Sequence of returns

RETIREMENT INCOME INSIGHTS: The Sequence of Returns Risk

Why the order of your investment returns can matter as much as the returns themselves — and why it changes everything in retirement.

Imagine two investors who earn the exact same annual returns over a 50-year period — just in the opposite order. During their working years, that order makes no difference whatsoever. But once they begin drawing income in retirement, their results diverge by nearly $1.9 million. This is the story of Mr. Brown and Mrs. Garcia.

Mr. Brown — rough start, strong finish. He opens with three brutal years (−9%, −12%, −22%) and then recovers through strong later returns.

Mrs. Garcia — strong start, rough finish. She opens with three excellent years (+19%, +18%, +22%) but faces big losses near the end.

Part 1 · Accumulation

When the Order of Returns Doesn’t Matter

Building wealth before retirement · Ages 41–65

Starting value: $100,000, identical for both investors
Withdrawals: None — they’re building wealth, not drawing it
Time horizon: 25 years, ages 41 through 65

Two very different journeys to the same destination

Mr. Brown and Mrs. Garcia experience the same 25 annual returns — but in opposite order. The chart below shows how their portfolios move very differently along the way, yet both arrive at exactly the same ending value at age 65.

Accumulation phase, ages 41–65. Two very different paths, one identical ending balance.

Mr. Brown began with significant early losses but recovered through strong later-career returns, ending at an age-65 portfolio of $621,115.

Mrs. Garcia started strong but faced significant losses in her final working years before retirement — and still ended at exactly $621,115. Same average return, same finish line.

Accumulation takeaway. When you’re not withdrawing from your portfolio, the order of returns is irrelevant — only the average matters. Both investors achieved an 8% average return and ended with exactly the same $621,115. So what changes in retirement?

Part 2 · Distribution

When the Order of Returns Is Everything

Withdrawing income during retirement · Ages 66–90

Starting value: $621,115, identical for both retirees
Annual withdrawal: 5%, adjusted 3% each year for inflation
Time horizon: 25 years, ages 66 through 90

Same returns. Same withdrawals. Dramatically different outcomes.

Both retirees now experience the same 25 annual returns as before — just in reversed order — and take identical inflation-adjusted withdrawals. This time, the timing of the negative returns determines whether the portfolio survives.

Distribution phase, ages 66–90. Mr. Brown’s portfolio is depleted at 85; Mrs. Garcia’s is still growing at 90.

For Mr. Brown, losses of −9%, −12%, and −22% in his first three years of retirement drained principal before the markets could recover. His funds were exhausted at age 85, leaving a balance of $0.

For Mrs. Garcia, gains of +19%, +18%, and +22% in her first three years built a compounding cushion that absorbed the later downturns. At 90, her portfolio was still growing at $1,885,183.

Distribution takeaway. Selling shares during a down market to fund withdrawals locks in losses that can’t be recovered. Identical returns that produced the same wealth during accumulation diverged by $1.89 million in retirement — driven entirely by sequence. This is a hypothetical, illustrative estimate only.

Conclusion · Action Plan

Protecting What You’ve Built

How to manage sequence risk in retirement

The contrast is stark. During accumulation, order doesn’t matter — the difference at age 65 was $0. Without withdrawals, the volatility along the way has no impact on the final balance; only the average return matters. During distribution, order is everything — the difference at age 90 was $1.89 million. Withdrawing during a down market forces sales at low prices, and those losses compound and can’t be recovered.

How to help protect against sequence risk

A thoughtful retirement income plan considers not just average returns, but the range of return sequences you might actually experience.

Model multiple sequences. Stress-test your plan against the possibility of poor early returns, not just average outcomes.
Maximize guaranteed income. Social Security, pensions, and annuities provide payments insulated from market sequence.
Build a cash buffer. Maintain one to three years of expenses in cash or short-term bonds to avoid selling stocks during downturns.
Consider an income floor. Annuities can create a baseline of guaranteed lifetime income that doesn’t depend on market timing.
Adjust as needed. Build flexibility into your withdrawal strategy so spending can be modulated during difficult markets.
Review regularly. Revisit your plan as markets, tax laws, and personal circumstances evolve over time.

Let’s build a retirement strategy designed to last.

Whether you’re 10 years from retirement or already drawing income, a clear-eyed look at sequence risk can be one of the most valuable conversations you have. We’d be glad to walk through your specific situation.

The Fitzgerald Wealth Group
(973) 557-7551 | joseph.fitzgerald@northeastfn.com | www.fitzgeraldwealthgroup.com

The Bottom Line

In retirement, when your returns happen can matter as much as what they are.

Two investors. Identical 8% average returns. Identical starting balances and withdrawal rates. The only difference was the order of their returns — and that single variable produced a $1.89 million gap by age 90. Mr. Brown’s portfolio ran out six years before Mrs. Garcia’s, even though they earned the exact same returns over the same period.

IMPORTANT DISCLOSURES

This material is for educational and illustrative purposes only and is not intended as legal, tax, or investment advice. The hypothetical examples shown are not representative of any specific investment and do not reflect the performance of any particular investment vehicle. They assume a constant annual rate of return and do not account for fees, taxes, or transaction costs, which would reduce actual results. Past performance is not a guarantee of future results. All investments involve risk, including possible loss of principal. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Please consult your legal, tax, and financial professionals for guidance specific to your individual situation.

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 1150 Raritan Road, Suite 201, Cranford, NJ 07016, (908) 709-0020. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. The Fitzgerald Group and Northeast Financial Network are not affiliates or subsidiaries of PAS or Guardian. CA Insurance License #0H01236