Sequence of returns risk is the danger that poor investment returns early in retirement, especially when taking withdrawals, can significantly deplete your savings.
In Depth
Sequence of returns risk refers to the danger that poor investment performance early in your retirement or withdrawal phase can deplete your savings faster than if the same returns occurred later. If you experience negative returns while withdrawing funds, you're selling more assets at a loss, which makes it harder for your portfolio to recover. This risk is particularly important for those nearing or in retirement, as they have less time to recover from market downturns.
Example
Someone retiring right before a major market crash faces a higher sequence of returns risk than someone who retires during a bull market, even if their average returns over time are the same.