Sequence of Returns Stress Test
Compare the same five annual returns in opposite orders while taking inflation-adjusted retirement withdrawals.
Both paths use the same five returns. One begins with losses and the other ends with them. Withdrawals occur at the start of each year.
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- Losses arrive first
- $846,484.65
- Losses arrive last
- $941,107.26
- First withdrawal rate
- 4.00%
Year 1-20% vs 15%$921,600.00 vs $1,324,800.00
Year 2-10% vs 10%$784,944.00 vs $1,402,896.00
Year 35% vs 5%$770,721.84 vs $1,419,571.44
Year 410% vs -10%$790,098.03 vs $1,230,408.49
Year 515% vs -20%$846,484.65 vs $941,107.26
This fixed illustration is not a forecast or a retirement success estimate. Taxes, fees, asset allocation, rebalancing, and returns beyond year five are excluded.
How the calculation works
At the start of each year, subtract the inflation-adjusted withdrawal. Then apply that year’s return to the remaining balance. Repeat for both return orders.
This is a five-year fixed illustration, not a probability model or forecast. It excludes taxes, fees, rebalancing, asset allocation, and all later retirement years.
Reference: Investor.gov: Gauge your risk tolerance
Sequence of Returns Stress Test FAQs
What is sequence of returns risk?
It is the risk that poor returns early in retirement, while withdrawals are leaving the portfolio, cause more lasting damage than the same returns arriving later.
Why do the same returns produce different ending balances?
Withdrawals change the amount exposed to each later return. An early loss reduces the portfolio before future withdrawals and recoveries, so the order matters even when the set of annual returns is identical.
Does this stress test predict whether my retirement will succeed?
No. It compares two fixed five-year illustrations. It does not model probabilities, future returns, taxes, fees, asset allocation, or the full retirement period.
When does the calculator subtract each withdrawal?
It subtracts the inflation-adjusted withdrawal at the beginning of each year, then applies that year’s return to the remaining balance.
What can reduce sequence risk?
Possible planning responses include flexible spending, adequate cash reserves, a suitable asset allocation, rebalancing rules, reliable income, and a lower initial withdrawal. Each choice has tradeoffs.
Should I use average return for retirement planning?
An average can summarize a set of returns, but it hides their order. Test several paths, especially early losses, and review the plan regularly instead of relying on one smooth average.