It’s common for experienced investors to evaluate a long-term plan by starting with an average return assumption.
Over long horizons, markets have delivered meaningful growth, and “average annual return” is an intuitive shorthand for what a portfolio might do over time.
But averages can hide one of the most important structural risks investors face once they begin withdrawing from a portfolio: the order of returns.
This concept, known as sequence of returns risk, is not about whether markets grow over time. It’s about what happens when withdrawals and volatility occur together.
The central takeaway is straightforward:
When a portfolio is funding spending, the timing of returns can matter as much as—or more than—the long-term average.
Understanding this risk helps investors evaluate sustainability with clearer eyes, and it encourages better questions about portfolio structure, resilience, and flexibility.
Defining sequence of returns risk in plain English
Sequence of returns risk is the risk that a portfolio experiences poor returns early in the withdrawal period, when the investor is taking money out to fund expenses.
Two portfolios can end a decade with the same average return and still produce very different outcomes for a retiree because the path of returns matters when distributions are underway.
This risk is fundamentally different from volatility during accumulation.
When investors are still contributing, down markets can allow them to buy at lower prices. Once withdrawals begin, that relationship flips: to fund spending, assets may need to be sold regardless of price.
A timeless illustration: same average, different outcome
Consider a simplified example:
- An investor begins withdrawals with a $1,000,000 portfolio.
- They withdraw 5% per year ($50,000), adjusting overtime based on their plan and circumstances.
- Over 10 years, two return paths produce the same average return.
Path A: Strong returns early, weaker returns later.
Path B: Weak returns early, strong returns later.
Even if both paths average out similarly, Path B is typically more damaging because early declines coincide with selling assets to fund withdrawals.
Researchers at the Center for Retirement Research at Boston College demonstrate this sequence effect by modeling portfolios with the same average return but different timing of gains and losses, showing that withdrawal outcomes can vary depending on when returns occur.
The point is not that any particular market pattern is “likely.” The point is that when withdrawals are involved, portfolio sustainability becomes path dependent.
Why early losses can be disproportionately disruptive
Early losses matter because withdrawals can permanently shrink the base that future gains compound on. When a portfolio declines and withdrawals continue, three things may happen simultaneously:
- More shares are sold to raise the same dollars, because prices are lower.
- The remaining portfolio becomes smaller, so the recovery has less capital to work with.
- Compounding works on a reduced base, which can make later gains less effective at restoring long-term sustainability.
Gordon (2025) explains that poor returns early in retirement, when paired with ongoing withdrawals, can accelerate portfolio depletion even when long-term return assumptions appear reasonable.
This is why sequence risk is often experienced as a math problem, not a market-timing problem.
Common misunderstandings that sequence risk helps correct
Myth 1: “If my portfolio averages X%, I’m fine.”
Average returns are not the same thing as sustainable outcomes once withdrawals begin. Retirement results are shaped by multiple factors, including the sequence of returns and portfolio design.
Myth 2: “I’ll avoid the problem by living only on dividends or interest.”
Income-oriented portfolios can still experience meaningful price declines, income variability, and changing payout policies. Focusing on “income” does not remove market risk; it simply changes how return shows up.
Myth 3: “Markets recover, so time solves it.”
Markets have historically recovered over long periods, but a portfolio funding withdrawals can be weakened in ways that make recovery harder. Sequence risk is about whether the plan can endure a difficult path, not whether markets eventually rebound.
What sequence risk means for investors
Sequence of returns risk is not a reason to avoid growth assets, and it is not an argument for predicting downturns. It is a framework for thinking clearly about resilience.
In general, investors can evaluate sequence risk by focusing on questions like:
- How dependent is the plan on steady market returns early in the withdrawal years?
- How much flexibility exists in spending or distributions if markets are temporarily unfavorable?
- Does the portfolio have a structure that supports both liquidity needs and long-term growth?
- Has the plan been tested under multiple plausible paths—not just an average?
This is where planning becomes most useful: not because it predicts outcomes, but because it clarifies tradeoffs and helps investors understand what conditions could stress the strategy.
The Monash Centre for Financial Studies notes that retirement outcomes are shaped by return paths, asset mix, and starting conditions, not simply average returns.
Quick Overview
- Sequence of returns risk is the risk that early negative returns, combined with withdrawals, can materially weaken long-term sustainability.
- Two portfolios with the same average return can create very different outcomes depending on the timing of returns.
- Sequence risk is primarily structural: it reflects the interaction of market volatility and withdrawal decisions, not the ability to forecast markets.
- Clear thinking comes from evaluating resilience under different paths, not relying on a single “average return” assumption.
Continuing the conversation
At Moran Wealth Management® we believe durable decision-making starts with understanding the structural forces that shape long-term outcomes. Sequence of returns risk is one of those forces: quiet, mathematical, and often underestimated.
If you’d like to explore how this concept fits into a broader planning framework, we invite you to continue the conversation with our team by submitting a consultation request. Our process begins with your priorities, time horizons, and the role your portfolio is meant to play. From there, we frame the decisions, identify potential stress points, and walk through the implications in plain language so you can evaluate your strategy with greater clarity.
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