The question
"If two retirees earn exactly the same returns over the same years, how can one end up with more money?"
The idea
- Sequence risk is the risk that bad years come at the wrong time. While you are only saving or holding, the order of returns doesn't change where you end. Once you draw money each year, it does.
- Money taken out before a bad year never gets to recover, and an early loss shrinks the pile every later good year grows. Retirement withdrawals walked through 2022 to 2025 in order. Here we flip the order to test it.
Worked example
The 4 steps beside the drawing at the top work this through on ETFIQ data. Point at a step to light the part of the drawing it describes.
We'll use ETFIQ Strategic, 60% stocks, the benchmark from that lesson. Its years before Oct 5, 2026 are hypothetical (its rule applied to past prices). Every return is from its calendar-year table, prices to Nov 10, 2026.
The four years: −15.83%, +15.32%, +10.26%, +16.19% (2022 to 2025).
| Year | Return | Year-end balance |
|---|---|---|
| 2022 | −15.83% | $404,018 |
| 2023 | +15.32% | $442,865 |
| 2024 | +10.26% | $466,245 |
| 2025 | +16.19% | $518,485 |
| Year | Return | Year-end balance |
|---|---|---|
| 2025 | +16.19% | $557,705 |
| 2024 | +10.26% | $592,866 |
| 2023 | +15.32% | $660,653 |
| 2022 | −15.83% | $539,240 |
First line worked out: ($500,000 − $20,000) × 1.1619 = $557,705.
Longer runs and larger draws widen the gap. Over the 15 years from 2011 to 2025, with a $30,000 draw, the real order ends at $539,431 and the reversed order at $620,273.
The common mistake
"My average return is what matters." Both paths share the same four returns, so the same average, yet they ended $20,755 apart. Once money comes out, the average hides the order. Test a draw against real runs of years, not one average rate.
Check your understanding
Pick an answer to see why. Two of three right passes the lesson.
1. You hold $200,000 for 10 years, adding and drawing nothing. Does the order of yearly returns change your ending balance?Answer: A. No, the same returns in any order end at the same amount. with no money moving, the ending balance is the start times each year's growth factor, and multiplication ignores order. Not B: that's true only once you draw money each year.2. Two retirees draw the same dollars each year and earn the same set of returns. Who likely ends with more?Answer: D. The one whose bad years come last. early good years grow the pile before losses arrive. Not C: their averages are the same; only the order differs.3. Sam plans to draw 6% a year. Which test best shows Sam's sequence risk?Answer: C. Replaying the draw through real runs of years, including ones that start with a loss. sequence risk is about order, so you have to replay orders, especially bad starts. Not A: an average hides when the losses came.
Takeaways
- While you draw money, the order of returns changes where you end. While you only hold, it doesn't.
- A bad year near the start of withdrawals costs the most.
- Test a draw against real runs of years on ETFIQ's benchmarks, not against one average rate.