Sequence Risk

Retirement

Sequence of returns risk is the danger that poor investment returns early in retirement permanently impair your portfolio's longevity. The same 7% average return distributes very differently depending on year-by-year sequence — early losses combined with withdrawals deplete the base that needs to recover. A retiree with 2008-2010 negative returns during the first three years of retirement faces materially higher failure probability than one with 2008-2010 occurring 20 years in. Defenses: hold 1-3 years of cash, dynamic spending rules, delaying Social Security, deferring large purchases until markets recover. The first 5 years of retirement matter disproportionately.