Transparent method
The formula
Worked example
Example inputs
How to interpret the result
The identical average return over a retirement horizon can produce dramatically different outcomes depending purely on when the bad years happen to occur, because withdrawals taken during a market decline lock in losses on a permanently smaller base. A downturn early in retirement does far more damage than the identical downturn arriving late, even with the same average return either way.
Before you rely on it
What to check
Stress-test a withdrawal plan specifically against an early-downturn scenario, not just an average annual return assumption, since the timing of a bad sequence matters more than its average.
The common error
Where people go wrong with sequence of returns risk calculator
Judging a withdrawal plan's safety by its average assumed annual return alone. Two plans with the identical average return can have very different real outcomes depending on whether the weak years land early or late in the withdrawal period.
Sensitivity evidence
How annual return in other years changes the cost of early-loss sequence
| Annual return in other years | Cost of early-loss sequence | Ending balance with early loss |
|---|---|---|
| 4.0% | $0.00 | $0.00 |
| 5.0% | $200,880 | $0.00 |
| 6.0%worked example | $720,150 | $0.00 |
| 7.0% | $1,442,717 | $0.00 |
| 8.0% | $1,963,134 | $471,065 |
Every input, tested
Which input moves the cost of early-loss sequence most
| Input | Tested from | To | Cost of early-loss sequence at each end | Swing |
|---|---|---|---|---|
| Annual return in other years | 5.0% | 7.0% | $200,880 to $1,442,717 | $1,241,837 (172%) |
| Annual withdrawal inflation | 1.5% | 3.5% | $1,085,686 to $287,968 | $797,718 (111%) |
| Starting portfolio | $900,000 | $1,100,000 | $313,771 to $1,126,529 | $812,758 (113%) |
| First-year withdrawal | $40,500 | $49,500 | $1,054,514 to $385,786 | $668,728 (93%) |
| Retirement horizon | 22.0 years | 38.0 years | $685,536 to $441,510 | $244,026 (34%) |
| One-year market loss | 23.0% | 27.0% | $741,810 to $698,490 | $43,319 (6.0%) |
Two variables at once
Cost of early-loss sequence by annual return in other years and starting portfolio
| Annual return in other years \ Starting portfolio | $800,000 | $1,000,000 | $1,200,000 |
|---|---|---|---|
| 4.0% | $0.00 | $0.00 | $302,149 |
| 5.0% | $0.00 | $200,880 | $818,301 |
| 6.0% | $0.00 | $720,150 | $1,343,975 |
| 7.0% | $375,579 | $1,442,717 | $1,621,712 |
| 8.0% | $1,036,608 | $1,963,134 | $1,963,134 |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Starting portfolio | $1,000,000 |
| First-year withdrawal | $45,000 |
| Annual return in other years | 6.0% |
| One-year market loss | 25.0% |
| Annual withdrawal inflation | 2.5% |
| Retirement horizon | 30.0 years |
| Cost of early-loss sequence | $720,150 |
| Ending balance with early loss | $0.00 |
Where the inputs come from
Starting portfolio and first-year withdrawal set the plan, and the annual return in other years is the steady return outside the bad year. The one-year market loss is a single bad year, entered as a percent. The tool runs the same loss at the start and at the end of the horizon to isolate timing. Annual withdrawal inflation and the horizon complete the setup. Use a loss size that matches a real bear market, such as 25% to 35%.
Using the cost of early-loss sequence in a real decision
That is why the first five to ten years of retirement matter most.
When the result stops applying
The scenario models one loss year, while real downturns can last years and be followed by inflation. It assumes withdrawals continue at the planned amount, which is the risk being tested. Mitigations such as a cash buffer, flexible spending or a bond tent are not included. Outcomes depend on the withdrawal rate and the size of the loss.
What to compare it with
Test a full range of paths with the retirement Monte Carlo calculator, and see the investment withdrawal page for the steady-return case. The retirement goal and withdrawal calculators help set a safer rate. Reducing withdrawals by even 10% after a bad year improves the odds substantially.
People also ask
Frequently asked questions
Why do early losses hurt retirees so much?
The danger that poor market returns come early in retirement, when withdrawals shrink the portfolio, so it cannot recover even if later returns are strong.
How can I reduce it?
Hold a cash or bond reserve for a few years of spending, keep spending flexible, or lower withdrawals after a decline instead of selling stocks at a loss.
Does it matter while I am still saving?
Much less. During accumulation, low prices let you buy more shares, so the order of returns matters far less than during withdrawals.