thirty numbers, averaging about 7% a year.

The only difference is the order. Margaret's poor years land early: her first few years include a bad one. Tom's poor years land late, in his eighties.

Margaret runs out of money. Tom dies with millions. Same returns, same average, same withdrawals. The only variable was timing — and neither of them chose it.

How to read the results

The three lines on the first chart use one identical set of returns, sorted three different ways. Red puts the worst years first, green puts them last, grey leaves them as drawn.
The "cost of a bad start" figure is the gap between the best and worst ordering. It is entirely down to luck of timing.
The crash-timing chart asks a cleaner version of the same question: one bad year, everything else average, and only the year it lands in changes.
The recovery table shows why losses hurt more than gains help. A 50% fall needs a 100% gain to get back to level — and if you're withdrawing while you wait, sometimes it never comes back at all.

What to do with it

You can't control when a downturn arrives, but you can control whether it forces you to sell. That's why the standard advice is to hold two or three years of spending in cash before you retire — not because cash is a good investment, but because it means a bad first year is something you read about rather than something you pay for. The catastrophic loss calculator works out how big that buffer needs to be for your situation.

The other lever is flexibility. Being willing to spend a bit less after a poor year is remarkably effective — the withdrawal strategy calculator puts a number on how much it's worth.

General information only — not financial advice, and not a prediction. Every number here follows from the assumptions you enter. The simulation assumes returns are independent from year to year, which real markets are not; it ignores tax, fees beyond what you enter, and any change in your own behaviour during a downturn — which in practice is often the largest variable of all.