The formula
How to calculate sequence of returns risk
Sequence of returns risk is the reason two retirees with identical average returns can end up in completely different places. Losses early in retirement are far more damaging than the same losses later, because the withdrawals come out of a portfolio that has already shrunk.
The mechanism is straightforward. Selling assets to fund spending during a downturn locks in the loss on the units sold, and those units are no longer there to recover when the market does.
What to enter:
- Portfolio at retirement
- Planned annual withdrawal
- Market fall in year one (%)
Results appear immediately — there is nothing to submit. Changing a field rewrites the link, so you can share the exact scenario you are looking at.
Worked example
Take the figures the calculator starts with:
- Portfolio at retirement: 800,000
- Planned annual withdrawal: 32,000
- Market fall in year one: 30 %
That gives:
- Portfolio after the fall and the withdrawal: 528,000
- Withdrawal rate you are now running: 6.06 %
- Gain needed to get back to the starting balance: 51.52 %
Reading the result
Watch the withdrawal rate rather than the balance. A plan running a comfortable 4% can find itself at 6% after a single bad first year — and 6% is a rate that historically fails often over a long retirement.
Where this goes wrong. Assuming a recovery fixes it. The market can return to its starting level while your portfolio does not, because you sold units on the way down. The gap never closes on its own.
Hold two to three years of spending in cash or short bonds so you are not forced to sell equities in a downturn; be willing to cut withdrawals after a bad year; and consider reducing equity exposure in the few years either side of retiring.
Much less, and it can even help. Buying during a downturn means acquiring units cheaply. The danger window is roughly the five years before and ten years after you stop earning.
The answer it gives you is portfolio after the fall and the withdrawal. With 800,000 portfolio at retirement, 32,000 planned annual withdrawal and 30 % market fall in year one, that comes to 528,000. Change any field and the figure moves with it.