Here is a strange fact about investing: the exact same set of yearly returns, in a different order, can produce wildly different results in retirement, but make zero difference while you are still working and saving. Understanding why is the key to understanding why the classic “4% rule” does not work the way it used to, and why the order your returns show up in can make or break your retirement.
This is one of the least intuitive concepts in retirement planning, precisely because it contradicts how most people are taught to think about returns. We are used to focusing on the average, the long-term trend, the big-picture number. Sequence of returns risk is a reminder that averages hide important details, and that those details only start to matter once your account shifts from growing to shrinking.
While You’re Working, the Order Doesn’t Matter
Take the actual year-by-year returns of the S&P 500 from 2000 to 2018, a real return of 2.8% over that stretch. Now shuffle those same yearly numbers into a completely different order, still no withdrawals, just reordering which year’s gain or loss happened when. The ending result is still 2.8%. Shuffle it again, and again, it keeps landing on the same 2.8% real return every single time.
As long as you are not pulling money out of the account, the sequence genuinely does not matter. Three losing years in a row followed by gains, or four gains followed by a rough patch, it all averages out to the exact same ending number as long as new contributions and existing balances are simply left to compound.
This makes sense once you think about it mathematically: multiplication can be reordered without changing the result. Growing a balance by -20%, then +20%, then -60%, then +100% produces the same ending number as growing it by +100%, then -60%, then +20%, then -20%. The order of the multiplications does not change the final product, as long as nothing is being added or subtracted along the way.
Once You Start Withdrawing, Everything Changes
Now take that same set of returns and add a 4% annual withdrawal, the classic retirement income strategy. Reshuffle the same numbers into different orders again, and this time the results swing dramatically: one sequence produces a real return of just 0.7%, another produces 1.4%, another 2.1%, another 2.6%, another 3%. Same exact returns. Same withdrawal rate. Wildly different outcomes, purely based on which years the losses happened to land in.
In the worst version of this example, a $100,000 starting balance with a steady 4%, or $4,000, withdrawn every year dropped all the way down to about $33,000 after 19 years. The exact same returns, shuffled into a friendlier order, left far more money in the account at the end.
| Scenario | Real Return Over the Period |
|---|---|
| No withdrawals, any order of returns | 2.8%, every time |
| 4% annual withdrawal, worst-case order | 0.7% |
| 4% annual withdrawal, better-case order | 3% |
That is more than a four-fold difference in outcome, purely from reshuffling which years the gains and losses landed in. Nobody gets to choose the order the market delivers its returns in, which is exactly why this risk is so difficult to plan around using averages alone.
Why Withdrawals Turn Losses Into Bigger Losses
Here is the mechanism behind it. When you withdraw money from an account in a year the market is down, you are not just experiencing the market’s loss, you are also pulling cash out on top of it. A year where the market lost 10% can effectively function like a 14% loss once your withdrawal is factored in, since you are taking money out of an already-shrinking balance.
This is what people mean when they say withdrawals “compound your losses.” Every dollar you take out during a down year is a dollar that is no longer there to participate when the market eventually recovers. That is the entire reason the order of returns matters so much once you flip from saving to spending.
This is also why two retirees who retire just a few years apart, with the exact same portfolio and the exact same long-term average return, can end up with completely different outcomes. If one of them happens to retire right before a market downturn and starts withdrawing immediately, while the other retires into a strong run of positive years, their results can diverge dramatically, even though the underlying investments and long-term averages look identical on paper.
Why the 4% Rule Isn’t as Safe as It Used to Be
The 4% rule was created back in the 1990s, based on the idea that withdrawing 4% of your portfolio each year gave you roughly a 98% chance of your money lasting through a 30-year retirement. That number came from a different era: interest rates were higher, and the market had not yet been through the early-2000s crashes.
