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Back to all Financial Planning
August 2026
By Nils Dillon, CIPM
Sequence of returns risk describes how the order in which investment gains and losses occur, not just their average, can dramatically affect a retirement portfolio, specifically when withdrawals are being taken. Two investors can experience the same average annual return over a 25-year retirement and arrive at dramatically different financial outcomes, simply because of when their gains and losses occurred.
During the accumulation phase, sequence of returns has little impact; time in the market allows bad years to recover. However, once a retiree begins taking distributions, the dynamic changes fundamentally:
Picture two investors who retire on the same day with identical $2,000,000 portfolios. They invest in the same asset class, earn the same average annual return over 25 years, and take the same amount of income every year. One finishes retirement with millions of dollars intact. The other runs out of money by age 85. This is not a modeling trick. It is the direct, mathematically demonstrable consequence of sequence of returns risk. Poor investment performance, particularly in the early years of retirement, can permanently derail a retirement plan that looks sound on paper.
The analysis that follows demonstrates how two investors with mirror-image return sequences could realize dramatically different results. We’ll explore how and why this happens, and what strategies can help prevent it.
| Mr. Early Gains | Mr. Early Losses |
|---|---|
| Experiences strong positive returns in the first decade of retirement. Negative years arrive later, when the portfolio is larger and better able to absorb them. | Faces a run of negative or weak returns immediately at retirement, precisely when $100,000 annual withdrawals begin. Forced to sell shares at depressed prices simply to fund income. |
When a $100,000 annual withdrawal (5% of the initial $2,000,000 portfolio) is introduced, the identical average return that produced the same outcome in the no-withdrawal illustration now tells two different stories. Mr. Early Gains, who benefits from strong early gains, sees the portfolio grow through the most critical first decade, building a large enough base that later downturns never threaten the overall plan. By age 90, the portfolio remains above $2,500,000 with years of income still ahead. Mr. Early Losses faces the opposite reality: a string of negative returns right at retirement forces the liquidation of shares at depressed prices to fund living expenses, permanently shrinking the capital available to recover. Each withdrawal in a down market accelerates the damage, and by the late 70’s the trajectory is irreversible. The portfolio is fully exhausted by age 85, leaving more than seven years of retirement with no portfolio income whatsoever. Same starting balance. Same average return. Same withdrawal amount. Completely different outcomes, determined entirely by the order in which returns arrived.
When a $100,000 annual withdrawal (5% of the initial $2,000,000 portfolio) is introduced, the identical average return that produced the same outcome in the no-withdrawal illustration now tells two different stories. Mr. Early Gains, who benefits from strong early gains, sees the portfolio grow through the most critical first decade, building a large enough base that later downturns never threaten the overall plan. By age 90, the portfolio remains above $2,500,000 with years of income still ahead. Mr. Early Losses faces the opposite reality: a string of negative returns right at retirement forces the liquidation of shares at depressed prices to fund living expenses, permanently shrinking the capital available to recover. Each withdrawal in a down market accelerates the damage, and by the late 70’s the trajectory is irreversible. The portfolio is fully exhausted by age 85, leaving more than seven years of retirement with no portfolio income whatsoever. Same starting balance. Same average return. Same withdrawal amount. Completely different outcomes, determined entirely by the order in which returns arrived.
Most investors know dollar-cost averaging, buying more shares when prices are low. Sequence of returns risk is its mirror image in retirement: when you withdraw a fixed dollar amount regularly, you are forced to sell more shares when prices are low. This is sometimes called “dollar-cost ravaging.”
When Mr. Early Losses’ portfolio falls 25% in the first year, from $2,000,000 to $1,500,000, the $100,000 withdrawal now represents 6.67% of the remaining portfolio, not 5%. Only $1,425,000 remains to participate in the recovery. That is $570,000 less working capital than Mr. Early Gains at the identical point in time, and that gap compounds relentlessly against Mr. Early Losses.
The Math: A 25% loss requires a 33.3% gain just to break even. A 50% loss requires a 100% gain. When those losses occur while withdrawals are accelerating the depletion, the portfolio may never reach the level needed to recover, even if average subsequent returns are perfectly normal.
The table below illustrates how losses compound the problem in a withdrawal scenario. Note that “recovery required” increases nonlinearly, and that ongoing withdrawals dramatically extend recovery timelines.
While you cannot control the order in which markets deliver returns, there are proven strategies that reduce your dependence on forced liquidation during the early, highest-risk years of retirement. The goal is to ensure the portfolio never has to sell equities at a loss to fund living expenses.
Lido offers customizable investment strategies designed to protect client portfolios during periods of market uncertainty, and those same strategies can also serve as powerful tools for mitigating sequence of returns risk in retirement. Because no two clients share the same financial picture, Lido tailors each approach to the individual, taking into account their unique circumstances, goals, and portfolio characteristics to build a plan that is as resilient as it is personal.
