marc2You had done all the right calculations. At least that’s what you thought. And according to the math the accumulated invested capital was exactly what you needed to bridge the years from your early retirement until full pension age. Even the average return was very close to what you had used in your formula’s.

But something had gone wrong. You had run out of money years before planned. This meant you had to find new funds. Possibly even work again.

Imagine you have an investment of $100K in equities (e.g. 1000 shares with value $100) in 2019 and start withdrawing funds from it, let’s say $6K per year (a total of $60K). While you do that the rates of return are:

2019 2%
2020 20%
2021 12%
2022 -3%
2023 4%
2024 8%
2025 -2%
2026 -1%
2027 -8%
2028 2%

At the end of 2028, you’ll still have approximately $69K left. That’s not bad. But let’s assume the rates of return occurred in the opposite order, so in 2019 it is 2%, in 2020 it is -8%, etc. After 10 years you would only have $50K left.

See the chart below. Compare the orange/grey (share price/total investment value) with the yellow/blue bars and lines.


Both return sequences result in the same final share price (approximately $121). However, the total remaining investment value (grey v. blue line) is very different.

The conclusion is that if you withdraw (or add) money from your investments, the order or sequence of annual investment returns has an impact. This should be a primary concern for anyone who is living off their investments.

If a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime. This is called sequence of returns risk.

This is why it is dangerous to make a simple calculation based on an average return rate (e.g. 5%) and fixed withdrawals when you try to predict how long you would be able to live off your investments. The reality is very different. Return rates will be below average and above average. And if you’re unlucky and the below average rates occur at the beginning of your early retirement, there may not be enough in your portfolio to get back on track during market recovery.

In short, you’ll end up with less than you had calculated.

This is a real risk which should be mitigated.

How to manage sequence of returns risk?

Again, the sequence of returns risk is the possibility that below average returns in the markets may occur early on in retirement.

What’s the risk?

Are you at risk and to what extent? If 90% of your financial needs are covered by guaranteed income sources such as pension and social security then the sequence of returns risk is low.

Compare it with my situation. I want to retire early and need funds to bridge the years from early retirement until full pension age. As a minimum. My preferred scenario is that I can live off my investments from early retirement until I leave the planet.

I have no guaranteed income sources (at least not until I reach full pension age). I make investments and build a portfolio from which I will withdraw funds when I retire (early). I am highly exposed to the sequence of returns risk.

In the following chart I calculated how much money I would need to bridge the years from early retirement (2028) until full pension age (2036).


From 2018 until 2028 I save money (the orange area reflects my savings) and from 2028 to 2036 I deplete the savings by withdrawing money (yellow bars). From 2036 I will fully rely on my pension (blue bars).

I made these calculation based on an average return rate of 4%. My annual (slowly decreasing) withdrawals are based on the projected expenses.

However, if we assume the following return rates from 2028 until 2036:

2028 7%
2029 10%
2030 12%
2031 8%
2032 4%
2033 1%
2034 -2%
2035 -3%

The chart would look like this:


That’s great. I have about $100K left in 2036. If I do not withdraw more funds after that my portfolio will grow again.

But what if the following happened instead?

2028 -3%
2029 -2%
2030 1%
2031 4%
2032 8%
2033 12%
2034 10%
2035 7%

This will give a totally different outcome.


If I would make the same withdrawals, I would not have any funds left to withdraw in 2035! And the strong market recovery after 2031 is to no avail.

That’s an eye opener isn’t it? It was to me at least.

So how do we prepare for this?

Test your numbers with lower returns

Instead of using averages take some of the worst sequences in the last decades and base your math on that. In case a bad sequence occurs, you have already planned for it.

If the conclusion is that – with a bad sequence – your withdrawal needs are no longer met (like in my scenario shown above), something needs to be done. I have asked myself the following questions:

  • Could I live for less? If yes, how much would be acceptable?
  • Can I move assets to low-volatility investments to fund the early years of retirement? (yes, that’s what I am planning to do. I am already diversifying my portfolio and investing in the low volatility crowdlending asset class)
  • Do I have any other options (so-called parachutes)? E.g. would a reverse mortgage be an option? (yes, I have a $300K mortgage-free home)
  • Would returning to work be an option? (that’s a no, but part-time work during the early years of early retirement would).

Let’s research these options a bit more in detail.

Living for less

Controlling and reducing expenses is key to reaching financial independence and early retirement. It is also key to being able to live off your savings once you retire.

What I did in the above calculations is use a fixed annual withdrawal amount, starting in 2028. A much better method would be to adjust your withdrawals depending on the remaining value of your portfolio.

For example, if I use the following formula:

Withdrawal amount = portfolio value – (remaining years until full pension age * $70K)

The chart where I didn’t have enough funds for 2035 would now look like this (years 2028 until 2036):


As you can see I would reduce my withdrawal amounts in the years 2029 and 2030, but after that (as the markets recover), I can start withdrawing more.

