Sequence of Returns Risk: The Hidden Danger of Early Retirement Losses

Sequence of returns risk is the phenomenon where the order of investment returns matters during the drawdown phase, even though the order is irrelevant during accumulation. If you experience a 30% portfolio decline in year 1 of retirement while also withdrawing 4% to live on, your portfolio base is locked in at a much lower level — future withdrawals come from a smaller pool, and subsequent 'average' returns can't rescue you. In contrast, the same 30% decline in year 25 of a 30-year retirement barely matters. Academic papers show that retirees whose first decade of returns averages below the long-run mean have dramatically higher failure rates than those whose first decade is above-average — even when total 30-year returns are identical. The 1966 retiree cohort in Bengen's research is the canonical example: they experienced a flat-to-negative 1970s early in retirement, which locked in poor outcomes despite strong later decades.

Sequence risk was implicitly identified in Bengen's 1994 paper (the 1966 cohort was the historical worst case) but named and formalized in the 2000s. Wade Pfau and Michael Kitces are the most-cited modern researchers; their 2013 paper 'Reducing Retirement Risk with a Rising Equity Glidepath' proposed the counterintuitive 'bond tent' strategy — holding more bonds early in retirement and gradually increasing equity exposure — as a direct sequence-risk mitigation. Before Pfau-Kitces, conventional advice was to reduce equity exposure with age; their research inverted that for retirees concerned about the first 5-10 years.

Sequence risk is often overstated for retirees with meaningful non-portfolio income. If Social Security + a pension covers 60% of your spending, your portfolio only needs to fill the remaining 40% — a 30% early decline matters much less. Similarly, retirees with flexibility to cut spending during downturns (10-15% reduction for 2-3 years) can largely neutralize sequence risk without sacrificing long-run lifestyle. The risk is most acute for retirees who: (a) have high withdrawal rates (>4%), (b) depend entirely on portfolio for spending, (c) have no ability to reduce spending temporarily, and (d) retire into a high-valuation environment (today). Also worth noting: sequence risk cuts both ways — retirees who retire into strong early markets (the 1982 cohort in Bengen's research) end up extraordinarily wealthy, with large bequests.

• “Bond tent / rising equity glidepath research” — Pfau & Kitces (2013), Journal of Financial Planning
• “1966 cohort worst-case in historical SWR research” — Bengen (1994)
• “Sequence risk is a retirement-specific phenomenon” — Bengen, Pfau, Kitces various works

• Pfau & Kitces (2013), 'Reducing Retirement Risk with a Rising Equity Glidepath', Journal of Financial Planning (accessed 2026-04-17)
• Bengen (1994), 'Determining Withdrawal Rates Using Historical Data', Journal of Financial Planning (accessed 2026-04-17)
• Cooley, Hubbard, Walz (1998), 'Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable', AAII Journal (accessed 2026-04-17)

Last verified: 2026-04-17