Sequence-of-Returns Risk

The risk that the ORDER of good and bad return years -- not just the long-run average -- changes your outcome when you are adding or withdrawing money. A crash early in retirement, while you are withdrawing, is the most dangerous: selling shares at depressed prices to fund spending shrinks the base the later recovery has to work with, so two retirees with the same average return can end up in very different places. The risk is largest in roughly the five years before and after withdrawals begin (sometimes called the 'fragile decade'). A crash early in accumulation is nearly harmless by comparison, because the balance is still small and you keep buying shares cheap.

Lessons that use this term

• Sequence-of-Returns Risk
• Spending It Down: Decumulation and the 4% Rule
• Why Falling Markets Help the Accumulator
• Difficult Client Conversations: Drawdowns, Risk, Lifecycle

Related terms

Adjusted Cost Basis · Annuity · APTC · Backdoor Roth · Capital Gains Distribution · Capitalized Interest

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