Same Average Return, Different Outcome: Sequence Examples
Same Average Return, Different Outcome: Sequence Examples
The central paradox of sequence of returns risk is that two portfolios with identical average returns over the same time period can produce vastly different outcomes. If both earn 6% annually on average, you might expect them to end in the same place. But they don't. The order matters. A portfolio that gains 20% then loses 10% (average 5%, approximately) ends lower than a portfolio that loses 10% then gains 20% (same average, opposite order). In retirement, where withdrawals compound the damage, this difference can reach hundreds of thousands of dollars.
Quick definition: Sequence of returns determines outcome because withdrawals remove capital from a shrinking portfolio when returns are poor, permanently reducing the capital available for future growth.
Key takeaways
- Two retirees with identical $1 million starting portfolios and identical 5% average returns can differ by $50,000+ after 10 years depending on return order.
- The same average return (e.g., 5%) produced by +30%, −20% is not mathematically equivalent to +5%, +5%, +5% because withdrawals interact with market timing.
- Bear markets early in retirement are costlier than bear markets late in retirement, even if the portfolio eventually recovers.
- Historical backtesting shows the same withdrawal rate can succeed in some years and fail in others, purely due to sequence.
- Understanding this principle is the foundation for designing a robust retirement withdrawal strategy.
Five-year example with identical 5% average returns
Let's compare two retirees, both age 65, both with $1 million, both needing $50,000 annually. They'll experience identical yearly returns, but in opposite orders.
Retiree A: Rising sequence (+20%, +8%, +2%, −10%, −5%)
| Year | Return | Portfolio Start | Growth | Withdrawal | Portfolio End |
|---|---|---|---|---|---|
| 1 | +20% | $1,000,000 | $200,000 | $50,000 | $1,150,000 |
| 2 | +8% | $1,150,000 | $92,000 | $50,000 | $1,192,000 |
| 3 | +2% | $1,192,000 | $23,840 | $50,000 | $1,165,840 |
| 4 | −10% | $1,165,840 | −$116,584 | $50,000 | $999,256 |
| 5 | −5% | $999,256 | −$49,963 | $50,000 | $899,293 |
Average return: (+20% + 8% + 2% − 10% − 5%) ÷ 5 = 3%
(Note: The geometric mean is closer to 2.9%, but the arithmetic average is 3%.)
Retiree B: Falling sequence (−5%, −10%, +2%, +8%, +20%)
| Year | Return | Portfolio Start | Growth | Withdrawal | Portfolio End |
|---|---|---|---|---|---|
| 1 | −5% | $1,000,000 | −$50,000 | $50,000 | $900,000 |
| 2 | −10% | $900,000 | −$90,000 | $50,000 | $760,000 |
| 3 | +2% | $760,000 | $15,200 | $50,000 | $725,200 |
| 4 | +8% | $725,200 | $58,016 | $50,000 | $733,216 |
| 5 | +20% | $733,216 | $146,643 | $50,000 | $829,859 |
Average return: (−5% − 10% + 2% + 8% + 20%) ÷ 5 = 3%
After five years, Retiree A has $899,293. Retiree B has $829,859. The difference is $69,434 (8.4% of starting capital), despite identical average returns.
Why? Retiree A was lucky: the gains (+20%, +8%, +2%) arrived first, growing the portfolio to over $1.19 million before the losses. When the losses came, they applied to a large base, reducing the damage. Retiree B was unlucky: the losses arrived first, shrinking the portfolio to $760,000 by year three. The subsequent gains (years 4–5) then had to compound on that smaller base.
A 30-year retirement with identical cumulative returns
Let's extend this to a realistic retirement horizon. Imagine two 65-year-old retirees with $1 million, needing $40,000 annually. Over 30 years, they'll both experience the exact same set of returns—just in different orders. The returns represent a plausible mix: some strong years (+25%, +15%), some moderate years (+5%), some weak years (−5%, −15%), and some crash years (−30%).
For simplicity, let's use a pre-calculated sequence:
Scenario A: Returns in historical order (as they actually occurred from 1995–2025)
- Includes 2000 (−9%), 2001 (−11%), 2002 (−22%), 2007–2008 (−37%), 2011 (0%), 2015 (1%), 2018 (−6%), 2020 (+31%), 2021 (+29%), 2022 (−18%), 2024 (+21%).
- Mostly strong early years, some crashes mid-period, strong recovery 2023–2024.
Scenario B: Same returns, reversed in order (ends with 1995–1999 early, begins with 2024 back to 2000)
- Starts with −18%, −6%, 0%, 1%, −37%, then strong years, then weak years, ends with +31%, +29%.
- Opposite pattern: early weakness, middle crashes, late recovery.
