Glossary
Sequence-of-Returns Risk
Sequence-of-returns risk is the danger that poor market returns early in retirement — while withdrawals are being taken — permanently deplete a portfolio, even if long-run average returns turn out fine.
Two retirees can earn the same average return over 30 years and end in completely different places depending on the order: losses in the first years, combined with withdrawals, sell assets at depressed prices, leaving too little base for the later recovery to work on. During the saving years, sequence barely matters; withdrawals are what make order decisive.
Why it matters in practice
The years just before and after retirement are the portfolio's most vulnerable window. Standard defenses include holding one to several years of spending in cash and short-term bonds, flexible withdrawal rules that trim spending after bad years, and delaying Social Security to enlarge the guaranteed income floor — each reduces the need to sell stocks into a decline.
Related terms: Drawdown · Bear Market · Longevity Risk · Asset Allocation · Volatility