Sequence-of-returns risk is the danger that poor market returns arrive in the first years of retirement, when withdrawals are being taken from the largest balance the investor will ever hold. The order of returns, not just their average, decides the outcome. Using actual annual returns from the NYU Stern historical table, a retiree who started in 2000 with $1 million in a 60/40 portfolio and withdrew $40,000 a year, rising 2.5% annually, had about $996,000 left after 15 years; the same 15 annual returns in reverse order would have left about $1.36 million, even though the average return was identical at 6.1% a year [1]. As of July 31, 2026, with the S&P 500 (SPX) at 7,489.72 and 3-month Treasury bills yielding 3.69%, new retirees have both a high starting equity level and a real cash yield to plan around [3] [4].
What sequence-of-returns risk means
Vanguard defines it as "the risk of impairing one's lifetime spending power by withdrawing during a down market early in retirement" [2]. For an investor still saving, a bear market is a discount on future purchases. For an investor withdrawing, the same bear market permanently removes shares that would otherwise have participated in the recovery. Two retirees can experience the same average return over 30 years and end with very different wealth, purely because of the order in which the good and bad years arrived.
Why the first retirement years matter most: a worked example
The NYU Stern table gives annual returns for the S&P 500 with dividends and for 10-year Treasury bonds back to 1928 [1]. The example below uses the 15 years from 2000 through 2014 for a 60/40 portfolio rebalanced annually, with a $40,000 withdrawal at the start of each year that rises 2.5% a year for inflation.
| Scenario (same 15 annual returns, $1,000,000 start) | Years 1 to 3 returns | Lowest balance | Balance after 15 years |
|---|---|---|---|
| Actual order, 2000 to 2014 | +1.2%, -4.9%, -7.1% | $763,000 (end of year 9) | $995,672 |
| Same returns in reverse order | +12.4%, +15.6%, +10.7% | $1,000,000 (start) | $1,358,984 |
| Retire in 2009 instead, 2009 to 2023 | +11.1%, +12.3%, +7.7% | $1,000,000 (start) | $2,273,224 |
Annual 60/40 returns are computed from the S&P 500 and 10-year Treasury columns of the NYU Stern table [1]. The arithmetic average of the 15 returns in the first two rows is the same, 6.14% a year. The only difference is order. The 2000 retiree absorbed three losing years immediately, then the 2008 loss of 13.9% on the 60/40 mix when the balance was already depleted, and finished with less than the starting capital in nominal terms. The reverse-order retiree compounded first and absorbed the same losses on a larger base. The retiree who started in 2009 illustrates the other side: a strong first decade more than doubled the portfolio despite identical withdrawals.
The mathematics behind the gap
Withdrawals turn a symmetric problem into an asymmetric one. When the portfolio falls 20% and the retiree still removes 4% of the original balance, the withdrawal is now 5% of what remains, and the portfolio needs a 31% gain rather than 25% to recover. Each early loss raises the effective withdrawal rate for every year that follows. This is why safe withdrawal studies, including the 4% rule that Vanguard uses as its baseline comparison, are calibrated to the worst historical starting years rather than to average returns [2].
How much sequence risk exists in mid-2026
The starting point matters because high valuations and strong recent returns raise the odds that the next few years are below average. The S&P 500 closed at 7,489.72 on July 31, 2026, up 9.4% for the year after gains of 24.88% in 2024 and 17.78% in 2025 [3] [1]. The index also showed how fast conditions can change: it fell about 9% between January 27 and March 30, 2026, before recovering [3]. A retiree who began withdrawals on January 1, 2026 lived through that decline in the first quarter.
Cash and short bonds offset part of the risk. Three-month Treasury bills yielded 3.69% on July 31, 2026, and the Federal Open Market Committee held its target range at 3.50% to 3.75% on July 29, with three members preferring an increase [4] [5]. DataPorium's economic series shows the effective federal funds rate at 3.63% in June and July 2026 [6]. A retiree holding two years of withdrawals in bills earns a return close to inflation while waiting out a drawdown, which was not true when bills yielded 0.04% in 2021 [1]. Investors can follow the policy rate and other macro series on DataPorium's economic metrics page.
