Quick answer
What is sequence of returns risk?
Sequence of returns risk is the danger that poor investment returns early in retirement, while you are withdrawing money, permanently shrink your portfolio. Selling assets after a fall locks in losses, so the same average return can leave very different ending balances depending on whether the bad years come first or last.
Key takeaways
- 01Order of returns does not matter without withdrawals, and matters a lot with them.
- 02The first 5–10 years of retirement carry most of the risk.
- 03Cash buffers, flexible spending and income that does not require selling all help.
- 04A concentrated stock magnifies it: one bad year can be −50% or worse.
| Also called | Sequence risk |
|---|---|
| When it matters | While withdrawing |
| Riskiest window | First 5–10 years |
| Without withdrawals | Order does not change the result |
| Common fixes | Cash bucket, flexible spending, income |
| Worst case | Large loss in year 1 or 2 |
The Short Answer
What is sequence of returns risk?
Sequence of returns risk is the danger that poor investment returns early in retirement, while you are withdrawing money, permanently shrink your portfolio. Selling assets after a fall locks in losses, so the same average return can leave very different ending balances depending on whether the bad years come first or last.
Without withdrawals, the order of returns does not change the ending value. With withdrawals, it matters a great deal, which is why the first five to ten years of retirement carry most of the risk.
Worked Example
How does sequence of returns risk work?
Two retirees each start with $2M and withdraw $80,000 at the start of every year. Both earn the same ten annual returns, averaging 5.4%: -20%, -10%, 5%, 8%, 12%, 15%, 18%, 10%, 7%, 9%. Retiree A gets them in that order; Retiree B gets them in reverse.
Chart
Portfolio value: bad years first vs bad years last
Retiree B ends with $474,064 more, about 26% more than A, purely because A sold shares at depressed prices in years one and two.
Why
Why do early losses matter more in retirement?
When you withdraw after a loss, you sell more shares to raise the same cash. Those shares are not there for the recovery. The earlier this happens, the more years of compounding are lost. While you are still saving, the effect runs the other way: early losses let you buy cheaply.
$1.85M
Ending value, losses first
$2.33M
Ending value, losses last
5.4%
Same average return for both
Managing It
How do you reduce sequence of returns risk?
Hold a cash or bond bucket
Two to three years of spending in cash or short bonds means you are not forced to sell stocks after a fall.
Use spending guardrails
Cut withdrawals by a set percentage after a bad year and raise them after a good one.
Start at a lower rate
Morningstar's 3.9% for 2026 already assumes rigid spending; flexible spending allows more.
Build income that does not require selling
Interest, dividends and option premium pay cash without selling shares. See monthly income from stocks.
Reduce concentration before retiring
A single stock can fall far more than an index. See how much concentrated stock is too much.
Where Embark fits
Sequence risk bites when you sell shares after a fall. What if spending came from income instead?
Run your ticker to see what a position could target in annual income.
- Income from the shares you own, so spending need not come from selling after a drop
- §721 in-kind contribution: $0 tax at contribution
- Targets 10%+ annual income; a target, not a guarantee
Run the numbers
Live prices · takes under a minute · no obligation
Concentrated Stock
Is sequence risk worse with concentrated stock?
Yes. The example uses index-like returns with a worst year of −20%. Individual stocks routinely fall 40–70% in a year, and some never recover. A retiree living off one position faces the same mechanism with much larger swings, and selling shares to fund spending also realizes capital gains.
Do
- Separate spending money from long-term stock exposure
- Plan the first five years of withdrawals before you retire
- Stress-test your plan with a −40% first year
Don't
- Fund retirement by selling a single stock each year
- Assume average returns will arrive in average order
- Raise spending after a strong first year without a rule
Embark
Can income replace forced selling?
Embark accepts appreciated stock in kind under §721, with $0 tax at contribution, and targets 10%+ annual income from the position. When spending comes from income rather than from selling shares after a fall, the mechanism behind sequence risk is weaker. The income is a target, not a guarantee, and the underlying stock still moves. 3-year lock-up; accredited investors only.
FAQ
Frequently asked questions
What is sequence of returns risk in simple terms?
The risk that bad returns early in retirement, while you withdraw money, do lasting damage to your portfolio.
Does sequence of returns risk matter before retirement?
Much less. Without withdrawals the order of returns does not change the ending value.
How long does sequence risk last?
It is highest in the first five to ten years of withdrawals.
What is the bucket strategy?
Keeping several years of spending in cash or short bonds so stocks are not sold after a decline.
Do annuities reduce sequence risk?
Guaranteed income annuities can, because they replace withdrawals with fixed payments; they have their own costs and credit risk.
Does the 4% rule account for sequence risk?
Yes, implicitly: it was set by the worst historical starting years, which had bad early sequences.
Sources
Primary sources
Sources
- Bengen, W. (1994), Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning (FPA reprint)
- Morningstar: What's a safe retirement withdrawal rate for 2026?
- Cooley, Hubbard and Walz (1998), Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable, AAII Journal
- 26 U.S. Code §721: Nonrecognition of gain or loss on contribution to a partnership
Cite this article
Embark Funds Research. “Sequence of Returns Risk Why the First Years Decide.” Embark Funds, updated October 29, 2026. https://www.embarkfunds.com/insights/sequence-of-returns-risk
Not tax, legal or investment advice: This article is educational and is not tax, legal, investment or Medicare advice. Rules and dollar amounts change every year and depend on your facts. Work with a CPA or financial planner before acting. Embark income figures are targets, not guarantees. Contributed shares have a 3-year lock-up, and Embark is open to accredited investors only.
Retirement Income & Medicare Series
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Sequence Risk
Income That Does Not Depend on Selling Shares
Contribute appreciated stock to Embark's SPV with $0 tax at contribution and target 10%+ annual income. 3-year lock-up; accredited investors.