Sequence-of-returns risk and why Monte Carlo matters
Sequence-of-returns risk is the danger that the order of market returns, not just the average, sinks a retirement plan. A market drop in your first few years of withdrawals can do permanent damage. Monte Carlo simulation exists to test your plan against many possible orders.
9 min read · By RetireCiv Editorial · Updated June 24, 2026
What is sequence-of-returns risk?
Sequence-of-returns risk is the chance that the order of returns, not the average, sinks your plan. While you are saving, order barely matters. Once you are withdrawing, a bad market early on can cause damage that good later years cannot fully repair.
The reason is the withdrawals. When you sell investments for income during a downturn, you lock in losses and leave less to recover. The same average return, with the bad years first instead of last, can end very differently.
This makes the first decade of retirement the most fragile. Early losses, combined with withdrawals, shrink the base that later growth works on. That is why retirement planning watches the early years so closely.
This lesson explains the risk, shows why order matters, and covers the main defenses. It also covers why Monte Carlo simulation is the standard tool for testing a plan against bad sequences.
Does sequence-of-returns risk affect me while I am still saving?
Barely. While you are contributing and not withdrawing, the order of returns has little effect on your final balance. Only the average really matters. A crash early in your career can even help, because you buy more shares cheaply. The risk flips once you retire and start withdrawing, when an early downturn does lasting damage.
Why cannot good later years fix early losses?
Because you are spending the portfolio at the same time. Selling investments during a downturn locks in the loss and leaves fewer shares to rebound. When the recovery comes, it works on a smaller base. Two retirees with identical average returns can end up far apart if one faced the bad years first.
Why are the early years so fragile?
The first few years of retirement carry far more weight than later ones. A downturn then hits while your balance is largest and your withdrawals are steady. The combination can permanently lower how much your portfolio supports.
Think of two forces working together. The market pulls the balance down, and your withdrawals pull it down further. Selling in a down market turns a paper loss into a real one.
A later crash is less dangerous. By then, years of withdrawals and growth have already played out, and a smaller balance has less far to fall. The same drop early versus late produces very different damage.
This is why a cushion matters most at the start. Covering early withdrawals from stable assets, instead of selling stocks low, protects the base your retirement depends on.
Why do the first years of retirement matter most?
Because your balance is largest then and you are withdrawing from it. A market drop early in retirement shrinks a big balance while you are also taking income out, locking in losses. Later years have a smaller balance and less time exposed, so the same drop does less damage. The early years set the trajectory for the rest of retirement.
What is the retirement danger zone?
It is the stretch of years right around your retirement date, the few years before and after. In that window your portfolio is at its peak and sequence risk is highest. A severe downturn then, combined with withdrawals, can do outsized harm. Many retirees hold extra stable assets during this period to avoid selling stocks low.
Same average, opposite outcome
The clearest way to see sequence risk is two retirees with the same returns in opposite order. Both average the same return over retirement. One gets the bad years first, the other gets them last. Their outcomes can be worlds apart.
The retiree who hits a downturn first is withdrawing from a falling balance. The losses compound with the withdrawals, and the portfolio may never recover. It can run out years early.
The retiree who gets good years first builds a cushion before any downturn. By the time the bad years arrive, the balance is larger and the withdrawals are a smaller share of it. The same average return lasts.
The averages are identical; only the order differs. That is the whole point. A plan that looks fine on an average-return projection can still fail on a bad sequence.
Same average return, different order
| When the bad years hit | What happens to the balance |
|---|---|
| Bad years first | Withdrawals lock in losses; can run out early |
| Bad years last | Early gains build a cushion; the balance lasts |
How can the same average return give different results?
Because withdrawals interact with the order of returns. With the bad years first, you sell into losses early and the portfolio may never recover. With the bad years last, early gains build a cushion that carries you through. The average is the same, but the path, and the ending balance, are not. Order only matters because you are withdrawing.
Why is an average-return projection not enough?
An average-return projection assumes a smooth, steady return every year, which never actually happens. Real markets deliver good and bad years in some order. A bad early stretch can break a plan that the average would call safe. That is why planners stress-test against many sequences instead of trusting a single average. The average hides the risk that the order creates.
Why does Monte Carlo matter?
Monte Carlo simulation tests your plan against many possible return sequences, not just one average. It runs your withdrawals through hundreds or thousands of market histories, including bad ones. The result is the share of those runs in which your money lasts.
That share is more honest than a single projection. Instead of one tidy line, you get a range of outcomes and a probability your plan survives. A plan that lasts in most sequences is more trustworthy than one that only works on average.
