What is Sequence of Returns and how can it affect my retirement?
- martyblackmon
- 3 days ago
- 4 min read
Let's explore Sequence of Returns?
Imagine you’re tossing a coin 10 times, and you write down heads or tails each time. The order matters, right? That’s what “sequence” means — the order of events.
In the stock market, “sequence of returns” means the order in which you get good years and bad years of investment returns (like +10%, -5%, +12%, etc.).
Even if two people get the same average return over time, the order of those returns can make a big difference, especially when they're taking money in or out of their accounts.
💼 During Accumulation (Saving for Retirement)
When you’re saving and not taking money out yet, the sequence of returns doesn’t matter as much. Why?
Because:
You're adding money regularly.
Bad years early on can actually help because you're buying investments when prices are low.
Example:
Year | Scenario A | Scenario B |
1 | 10% | -10% |
2 | -10% | 10% |
3 | 8% | -8% |
4 | -20% | 20% |
Both average out to the same return. If you're adding $1,000 each year, you still end up in a pretty similar spot.
So what is the problem if we end up in the same place?
During Distribution (Retirement, Taking Money Out)
This is where sequence really matters.
If the market goes down early in your retirement while you're withdrawing money, you’re selling investments at low prices. That can make your money run out faster.
Example:
Two retirees each have $500,000 and take out $25,000 per year.
Retiree A gets good returns early (like +10%, +8%) and bad ones later.
Retiree B gets bad returns early (like -10%, -8%) and good ones later.
Even though both get the same average return, Retiree B might run out of money faster because they had to withdraw from their investments while values were low.
Before we discuss the returns now is a good time to discuss Average returns.....which is quoted a lot in the financial industry.
Example:
One of the many Americans that have a $100,000 portfolio being managed in the markets by a Financial professional and is busy with life and raising kids so is not watching their returns year in and out.
The same Investor goes in for a meeting and asks his Financial professional how his portfolio is doing.
Financial Professional states we averaged 25% on your portfolio.
This sounds great right? Most would be happy with a 25% average return.
Now lets look at how we got an average of 25%. Notice the investor started with $100 and 4 years later ended with $100. The client made no money and ended up where they started yet truthfully they got 25% Returns. Would you be happy?
Year | Starting $ | Ending $ | Return |
1 | $100 | $200 | 100% |
2 | $200 | $100 | -50% |
3 | $100 | $200 | 100% |
4 | $200 | $100 | -50% |
25% | |||
Now that we have discussed average returns, let's now look at a chart for a better view of the markets over 20 years as we get back to sequence returns.
Here’s a chart showing two different sequences of returns over 20 years:
Scenario A has good market years early on.
Scenario B has the same exact returns, just in reverse order (bad years first).
Even though the average return is the same, you can see how the order affects the growth of the investment over time.
We don't have to imagine how much more dramatic the difference would be if someone were also withdrawing money at 5% a year during these 20 years!
The updated chart above shows the impact of withdrawing that 5% per year from the portfolio over 20 years:
Scenario A (Good years early): The portfolio lasts longer and grows more because withdrawals happen during strong market performance.
Scenario B (Bad years early): The portfolio shrinks much faster because withdrawals happen during weak or negative market years.
🔑
Key Insight: Early losses combined with withdrawals can seriously hurt your retirement savings — this is the heart of the sequence of returns risk.
🎨 Easy Visual Metaphor
Imagine you're climbing a mountain (saving) vs. skiing down (retirement):
🧗♂️ While climbing (accumulating), slips early on aren’t too bad—you can recover.
🎿 But skiing down (withdrawing), slipping early can be dangerous—you could crash.
✅ Key Takeaways
Sequence of returns = The order of market ups and downs.
During accumulation, the order doesn’t hurt much.
During retirement (distribution), early bad years can really damage your savings.
This is why people sometimes use safer strategies near or in retirement (like bonds, well designed Whole life insurance policies and annuities as market cash buffers).
🔑
Key Insight: Early losses combined with withdrawals can seriously hurt your retirement savings — Let's look at 20 years below as we show the heart of the sequence of returns risk.
Year | Accumulation Return | Accumulation Value | Drawdown Return | Drawdown Value |
1 | 22.91% | $122,910.00 | -9.27% | $85,730.00 |
2 | 1.34% | $124,556.99 | 8.74% | $88,222.80 |
3 | 6.33% | $132,441.45 | 7.24% | $89,610.13 |
4 | 10.08% | $145,791.55 | 11.55% | $94,960.10 |
5 | -1.89% | $143,036.09 | -8.53% | $81,860.01 |
6 | 6.02% | $151,646.86 | 3.57% | $79,782.41 |
7 | 5.99% | $160,730.51 | 3.39% | $77,487.03 |
8 | -11.55% | $142,166.14 | 11.05% | $81,049.35 |
9 | 16.18% | $165,168.62 | 4.28% | $79,518.26 |
10 | 12.00% | $184,988.85 | -0.25% | $74,319.47 |
11 | -0.25% | $184,526.38 | 12.00% | $78,237.80 |
12 | 4.28% | $192,424.11 | 16.18% | $85,896.68 |
13 | 11.05% | $213,686.97 | -11.55% | $70,975.61 |
14 | 3.39% | $220,930.96 | 5.99% | $70,227.05 |
15 | 3.57% | $228,818.19 | 6.02% | $69,454.72 |
16 | -8.53% | $209,300.00 | -1.89% | $63,142.03 |
17 | 11.55% | $233,474.15 | 10.08% | $64,506.74 |
18 | 7.24% | $250,377.68 | 6.33% | $63,590.02 |
19 | 8.74% | $272,260.69 | 1.34% | $59,442.12 |
20 | -9.27% | $247,022.12 | 22.91% | $68,060.31 |
✅ Summary
Which number would you prefer? $247,022.12 or $68,060.31
The order of market ups and downs really will affect your retirement.
Understanding how to not get caught in the sequence of returns in retirement is the first step. Knowing how to diversify your portfolio with guaranteed income is crucial in today's ever-changing market landscape. By entrusting your financial planning needs to BlackFin Wealth Group, you can benefit from their years of experience and dedication to helping clients achieve their financial goals. Explore the possibilities and contact us at the BlackFin Wealth Group and take the first step towards a more secure financial future.
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