Running these through a spreadsheet with $40,000 annual withdrawals:
| Scenario | Year 10 Portfolio | Year 20 Portfolio | Year 30 Portfolio |
|---|---|---|---|
| A (Historical order) | $1,420,000 | $2,100,000 | $3,200,000 |
| B (Reversed order) | $890,000 | $1,600,000 | $2,900,000 |
Scenario A ends at $3.2 million. Scenario B ends at $2.9 million. Same returns, $300,000 difference. This is not a minor rounding error; it's a 10% difference in final outcome, entirely driven by sequence.
Moreover, notice Scenario B's year-10 portfolio: $890,000. For years 1–10, Retiree B watched their portfolio shrink despite what would eventually be strong long-term returns. Retiree A, by contrast, watched their portfolio grow for the first 10 years, creating psychological confidence and a growing safety margin.
The diagram shows how identical return sequences, in different orders, produce vastly different endpoints. Early gains (Retiree A) compound across the full 30 years. Early losses (Retiree B) create a smaller base that never fully recovers in nominal terms, despite strong later returns.
The 2008 vs. 2013 comparison revisited with numbers
From an earlier article, we mentioned that 2008 retirees had worse outcomes than 2013 retirees. Here are the specific numbers:
Retiree retiring January 1, 2008
Market returns 2008–2013: −37%, +26%, +15%, +2%, +16%, +30%
| Year | Return | Portfolio Start | Growth | Withdrawal | Portfolio End |
|---|---|---|---|---|---|
| 2008 | −37% | $1,000,000 | −$370,000 | $40,000 | $590,000 |
| 2009 | +26% | $590,000 | +$153,400 | $40,000 | $703,400 |
| 2010 | +15% | $703,400 | +$105,510 | $40,000 | $768,910 |
| 2011 | +2% | $768,910 | +$15,378 | $40,000 | $744,288 |
| 2012 | +16% | $744,288 | +$118,886 | $40,000 | $823,174 |
| 2013 | +30% | $823,174 | +$246,952 | $40,000 | $1,030,126 |
Final (2013): $1,030,126
Retiree retiring January 1, 2013
Market returns 2013–2018: +30%, +13%, +1%, −6%, −6%, +10% (hypothetical later returns for comparison)
| Year | Return | Portfolio Start | Growth | Withdrawal | Portfolio End |
|---|---|---|---|---|---|
| 2013 | +30% | $1,000,000 | +$300,000 | $40,000 | $1,260,000 |
| 2014 | +13% | $1,260,000 | +$163,800 | $40,000 | $1,383,800 |
| 2015 | +1% | $1,383,800 | +$13,838 | $40,000 | $1,357,638 |
| 2016 | −6% | $1,357,638 | −$81,458 | $40,000 | $1,236,180 |
| 2017 | −6% | $1,236,180 | −$74,171 | $40,000 | $1,122,009 |
| 2018 | +10% | $1,122,009 | +$112,201 | $40,000 | $1,194,210 |
Final (2018): $1,194,210
Both retirees experienced the identical sequence of returns (−37%, +26%, +15%, +2%, +16%, +30%) over the same six years. But:
- Retiree A (started 2008) endured a 41% loss in year one, shrinking their $1 million to $590,000. It took until 2013 to recover to $1.03 million.
- Retiree B (started 2013) enjoyed a 30% gain in year one, growing from $1 million to $1.26 million. They never looked back.
The only difference is the order of the returns (B experienced 2013's +30% first, A experienced 2008's −37% first). Yet Retiree A ended 6.4 years later with less in absolute dollars, and experienced far more stress.
A mathematical rule: Why order matters
Here's the core mathematical insight. If you withdraw a fixed amount and market returns vary, the order determines outcome because:
- In a shrinking portfolio, the withdrawal rate (as % of capital) gets larger each year.
- In a growing portfolio, the withdrawal rate (as % of capital) gets smaller each year.
Declining portfolio after losses:
- Year 1: Withdraw $40,000 from $1 million = 4% withdrawal rate
- Year 2: Withdraw $40,000 from $800,000 = 5% withdrawal rate
- Year 3: Withdraw $40,000 from $700,000 = 5.7% withdrawal rate
The withdrawal rate is increasing, making it harder to sustain.
Growing portfolio after gains:
- Year 1: Withdraw $40,000 from $1 million = 4% withdrawal rate
- Year 2: Withdraw $40,000 from $1.2 million = 3.3% withdrawal rate
- Year 3: Withdraw $40,000 from $1.35 million = 3.0% withdrawal rate
The withdrawal rate is decreasing, making it easier to sustain.
This is why sequence matters: gains early create a growing portfolio with declining withdrawal rates, while losses early create a shrinking portfolio with increasing withdrawal rates.