The message is that rather than counting on a fixed withdrawal rate or withdrawal amount, be flexible. If a sequence of below average returns occurs and the value of your portfolio drops too quickly, adjust your withdrawals.

It means you will have to reduce your expenses, so it is good to think about this in advance.

It is beyond the scope of this article to list all the options, but one (drastic) option I am seriously looking into is emigration to a cheaper country. That’s not for everyone of course. However, less drastic options are available as well. One possibility would be to live in a cheaper place during the cold winter months (our winters are cold) during which I could rent out my main home.

Low-volatility investments

My portfolio is currently composed of three different asset classes. Real estate (my mortgage-free home), company shares (shares in the company I work for) and crowdlending (Mintos platform).


My plans are as follows:

  • Expand company share assets. The main reason for this is that I can purchase shares via my company’s ESPP program against a discounted price.

Note that sequence of returns risk not only applies to withdrawing funds but also to adding funds to investments. The order of returns matters (it is best to invest regularly and buy more shares when markets are down). In this case, a negative sequence of returns early on works to your benefit as you can buy more shares that can participate in market expansion later on.

ESPP shares come with a discount, which is like a guaranteed ‘market is down’ situation for me.

  • Invest in crowdlending. I see this as a great way to diversify my portfolio. Crowdlending has the potential to generate a predictable, passive income stream which would be ideal for covering the (early) years from early retirement until full pension age.
  • Invest in crowdfunding of real estate. Similar to crowdlending. It is a great way to diversify and generate a steady, predictable income stream.
  • Invest in index funds (trackers). The main reason would be to mitigate the risks of having a portfolio that is too concentrated (only company shares) during the growth phase.

Other options

As far as my mortgage-free home is concerned, this is a great low volatility asset that has the lion’s share of my current portfolio. The great thing with this is that if my other investments produce below average returns during the early retirement years (assuming I still have high volatility equities), a reverse mortgage will be my parachute option.

Other options include creating a so-called laddered bond portfolio with different bonds that mature at different years during retirement. I will probably dedicate another post to that.

Returning to work/part-time work

I don’t want to, but part-time work early on during early retirement is a fallback solution.

I’m rather fluent in several languages and would for example be able to work as a translator – from anywhere in the world, as long as I have an internet connection.

How about you?

Did you know about the sequence of returns risk?

What are your plans to manage it?

6 thoughts on “Early Retirement: Could A Bad Sequence Of Returns Annihilate Your Portfolio?

  1. Very interesting charts. I’m aware that I’m at quite high risk of sequence of returns risk but think that I will be able to adjust my spending depending on how the markets are, ie spend less when it’s bad, spend more when the markets are up. I hope to build up some cash reserves to fall back on so I don’t have to sell too much when the going is bad. Interesting how you will diversify by going into P2P and crowdfunding property, whereas I’m exiting P2P and when I am able to, will exit the crowdfunding property too. My only reason is that I want to simplify my portfolio so I have most of my investments in tax beneficial accounts.


    1. Thanks Weenie. I think that’s the best approach, to limit sell offs when the markets are bad. Or have a ‘defensive’ portfolio that is less vulnerable. One or the other…or both. My portfolio is too concentrated. Right now my risk tolerance allows me to sleep, but I am very aware of the risks. P2P and crowdfunding are welcome additions to my portfolio. It’s a good non-correlated asset to have, capable of generating the passive income streams that I want. What platforms did you use? Did you have good/bad experiences with them?


      1. I used Funding Circle, Ratesetter and Lending Works and I’d say generally good experience with all of them. I suffered some losses/defaults with FC, but the higher interest rates I got (some over 14%) balanced things out. RS and LW I suffered no losses. Of these two, I found that RS was quicker to match loans than LW.


        1. That’s interesting, thanks. On Mintos I can invest in loans with a buyback guarantee. A default would result in repayment of the principle amount (by loan originator) and any outstanding interest. Lower interest rates, but safer.


  2. Hi,
    I think your market predictions are way too optimistic.
    I stopped working at 55 (more than 3 years ago) and I also have to bridge an income gap until my retirement at 65.
    In my projections I calculate(d) with a market dive of 50% in the first year! And every next “first” year if the crash didn’t happen.Yes this means you’ll have to safe double the amount you are counting on now. But you’ll also sleep better. Believe me, saying goodbye to your (good paying by then) job at 55 is pretty scary.
    This year the market is down 10-20%, depending on where you invest. Next year could be worse. I still sleep like a child.
    In a nutshell: you should have more margin.
    Good luck! Nice blog BTW.


    1. Thanks for stopping by Walter! You did the right thing when planning with such drastic market dives. I totally agree it gives peace of mind and helps promote sleep 😉
      My sequence of returns wasn’t a prediction, but I was merely making a point that sequence of returns matters. Personally, I will work on several ways to mitigate the risks. One is counting on below average returns (maybe not -50%), invest in asset classes that generate passive income, perhaps move over to bonds, etc.
      Great you managed to stop working at 55! I will not make that I am afraid, but will definitely try to reach FIRE before I hit 60.


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