Same Returns, Different Retirements: Why the Order of Returns Matters

For most of your working life, the question that matters is fairly simple: how much is my portfolio earning over time? A strong year helps, a rough year hurts, and as long as you stay invested and keep contributing, the long run average tends to carry the day.

Retirement changes that question. Once you stop adding money and start withdrawing it, it is no longer just about how much your investments earn. It is also about when. The order in which good years and bad years show up can shape how long your savings last, and it is one of the more overlooked risks in retirement planning.

It has a name: sequence of returns risk. If you are nearing retirement, or recently retired, and you feel a little uneasy watching the market move, this is likely part of the reason. Your instincts are picking up on something real. The good news is that it is a risk you can plan for.

Meet Lucy and George

Imagine two retirees, Lucy and George. They have a lot in common. Both retire at 65 with $1 million. Both withdraw $50,000 a year to cover their living expenses. And over the next 30 years, both earn exactly the same set of annual returns, averaging about 6.8% per year.

There is just one difference. They experience those returns in opposite order.

Lucy retires into a strong market. Her first several years are positive, and the rough patches come later in life. George retires at the start of a three year downturn, and his best years arrive near the end.

On paper, their investment experiences are identical. Same returns, same average, same ups and downs. So you might expect them to end up in roughly the same place.

Same Averages, Very Different Outcomes

They do not.

Lucy's early gains give her portfolio room to grow even as she withdraws money each year. At 95, she still has roughly $2.7 million, more than double what she started with, after taking $1.5 million in withdrawals along the way.

George's story is harder. The early losses, combined with his ongoing withdrawals, shrink his portfolio before it has a chance to recover. By the time the strong years finally arrive, there is too little left for them to make up the difference. His savings run out at age 90.

Nothing about George's investments was worse than Lucy's. His timing was simply unlucky, and timing is something none of us can control.

Why Order Only Matters Once Withdrawals Begin

Here is the part that surprises many people. If neither Lucy nor George had withdrawn a single dollar, the order of their returns would not have mattered at all. Their portfolios would have taken very different paths, but both would have finished at exactly the same amount.

Withdrawals are what change the math. When you take money out during a downturn, you are often selling investments at lower prices. That money is no longer invested, so it cannot participate in the recovery. A 20% decline followed by a 20% gain already leaves a portfolio behind where it started. Add withdrawals on top of the decline, and the hole gets deeper while the climb out gets longer.

Think of it like a garden in its first season. Harvest too much before the plants have taken root, and there is less left to grow. Harvest from a garden that is already established, and it can keep producing for years.

This is why the years just before and just after retirement tend to matter most. A downturn at 85 is unpleasant, but a portfolio that has had two decades to grow is usually better positioned to absorb it. The same downturn at 65, when withdrawals are just beginning, can have a lasting effect.

The Role of Your Stock and Bond Mix

How exposed you are to sequence of returns risk depends in part on how your portfolio is built. Historically, portfolios that hold more stocks have experienced wider swings in both directions, with more potential for growth but also deeper declines in bad years. Portfolios with more bonds and short term investments have tended to move more gently, with less growth potential.

That does not mean retirees should avoid stocks. A retirement that begins at 65 can easily last 30 years or more, and over that span, inflation and rising costs make growth important. The goal is balance: enough stability to get through a rough stretch without selling at the worst time, and enough growth to support your spending for decades. The right mix will look different for each person, depending on their goals, income sources, time horizon, and comfort with market swings.

Practical Ways to Help Manage the Risk

You cannot choose the market you retire into. But you can build a plan that is better prepared for whatever that market turns out to be. Several approaches may help, and they often work best in combination.

Keep a cash cushion for spending. Setting aside a reserve in cash or short term bonds, often enough to cover a year or two of withdrawals, can give you something to draw from during a downturn. That may reduce the need to sell stocks while prices are down and give the rest of the portfolio time to recover.

Build flexibility into your spending. Retirees who can trim withdrawals in a difficult year, perhaps by postponing a big trip or skipping an inflation increase, may meaningfully extend how long their savings last. Even modest adjustments during a downturn can make a difference.

Cover essential expenses with predictable income. Social Security, pensions, and annuities provide income that does not depend on what the market does in a given year. Using these sources to cover essentials like housing, food, and health care can leave your portfolio free to fund more flexible goals, which in turn makes spending adjustments easier.

Choose a thoughtful withdrawal rate. How much you take out each year matters as much as how you invest. A sustainable withdrawal rate depends on your age, how long your money needs to last, inflation, and market conditions. It is worth revisiting over time rather than setting once and forgetting.

Adjust gradually as retirement approaches. Many investors shift toward a somewhat more conservative mix in the years leading up to retirement, then continue to review it as their needs change. Gradual, planned changes tend to serve investors better than sudden ones driven by headlines.

Stay the course. Sequence of returns risk can make market declines feel especially urgent, and the urge to make big changes in the moment is understandable. In many cases, though, reacting to short term volatility with major portfolio moves does more harm than good. A plan built ahead of time, reviewed regularly and adjusted thoughtfully, is usually a steadier guide.

Final Thoughts

Lucy and George did everything the same. They retired with the same savings, earned the same returns, and spent the same amount each year. The only difference was timing, and that difference decided whether their savings lasted a lifetime.

No one can predict which kind of market they will retire into. What you can control is how prepared you are when you get there: how your income is structured, how much flexibility you have in your spending, and whether your portfolio is balanced for both the early years and the decades that follow.

If you are within a few years of retirement, or have recently made the transition, this is a good time to look at your plan through this lens. A thoughtful strategy will not change what the market does, but it can help make sure the order of returns does not decide the outcome for you.

The examples of Lucy and George are hypothetical and for illustrative purposes only. They assume a $1,000,000 starting balance, $50,000 withdrawn at the start of each year, and the same 30 annual returns (average 6.8%, volatility 13%) applied in opposite order. They are not based on any actual investment, do not reflect fees, taxes, or inflation, and are not intended to predict or project investment results. Actual results will vary.