Strategies the evidence supports
- Dynamic spending. Vanguard's analysis of retirees starting in 1973, 1983 and 1993 with $1 million in a 60/40 portfolio found that adjusting withdrawals within a floor and ceiling, rather than taking a fixed inflation-adjusted 4%, allowed all three to receive more income over 30 years without exhausting their portfolios [2].
- A cash and short-bond reserve. Holding one to three years of withdrawals outside stocks means a bear market does not force stock sales at the bottom. At a 3.69% bill yield, the opportunity cost of that reserve is modest [4].
- A lower starting withdrawal rate. Starting at 3.5% instead of 4% cuts the depletion risk sharply in bad sequences, at the cost of lower spending in good ones.
- Flexible retirement timing. Delaying retirement or part-time work during a bear market reduces the number of shares sold at depressed prices, the single most damaging feature of a bad sequence.
The counterpoint
Bond-heavy portfolios reduce sequence risk but raise longevity risk. Over 1928 to 2025, 10-year Treasuries compounded at 4.53% a year against 10.02% for stocks, and in 2022 bonds fell 17.83% alongside stocks [1]. A retiree who shifts entirely to bonds to avoid an early stock loss accepts a lower expected return for 25 years and, at current yields, only a thin margin over inflation. The balanced answer in the research is to keep a meaningful stock allocation, cushion it with a reserve, and adjust spending when markets fall [2].
Two retirees with the same average return can end up with very different wealth, and the difference is decided in the first five years.
Key takeaways
- With actual 2000 to 2014 returns, a $1 million 60/40 portfolio with $40,000 rising withdrawals ended at about $996,000; the same returns in reverse order ended at about $1.36 million [1].
- Average returns do not decide retirement outcomes; the order of returns does, because withdrawals lock in early losses.
- Vanguard's dynamic spending research found that flexible withdrawals let 1973, 1983 and 1993 retirees spend more without running out of money [2].
- As of July 31, 2026, T-bills yielded 3.69%, making a cash reserve against a bad sequence far cheaper to hold than in 2021 [4].
- Moving entirely to bonds trades sequence risk for longevity risk; bonds compounded at 4.53% since 1928 versus 10.02% for stocks [1].
Frequently asked questions
What is sequence-of-returns risk in simple terms?
It is the risk that bad market years arrive early in retirement, while money is being withdrawn. Early losses combined with withdrawals shrink the base that later good years can grow, so the order of returns changes the outcome even when the average is the same [2].
How much difference can the order of returns make?
Using actual 2000 to 2014 returns for a 60/40 portfolio with $40,000 annual withdrawals rising 2.5%, a $1 million portfolio ended near $996,000; the same returns reversed ended near $1.36 million, a gap of about 36% [1].
How can retirees reduce sequence-of-returns risk?
The research points to a cash and short-bond reserve covering one to three years of spending, a flexible withdrawal rule with a floor and ceiling, and a modest starting withdrawal rate [2]. Treasury bills yielding 3.69% as of July 31, 2026 make the reserve cheaper to hold [4].
Is sequence risk higher for people retiring in 2026?
The S&P 500 gained 24.88% in 2024 and 17.78% in 2025 and was up 9.4% in 2026 through July 31, so the starting level is high, which historically raises the odds of below-average returns ahead [1] [3]. That does not predict a decline, but it argues for a reserve and a flexible spending plan.
Sources & References
- [1] NYU Stern (Damodaran): Historical Returns on Stocks, Bonds and Bills, 1928 to 2025
- [2] Vanguard Advisors: Show clients that, yes, they can spend more in retirement (May 2024)
- [3] FRED: S&P 500 (SP500), daily close
- [4] FRED: 3-Month Treasury Bill Secondary Market Rate (DTB3)
- [5] Federal Reserve: FOMC statement, July 29, 2026
- [6] DataPorium Economic Metrics
