The order of returns decides retirements that averages cannot explain
The claim
Two retirees experiencing identical average returns can face opposite outcomes depending on when the bad years arrive.
Why we rate it strong
A mathematical property of withdrawing from a volatile portfolio, demonstrable directly on the historical record.
During accumulation, the order of returns is irrelevant to the final balance if contributions are fixed — multiplication commutes. A crash early in your career is arguably good news: your ongoing contributions buy more units at lower prices.
Withdrawal reverses this completely. Selling to fund spending from a portfolio that has just fallen 30% means liquidating far more units for the same income, and those units are not there to participate in the recovery. Identical average returns arriving in a different order produce wildly different outcomes.
The historical record makes this concrete. A retiree starting in 1966 faced a decade and a half of poor Real returnReturn after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%.Read the evidence on this → immediately, and a 4-5% withdrawal plan was in serious difficulty. A retiree starting in 1982 with the same plan and a similar long-run average finished with a far larger portfolio than they began with. Neither outcome had anything to do with skill.
The practical responses are unglamorous and effective: hold a cash and bond buffer sized to fund several years of spending without selling equities, and retain the ability to reduce withdrawals after a bad year. Our sequence-risk simulator runs your plan from every historical starting year so you can see the spread rather than a single average.
Where this breaks down
- The risk is concentrated in roughly the five years either side of retirement — the point of maximum portfolio value relative to remaining contributions.
- Over-correcting has its own cost. A portfolio held too conservatively through a 30-year retirement runs a serious risk of being eroded by inflation instead.
- Historical windows overlap heavily, so the apparent number of independent bad sequences is smaller than the count of start years suggests.
Terms used on this page
The same definitions the underlined words open, written out so nothing on this page depends on a click.
- Real return
- Return after inflation has been removed: what your money can actually buy afterwards, not what the number on the statement says. A 7% return in a 3% inflation year is a real return of about 3.9%. Evidence →
Sources
Follow these rather than taking our word for the summary.
William P. Bengen (1994). Determining Withdrawal Rates Using Historical Data
Journal of Financial Planning, 7(4), 171-180
Finding: Portfolio failures cluster in retirements beginning immediately before sustained real declines, not in those with low average returns.
Philip L. Cooley, Carl M. Hubbard and Daniel T. Walz (2003). Comparative Analysis of Retirement Portfolio Success Rates
Financial Services Review, 12(2), 115-128
Finding: Success rates for identical withdrawal plans differ sharply by starting year, so an average outcome describes almost none of the individual retirements it is averaged over.