Sequence of Returns Calculator
Sequence risk in retirement.
Calculate the sequence-of-returns risk impact during retirement withdrawals — same average return, but bad early years can permanently shrink the pot.
What this tool does
This tool models how the sequence in which investment returns occur affects a retirement portfolio's longevity. It compares two scenarios: one where negative returns happen early in retirement, and another where the same returns arrive in reverse order. By calculating the ending balance under both sequences, the tool illustrates why the timing of gains and losses matters—even when average returns are identical. The result shows the difference between experiencing poor market conditions while withdrawing funds versus encountering them later. Starting balance, annual withdrawal amount, and the specific returns in each year are the primary drivers of the outcome. This is useful for understanding portfolio behaviour during different market cycles over a fixed period, though it does not account for inflation, changing withdrawal needs, or tax effects.
Quick answer: with the default values, the result is $36,900.00 (Sequence Risk Impact). Adjust the values below for your own figures.
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Formula Used
Disclaimer
Results are estimates for educational purposes only. They do not constitute financial advice. Consult a qualified professional before making financial decisions.
Sequence of returns risk: same average return, different orders, dramatically different retirement outcomes. 1M with 40k withdrawals annually: bad returns first (-20%, +5%, +25%) ends at 905.5k. Good returns first (+25%, +5%, -20%) ends at 942.4k. Same 3.3% average — a 36.9k difference from the luck of timing.
Example: retiree starts with 1M, withdraws 40k/year. Same 3.3% average return over 3 years. Order 1 (bad first): -20%, +5%, +25%. Year 1: (1M - 40k) × 0.80 = 768k. Year 2: (768k - 40k) × 1.05 = 764k. Year 3: (764k - 40k) × 1.25 = 905.5k. Order 2 (good first): +25%, +5%, -20%. Final: 942.4k. Same average return, 36.9k difference.
Why sequence matters in retirement: withdrawing during downturns locks in losses (selling more shares at low prices). Recovery has less capital to regrow. Sequence risk highest first 5-10 years of retirement. Mitigation strategies: (1) Bond tent (higher bond allocation early retirement), (2) Cash reserves (2-3 years expenses), (3) Variable withdrawal (cut spending in down years), (4) Working part-time first 5 years to reduce withdrawal pressure. Accumulation phase: sequence doesn't matter (all years compound equally without withdrawals).
Run it with sensible defaults
Using starting portfolio balance of 1,000,000, annual withdrawal of 40,000, year 1 return of -20%, year 2 return of 5%, the calculation works out to 36,900.00. The defaults are meant as a starting point, not a recommendation.
The levers in this calculation
The inputs — Starting Portfolio Balance, Annual Withdrawal, Year 1 Return %, Year 2 Return %, and Year 3 Return % — do not pull with equal force.
How the math works
Compare ending balance with same returns in different sequences (bad first vs good first).
What this doesn't capture
Steady-rate math ignores real-world volatility. Actual returns are lumpy; sequence-of-returns risk matters most in drawdown; fees and taxes drag on compound growth; and behaviour changes in drawdowns can reduce outcomes below the projection. The number represents one scenario rather than a forecast.
£1,000,000 with £40,000/yr at returns -20%/5%/25% = $36,900.00.
Inputs
| Good Returns First | $942,400.00 |
|---|---|
| Bad Returns First | $905,500.00 |
| Same Average Return | 3.33% |
| Annual Withdrawal | $40,000.00 |
This example uses typical values for illustration. Adjust the inputs above to match a specific situation and see how the result changes.
Sources & Methodology
Methodology
Compare ending balance with same returns in different sequences (bad first vs good first).
References
Frequently Asked Questions
Why sequence matters in retirement?
Mitigation strategies?
When is sequence risk worst?
Safe withdrawal rate (SWR)?
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