Sequence of Returns Risk
research · Bengen's Safe Withdrawal Research (1994)
The order of investment returns matters more than the average return during retirement. Early portfolio losses combined with regular withdrawals can deplete a nest egg beyond recovery, even if markets later recover.
Core Concepts
The Problem
Standard retirement projections often use average returns and ignore the devastating impact of early losses, leading to overly optimistic plans.
The Claim
A retiree must manage sequence risk by using flexible withdrawal strategies, holding cash reserves, or adjusting asset allocation to protect against early market downturns.
Key Evidence
- •Historical simulations show that a retiree who retired in 1966 (just before a bad decade) would have run out of money under a fixed 4% withdrawal, while someone retiring a few years later would have thrived.
Practical Implication
Effective retirement planning must prioritize downside protection in the critical first 5-10 years of retirement.
Nuance & Limits
Sequence risk is most acute for traditional portfolios with high equity exposure and fixed withdrawals. Annuities, bond ladders, or dynamic spending rules can mitigate it.
Source Material
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