Sequence of returns risk — the same returns in a different order

The horizon is split in half. One portfolio gets the good return for the first half and the bad one for the second, the other gets them the other way round, and both are then run year by year with the same annual flow — a contribution in accumulation mode, a withdrawal in decumulation. Because the two return series are the same multiset, the arithmetic average is identical by construction and is printed so you can check it. The dashed line marks the year the two sequences swap over.

Two blocks of constant returns is a caricature of a market, chosen because it isolates the mechanism rather than because it resembles history. Real sequences are noisier, which spreads the effect out but does not remove it. Flows are annual and applied after the year's return, there is no inflation indexing on the withdrawal, and no tax or cost is applied to either path.

What does the order do while I am contributing?

It still matters, and it points the opposite way to retirement. A contribution earns only the returns that come after it, so money paid in during the bad years buys more units and then compounds through the good ones: with contributions going in, the bad start ends ahead. How far ahead depends on the contributions against the starting balance — at the default returns over 20 years, about 2% for €1,000 a year on €500,000, and twice as much in the end for €20,000 a year on €10,000. The starting balance on its own ends the same either way.

Why is it so damaging in retirement?

Because a withdrawal in a fallen market does the opposite: it sells more units to raise the same amount of cash, and those units are permanently gone. They are not there to recover when the good years arrive, so the portfolio cannot get back to where the good-first path is even though the returns from then on are identical. The damage is locked in by the selling, not by the fall.

What actually reduces this risk?

Anything that stops you selling into a fall. A cash buffer covering the first year or two of spending, a bond allocation held specifically to be sold first, spending rules that flex downward in bad years, and part-time income early in retirement all work through the same mechanism. Each one is a way of making the withdrawal come from somewhere other than the depressed asset, which is the only variable this page shows as mattering.

• Safe withdrawal rate calculator — how long the portfolio lasts
• Retirement phase planner — the gap before AOW starts
• Loss tolerance — what each allocation lost in three real crashes