Sequence-of-returns risk
Also called: sequence risk, order of returns risk
The risk that bad returns arrive at the worst time, such as just before or just after withdrawals begin, leaving less money than the average return suggests.
For a lump sum left untouched, the order of returns does not change the result. When money is being withdrawn, early losses do lasting damage, because selling during a fall locks in the loss and leaves less to recover. When money is being added regularly, late losses hurt most, because they hit the largest balance.
Reducing risk as a goal approaches and keeping several years of withdrawals in safer assets are common ways to soften it.
Example
Two retirees get the same five yearly returns in opposite orders and withdraw the same amount each year. The one whose losses come first ends with much less.
Learn more in these lessons
- Sequence of returnsWhy does the order of returns matter if the average is the same?
Related terms
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