IMPORTANT DISCLOSURES
Lido Advisors, LLC (“Lido”) is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call (800) 301-LIDO (5436), or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. Certain information contained in these materials has been obtained from published and unpublished sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Lido has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date, and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof. Lido’s opinions and estimates constitute the Lido’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior yield figures indicated herein represent performance for only a short time period and may not be indicative of the yield or volatility each security will generate over a long time period. The yield should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed. Not all investments are suitable for all investors.
Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” “believe,” the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
ASSUMPTIONS
The hypothetical illustrations presented are for educational purposes only and are not intended to represent any actual investment account, strategy, or guaranteed outcome. Both Mr. Early Gains and Mr. Early Losses are assumed to begin with a $2,000,000 portfolio at age 65 and experience the same 25-year annual return sequence, with Mr. Early Gains receiving returns in a favorable early order and Mr. Early Losses receiving the identical returns in reverse order. Both investors achieve the same 6.0% average annual return over the full 25-year period ending at age 90. In the no-withdrawal scenario, no distributions of any kind are taken from either portfolio. In the withdrawal scenario, both Mr. Early Gains and Mr. Early Losses withdraw a fixed $100,000 per year (equal to 5% of the initial portfolio value), with withdrawals assumed to occur at the beginning of each year prior to market returns being applied. All return sequences are hypothetical and were selected specifically to illustrate the concept of Sequence of Returns Risk; they do not represent the returns of any actual index, fund, or investment product. No adjustments have been made for taxes, inflation, investment management fees, transaction costs, or any other expenses. Past performance does not guarantee future results. This material is for illustrative and discussion purposes only and does not constitute investment advice. Individuals should consult with a qualified financial professional before making any investment or retirement planning decisions.
IMPORTANT DISCLOSURES
Lido Advisors, LLC (“Lido”) is an SEC-registered investment adviser. Please note that SEC registration does not denote any particular competence or ability and no inference to the contrary should be made. For complete information on the services we provide and our fees, please review our Form ADV at adviserinfo.sec.gov, call (800) 301-LIDO (5436), or mail us at 1875 Century Park East Suite 950, Los Angeles, CA 90067.
Past performance is not indicative of future performance. The information in this report is for informational purposes only and should not be relied upon as the basis of an investment or liquidation decision. Nothing in this report shall be construed to be a solicitation to buy or offer to sell any security, product or service to any non-U.S. investor, nor shall any such security, product or service be solicited, offered or sold in any jurisdiction where such activity would be contrary to the securities laws or other local laws and regulations or would subject Lido to any registration requirement within such jurisdiction. Certain information contained in these materials has been obtained from published and unpublished sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Lido has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date, and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof. Lido’s opinions and estimates constitute the Lido’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only.
Not all investments are suitable for all clients. It should not be assumed that any security listed or any recommendations made in the future will be profitable or without loss, including risk of loss of principal, or will equal any prior performance. All investments involve the risk of potential investment losses including the potential risk of loss of principal as well as the potential for investment gain. Further, the prior yield figures indicated herein represent performance for only a short time period and may not be indicative of the yield or volatility each security will generate over a long time period. The yield should also be viewed in the context of the broad market and general economic conditions prevailing during the periods covered by the performance information. Any references to future returns/risk are not promises of the actual return the client portfolio may achieve. Before investing, investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed. Not all investments are suitable for all investors.
Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “seek,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” “believe,” the negatives thereof, other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund may differ materially from those reflected or contemplated in such forward-looking statements.
Lido specifically disclaims any and all liability arising from the information or illustrations presented in these materials and is not responsible for the consequences of any decisions or actions taken as a result.
ASSUMPTIONS
The hypothetical illustrations presented are for educational purposes only and are not intended to represent any actual investment account, strategy, or guaranteed outcome. Both Mr. Early Gains and Mr. Early Losses are assumed to begin with a $2,000,000 portfolio at age 65 and experience the same 25-year annual return sequence, with Mr. Early Gains receiving returns in a favorable early order and Mr. Early Losses receiving the identical returns in reverse order. Both investors achieve the same 6.0% average annual return over the full 25-year period ending at age 90. In the no-withdrawal scenario, no distributions of any kind are taken from either portfolio. In the withdrawal scenario, both Mr. Early Gains and Mr. Early Losses withdraw a fixed $100,000 per year (equal to 5% of the initial portfolio value), with withdrawals assumed to occur at the beginning of each year prior to market returns being applied. All return sequences are hypothetical and were selected specifically to illustrate the concept of Sequence of Returns Risk; they do not represent the returns of any actual index, fund, or investment product. No adjustments have been made for taxes, inflation, investment management fees, transaction costs, or any other expenses. Past performance does not guarantee future results. This material is for illustrative and discussion purposes only and does not constitute investment advice. Individuals should consult with a qualified financial professional before making any investment or retirement planning decisions.
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