Sequence-of-returns risk is the effect of return timing on a portfolio that is receiving contributions or funding withdrawals. For retirement planning, an early loss can leave fewer assets available for later returns while spending continues. Test return order separately from average return assumptions.
This PureLogicOS guide uses invented figures to explain a calculation and a scenario workflow. It is not a market forecast or an investment recommendation. Reviewed November 5, 2026.
Why sequence-of-returns risk matters when you withdraw
Consider a $1,000,000 starting portfolio and two annual returns: −20% and +25%. Without any withdrawals or contributions, either order ends at $1,000,000 before fees and taxes, because 0.80 × 1.25 = 1.00.
Now withdraw $50,000 at the beginning of each year. The same returns produce different ending balances. This example assumes constant dollar withdrawals, no inflation adjustment, no fees, no taxes, and no other cash flows. It is arithmetic only, not a PureLogicOS engine result.
| Case | Year 1 return | Year 2 return | End of year 2 |
|---|---|---|---|
| No withdrawals, either order | −20% or +25% | The other return | $1,000,000 |
| $50,000 yearly withdrawals, loss first | −20% | +25% | $887,500 |
| $50,000 yearly withdrawals, gain first | +25% | −20% | $910,000 |
Loss-first calculation: ($1,000,000 − $50,000) × 0.80 = $760,000; then ($760,000 − $50,000) × 1.25 = $887,500. Gain-first calculation: ($1,000,000 − $50,000) × 1.25 = $1,187,500; then ($1,187,500 − $50,000) × 0.80 = $910,000. The difference is $22,500.
Build a bear-market stress test for sequence-of-returns risk
Save the baseline before changing return assumptions. Specify the portfolio return path, the withdrawal timing, the spending rule, and any income received outside the portfolio. Label whether dollars and returns are nominal or inflation-adjusted. A sequence-of-returns risk test changes only the order of returns and holds every other input constant.
Place the weaker returns early in retirement, then compare a case with the same returns later. Keep the set of returns constant for this order-only test. If you also change the average return, describe that as a separate assumption change.
In a planning tool, inspect annual spending coverage, withdrawal amounts, taxes, and remaining balances. A positive final balance can still hide difficult years along the way. Record when assets become unavailable or when the modeled spending rule changes.
Keep stress tests distinct from probabilities
A chosen bear-market path answers what happens under that specified path. Monte Carlo analysis examines many simulated paths under a stated model. A historical backtest uses selected historical periods. These approaches answer different questions; none establishes what markets will do next.
The Center for Retirement Research at Boston College’s market-risk report discusses how market volatility and retirement withdrawals interact. The two-year example above was calculated independently for this guide.
Evaluate a response as a separate scenario
After documenting the original stress case, test a different spending assumption or retirement date. Record which adjustment changed the result and whether the household could actually follow it. This is an evaluation method, not a recommendation to adopt a particular withdrawal rate or investment mix.
Review the homepage scenario comparison, our retirement age comparison guide, and the software comparison directory. Start with a free PureLogicOS Basic account. Projections do not guarantee future outcomes.