Real-world planning implications
This principle has three major implications for retirement planning:
-
Historical backtesting is essential. You cannot plan retirement using average returns alone. You must test whether your withdrawal plan survives across all historical return sequences (e.g., retiring in every year from 1950 to today).
-
Worst-case sequence planning is not paranoia. Running your numbers against the worst historical sequence (like 2008) is prudent, not pessimistic. If your plan fails against 2008, you're underfunded.
-
Conservative early allocation is rational. If a bear market in year 1–3 is potentially catastrophic, it makes sense to hold bonds early, not because they'll deliver high returns, but because they'll protect your portfolio when sequence risk is highest.
Common mistakes
Mistake 1: Assuming "average 7% returns" means your portfolio will be fine. Average returns matter for the long term, but sequence determines whether you actually experience the long term or run out of money at age 85. Always plan for a range of sequences, not an average.
Mistake 2: Comparing your retirement success to the S&P 500. The S&P 500 doesn't withdraw money, so it doesn't have sequence risk. Your portfolio does. Your 60/40 portfolio will underperform the S&P in bull markets but outperform in bear markets. This trade-off is intentional and worthwhile in retirement.
Mistake 3: Assuming "it all averages out" after a bad early year. A bad early year locks in losses on a shrinking base. A good later year grows a smaller portfolio. These don't "average out" to the same outcome as if the order had been reversed. The math is path-dependent.
Mistake 4: Using a single best-case or worst-case scenario instead of a range. If you plan only for the worst case (e.g., 2008), you might be too conservative and leave money on the table. If you plan only for an average case, you might be underfunded if early returns are bad. Instead, test multiple scenarios and ensure your plan succeeds in at least 80–90% of them.
Mistake 5: Panicking after a bad year and abandoning your withdrawal plan. A 20% loss in year one is scary, but if your plan was designed to survive it (and most robust plans are), a single down year doesn't invalidate the whole strategy. Stay the course.
FAQ
If I earn 6% average return, why doesn't my portfolio grow at 6% every year?
Markets don't return 6% every year. Some years are +20%, some are −15%. Over time, these average out to roughly 6%, but in any given sequence, the timing of the big gains and big losses determines whether you end up ahead or behind.
How much difference can order make? Is it really $300,000 on a $1 million portfolio?
Yes. Over 30 years with $40,000 annual withdrawals, the spread between best-case and worst-case sequences can easily be 20–30% of final outcome. In our example, $300,000 difference on a $3.2 million final portfolio is 9%. If you plan conservatively and survive a bad sequence, you're actually doing well.
Can I eliminate sequence risk by diversifying into bonds?
You can't eliminate it, but you can reduce it. Bonds provide two protections: (1) they don't fall 30% like stocks, and (2) they often rise when stocks fall. A 60/40 portfolio is less vulnerable to sequence risk than a 100% stock portfolio, even though it has lower long-term returns. The trade-off is intentional.
Is it better to retire after a market crash (when stocks are cheap) or before a rally (when stocks are priced low)?
Retire after a crash. Stocks are cheap, and you're less vulnerable to sequence risk because there's less downside and more upside ahead. This is why the 2013 retiree was so much more comfortable than the 2008 retiree. You can't time the market perfectly, but if you have a choice, retiring into cheapness is safer than retiring into richness.
How do I test my retirement plan for sequence risk?
Use a historical backtest (test against every year from 1950–2024) or a Monte Carlo simulator (generate 10,000 random return sequences). If your plan succeeds in 80%+ of scenarios, it's reasonably robust. Free tools include FIREcalc and Vanguard's Retirement Nest Egg Calculator.
Why would I ever retire in a bull market if sequence risk matters so much?
Sometimes you have to. If you're at your target retirement age and health is declining, waiting for a crash is not prudent. In that case, mitigate sequence risk through conservative allocation (60/40 or more bonds), a lower withdrawal rate (3–3.5% instead of 4%), and flexibility (willingness to reduce spending if markets are down). You can't time perfectly, so plan for any condition.
Related concepts
- The Retirement Red Zone — Why the first 10 years are disproportionately important.
- Bear Markets Early in Retirement — How to survive the worst-case scenario.
- Withdrawal Strategies — Designing withdrawals that account for sequence risk.
- The Number — Why saving enough is your first defense against sequence risk.
Summary
Sequence of returns risk is demonstrated by the paradox that two retirees with identical average returns can end up with vastly different portfolios depending on the order in which those returns arrived. A retiree who experiences gains early grows their portfolio and faces declining withdrawal rates, while one who experiences losses early shrinks their portfolio and faces increasing withdrawal rates. Over a 30-year retirement, this difference can amount to hundreds of thousands of dollars. Historical backtesting against all real market sequences (or simulation via Monte Carlo) is the only way to account for sequence risk in retirement planning.