Morningstar, an independent research firm, revisited this question and found that applying the same 4% rule under 2020 conditions, near-zero interest rates and the market volatility seen since 2000, dropped the odds of success to roughly 50%.
| Time Period Studied | Estimated Chance of Success Over 30 Years |
|---|---|
| 1990s original study | About 98% |
| Morningstar’s 2020 reassessment | About 50% |
A 50% success rate is essentially a coin flip on whether your money lasts through retirement. Yet plenty of advisors and retirees still plan around the original 4% figure without accounting for how much market conditions have shifted since it was first published.
It is worth being clear about what “success” and “failure” mean in this kind of study. Failure does not mean your account hits zero on day one of retirement, it means that at some point during a 30-year retirement, under that particular sequence of returns, the money ran out before the person did. A 50% failure rate does not guarantee disaster, but it does mean the odds are far less comfortable than the 98% figure most people still associate with the 4% rule.
What Actually Helps Reduce This Risk
One straightforward adjustment is simply withdrawing a lower percentage, which improves your odds but comes with the trade-off of less income to live on. Another approach is reducing exposure to down years in the first place during the specific years you are withdrawing, since the compounding-loss effect only shows up when a withdrawal and a market loss happen in the same year.
Products that protect against negative years, such as the fixed indexed annuities covered elsewhere on this site, work by turning a “down year plus withdrawal” into simply “a withdrawal from principal,” without the market loss stacking on top of it.
No approach eliminates the risk of running out of money entirely. Even a more protected strategy can still come up short if interest rates or market conditions move against it over a long enough retirement. But understanding the actual mechanism behind sequence of returns risk, and why it only bites once you start withdrawing, puts you in a much better position to build a withdrawal strategy that can hold up.
A flexible approach, one that can adjust the withdrawal amount during a down market rather than pulling the same fixed dollar figure no matter what, also helps. Locking in a spending number and refusing to adjust it regardless of market conditions is one of the more common ways people accidentally accelerate this risk.
Because your own withdrawal rate, timeline, and risk tolerance all factor into how much sequence of returns risk actually threatens your plan, it is worth running your specific numbers rather than defaulting to a rule of thumb from the 1990s. You can schedule a personal meeting and we will stress-test your retirement income plan together.
Frequently Asked Questions
Does sequence of returns risk matter while I’m still working?
No, not in the same way. As long as you are not withdrawing money, the order your returns show up in does not change your ending balance. It only becomes a real risk once you start taking withdrawals.
Why does a 10% market loss feel like more once I’m withdrawing?
Because you are pulling cash out of the account at the same time it is losing value. The combined effect of the market loss and the withdrawal can function like a much larger loss than the market’s decline alone.
Is the 4% rule still a safe withdrawal rate?
According to Morningstar’s 2020 reassessment, applying the original 4% rule under more recent market and interest rate conditions produces roughly a 50% success rate over a 30-year retirement, down from the 98% figure it was originally based on in the 1990s.
What withdrawal rate is safer than 4%?
Many planners now point to something closer to 2% to 3% as a more conservative starting point under today’s conditions, though the right number depends on your specific timeline, other income sources, and risk tolerance.
Can anything fully eliminate sequence of returns risk?
Not entirely. Strategies that protect against down years during withdrawal, such as certain annuity products, can reduce the compounding effect, but no strategy can guarantee against running out of money under every possible future scenario.
What is the difference between average return and sequence of returns risk?
Average return tells you the typical yearly result over a period. Sequence of returns risk is about the order those results occur in, which barely matters during accumulation but can significantly affect how long your money lasts once you begin withdrawing.
Does retiring right before a market downturn ruin a retirement plan?
It can significantly hurt outcomes if withdrawals continue at the same rate through the downturn without adjustment. This is exactly why understanding sequence of returns risk matters before setting a retirement date and a withdrawal strategy.
P.S. If you found this breakdown helpful and want more videos like this on building a retirement income plan that can hold up, come join a community of over 150 members working through these exact concepts together, with free courses and resources included.
