Definition
Sequence risk is the danger that market downturns occurring during the early withdrawal years cause irreparable portfolio damage. An investor who experiences a -30% return in year one of retirement while withdrawing 4% reduces their portfolio by 34%, requiring a 52% gain just to recover—all while continuing to withdraw funds. The same -30% return in year 20 has far less impact.
lightbulb Example
Two retirees with $1M: both average 7% over 30 years. Retiree A gets good returns early, bad later: portfolio lasts 35 years. Retiree B gets bad returns early, good later: portfolio depleted in 22 years. Same average returns, vastly different outcomes.
verified_user Key Points
- Early retirement losses are most damaging
- Same average returns can produce vastly different outcomes
- Bond tent strategy reduces equity exposure at retirement
- Flexible spending in down years is the best mitigation