Sequence of Returns Risk
Why the Order of Returns Matters in Retirement
Same Average. Different Retirement.
By Jared Prazen | Secure Retirement Planners
Most retirement projections start with one number: an average return. Assume the market earns 7% a year, take out what you need, and see how long the money lasts.
The problem is that nobody retires into an average. You retire into a sequence: real years, in a real order, while you're taking money out. In this short video, I walk through three people who retired with the exact same plan and got three very different retirements.
Three retirees, one identical plan*
Each retiree starts with $1,000,000, takes $50,000 in the first year, and raises that withdrawal every year to keep up with inflation. All three are fully invested in the S&P 500. The only difference is the year they retired.
| Retired In | 30-year average return | Average, first 10 years | What happened? |
|---|---|---|---|
| 1982 | 12.3% | 18% | Never ran out; about $11.9 million left after 30 years |
| 1966 | 11.8% | 5.0% | Ran out of money in year 19 |
| 2000 | 9.6%* | 1.2% | Ran out of money in year 17 |
*2000 performance period includes the 26 year period ending 2025
The 1966 and 1982 retirees had almost the same long-term average. One ended up with millions. The other ran out of money with 11 years to go.
Why the first decade matters most
While you're working and adding money, a bad year early on doesn't do much lasting damage. Once you retire and start withdrawing, everything flips. A loss early in retirement means selling investments while they're down to pay the bills, and those dollars aren't there when the market recovers.
The 2000 retiree is the clearest example. The market fell three years in a row, and after three years of withdrawals the $1 million portfolio was down to about $517,000. Starting in 2009, stocks went on one of the longest bull markets on record. By then it was too late: you can't recover with money you no longer have.
What this means for your plan
The first 10 years of retirement carry the most risk. Losses while you're taking withdrawals become permanent.
Nobody gets to choose their sequence. A plan has to hold up whether you retire into a 1982 or a 2000.
Essential income shouldn't depend on the market. When the bills are covered by income that doesn't rely on market returns, a bad year doesn't force you to sell low.
A question worth answering
If your first few years of retirement look more like 2000 than 1982, what's the plan? If you don't have a clear answer, that's exactly the conversation we have with every family we work with.
Keep watching: Why the type of annuity matters as much as whether you own one:
About the author:
Jared Prazen is a financial advisor with Secure Retirement Planners, focused on retirement income planning for people approaching or already in retirement. He helps families build plans that cover their essential expenses with predictable income, so the rest of their money can be managed with a clear plan.
*Hypothetical illustration: $1,000,000 with a $50,000 first-year withdrawal taken at the start of each year and raised by the prior year's inflation; 100% S&P 500 total return; no fees or taxes. Returns: S&P 500 with dividends (NYU Stern, Damodaran). Inflation: CPI-U (BLS). Indexes are unmanaged and cannot be invested in directly. Past performance does not guarantee future results. Full 30-year average not shown for 2000 because that period isn't complete yet.
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