It puts a number on the bad-sequence risk. If your plan fails in a large share of runs, the simulation flags it before the market does. You can then adjust your spending, your cushion, or your retirement date.
It is a stress test, not a crystal ball. Monte Carlo cannot predict the future, but it shows how fragile or resilient a plan is across many futures. That is exactly the risk sequence-of-returns creates.
What is Monte Carlo simulation in retirement planning?
It is a method that runs your retirement plan through many possible sequences of market returns, including bad ones. Each run tests whether your withdrawals would have lasted. The output is a probability, the share of runs in which your money survives, rather than a single guess. It is built to capture the sequence-of-returns risk that an average projection misses.
Is a high Monte Carlo success rate a guarantee?
No. A high success rate means your plan held up across most simulated sequences, not that it cannot fail. The simulation is only as good as its assumptions, and the future may differ from the past. Treat it as a stress test that shows resilience, not a promise. Reviewing it periodically, as markets and your balance change, keeps it useful.
Where can I run a Monte Carlo simulation?
Many retirement tools include one, and ours does too. Our readiness tools can run your plan through many market sequences to gauge how often it lasts. The point is to see your plan’s range of outcomes, not just an average. We show the method and the odds; the choices about spending and timing remain yours.
How FERS retirees are partly protected
FERS retirees have a built-in cushion against sequence risk. Your FERS pension and Social Security are guaranteed income that does not depend on the market. Only your TSP is exposed to the order of returns.
That guaranteed floor changes the math. Because the pension and Social Security cover part of your spending for life, you can lean less on the TSP, especially in a downturn. Less forced selling means less sequence-risk damage.
You can build more cushion inside the TSP. Hold part of your balance in stable assets, like the G fund. The U.S. government guarantees the G fund against loss of principal, so it gives you something to draw from when stocks are down.
Flexible spending helps too. Trimming withdrawals after a bad year, even temporarily, eases the pressure on the portfolio. Between a pension, a cushion, and some flexibility, feds can blunt the risk that hits market-only retirees hardest.
How does a FERS pension reduce sequence-of-returns risk?
Your FERS pension and Social Security are guaranteed income for life, unaffected by the market. They cover part of your spending no matter what stocks do, so you can withdraw less from the TSP during a downturn. That reduced reliance on the TSP is exactly what limits sequence-risk damage. The pension is income you never have to sell investments to get.
How can I protect my TSP from an early downturn?
One defense is a cushion of stable assets, like the G fund, to draw from when stocks are down. Another is trimming withdrawals after a bad year. Leaning on your pension and Social Security for the income floor reduces forced selling. Keeping some growth investments helps the balance recover over a long retirement. We describe the approaches rather than recommend one.
Should I move everything to the G fund at retirement?
We explain the tradeoff rather than advise a move. The G fund protects principal, but it carries inflation risk. Over a long retirement, an all-stable portfolio may not keep up with rising prices. Most plans keep some growth investments alongside a stable cushion. The right mix depends on your income floor, your horizon, and your comfort with risk.
How to stress-test your plan
To guard against sequence risk, build an income floor, hold a cushion, stay flexible, and test the plan. No single move removes the risk, but together they make a plan that survives a bad start. The goal is resilience, not prediction.
Start with what is guaranteed. Your pension and Social Security cover a base of spending for life. The gap your TSP fills is the part exposed to sequence risk, so size your cushion and withdrawals around it.
A resilient drawdown usually combines:
Sequence risk is best managed before it shows up. To stress-test your plan across many market sequences, run a Monte Carlo simulation, and use your free readiness score to see how your pension, Social Security, and TSP fit together. We show the odds; the plan is yours to set.
- An income floor. Pension and Social Security that cover essentials regardless of the market.
- A cushion. Stable assets, like the G fund, to spend from in downturns instead of selling stocks low.
- Flexibility. Room to trim withdrawals after a bad year so the portfolio can recover.
How do I protect my retirement from a bad market early on?
Build a guaranteed income floor from your pension and Social Security. Hold a cushion of stable assets to draw from in downturns. Keep your withdrawals flexible. Then stress-test the plan with a Monte Carlo simulation to see how often it lasts. No single step removes sequence risk, but together they make the plan resilient.
When should I stress-test my retirement plan?
Before you retire, and then periodically afterward. Testing before you set a retirement date shows whether your withdrawal pace is sustainable across good and bad sequences. Re-running it as your balance and the markets change keeps the picture current. The early years matter most, so the years right around retirement are the most important to test.