Spending in retirement
Sequence-of-returns risk, explained with numbers
Why the order of market returns matters once you start withdrawing, with a worked example, and the practical ways retirees reduce the risk.
Education, not advice. This guide explains general rules with invented examples. It isn't financial, tax or legal advice for your situation. Tax figures are for 2026 and come from published IRS, SSA and CMS sources. Rules change, so check current figures before you act.
While you're saving, the order of your returns doesn't change where you end up. Ten years of returns multiply together the same way in any order. Once you start withdrawing, that stops being true. Losses early in retirement do more damage than the same losses later.
This is sequence-of-returns risk. It's the main reason two retirees with the same savings, the same spending and the same average return can end up in very different places.
A worked example
Two retirees each start with $1,000,000. Each withdraws $50,000 at the start of every year. Over seven years they earn exactly the same returns, in opposite order.
| Year | Ines: returns | Ines: balance at year end | Tom: returns | Tom: balance at year end |
|---|---|---|---|---|
| 1 | −20% | $760,000 | +25% | $1,187,500 |
| 2 | −10% | $639,000 | +18% | $1,342,250 |
| 3 | +5% | $618,450 | +15% | $1,486,088 |
| 4 | +12% | $636,664 | +12% | $1,608,418 |
| 5 | +15% | $674,664 | +5% | $1,636,339 |
| 6 | +18% | $737,103 | −10% | $1,427,705 |
| 7 | +25% | $858,879 | −20% | $1,102,164 |
Both retirees had the same seven returns. Their average return was the same. Yet after seven years Tom has about $243,000 more than Ines.
The reason is simple. Ines sold investments to fund her withdrawals while prices were low. Those shares were gone before the recovery. Tom withdrew from a growing balance, and by the time the losses came, his balance was large enough to absorb them.
Ines isn't out of money. But she's now withdrawing $50,000 from $858,879, a rate of 5.8%. Tom's rate is 4.5%. If the next decade is ordinary, Ines is at much greater risk of running short.
Why averages hide the risk
A projection that assumes the same return every year has no sequence at all. Every year is average. That's why a simple projection can look comfortable while a simulation shows a meaningful chance of falling short.
The risk is largest in the years just before and just after retirement. That's when your balance is near its peak and withdrawals are starting. A bad decade then shapes the rest of the plan. The same bad decade at 85 matters much less.
What you can do about it
None of these remove the risk. Each one trades something for less exposure to a bad early sequence.
Be ready to adjust spending
Small, early cuts after bad years are one of the most effective tools. They reduce the shares you sell at low prices. Guardrails turn this into a rule you set in advance. See spending guardrails explained.
Hold a buffer of safer assets
Some retirees keep a few years of withdrawals in cash or short-term bonds. In a downturn they spend from the buffer instead of selling stocks. The cost is lower expected growth on that money. The app's plan settings include a cash buffer, measured in months of essential spending.
Lower the stock share around retirement
A lower stock allocation in the years around retirement reduces how far the portfolio can fall just when withdrawals begin. Some plans then raise the stock share gradually through retirement. Whether that helps depends on returns and your spending. You can test a glide path on your own plan.
Delay Social Security
A larger lifelong benefit reduces how much you need to withdraw each year for the rest of your life. Spending savings while you wait can look risky, but it buys inflation-adjusted income that no market can take away. See when to claim Social Security.
Keep fixed costs low going in
Paying off a mortgage or avoiding a large new fixed cost in the first years of retirement lowers the withdrawals a bad sequence would hit hardest.
How to see it in your own plan
The app gives you several views of the same risk:
- Range of outcomes by year. On Outlook, the lower percentile lines show how the weaker futures unfold. If the 10th percentile line falls steeply in the first decade, sequence risk is driving your result.
- Stress tests. Outlook can replay your plan as if you retired at the start of difficult historical periods, such as 1929, 1966 or 2000. These show what a real bad sequence does to your specific plan.
- Look inside one future. You can open a single simulated future at a chosen percentile and follow it year by year.
- Guardrail stress tests. The Spending guardrails screen shows how sudden market drops would move you relative to your guardrails.
Why history-based simulation helps here
The app's default simulations string together multi-year blocks of actual historical market returns and inflation. That keeps real patterns, such as several bad years in a row or a stretch of high inflation, inside each simulated future. Random draws that treat every year as independent tend to understate those runs. See what chance of success really means.
Frequently asked questions
Does sequence risk matter if I don't sell anything?
It matters whenever you withdraw. If all your spending comes from guaranteed income and you never sell investments, a bad sequence changes your balance but not your income.
Is the first five years really that important?
It's the period when returns matter most. But a plan can also be hurt by a long, mild stretch of low returns or by high inflation later. Look at the full range of outcomes, not only the early years.
Should I move everything to cash before I retire?
That swaps sequence risk for a different risk: that inflation and low returns erode your savings over a long retirement. A balanced approach usually holds some growth assets throughout.