Same returns, different order: why the early years matter
Two retirees can earn exactly the same 30 yearly returns and still end up in different places, because withdrawals take money out while the market moves. Below, the same 30 returns are replayed in three orders. Change the savings and spending to see where each order runs out.
Invented returns for illustration: these 30 yearly returns are made up. They are not historical data and not a forecast.
Best years first
$2,706,547 left at 95
All 30 years of spending funded.
Mixed order
$818,752 left at 95
All 30 years of spending funded.
Worst years first
Runs short by age 74
8 full years of spending funded; the money runs short in year 9.
| Age | Best years first: return / balance | Mixed order: return / balance | Worst years first: return / balance |
|---|---|---|---|
| 66 | 24% / $1,192,000 | 22% / $1,172,000 | -22% / $732,000 |
| 67 | 22% / $1,405,040 | 15% / $1,298,600 | -18% / $551,040 |
| 68 | 21% / $1,649,668 | 9% / $1,365,044 | -15% / $417,954 |
| 70 | 19% / $2,241,231 | -8% / $1,381,353 | -8% / $237,837 |
| 75 | 13% / $4,169,406 | 3% / $1,464,372 | 2% / $0 |
| 80 | 9% / $6,386,155 | 19% / $1,434,039 | 8% / $0 |
| 85 | 3% / $8,060,380 | 20% / $1,227,823 | 12% / $0 |
| 90 | -6% / $6,887,438 | 2% / $1,207,066 | 18% / $0 |
| 95 | -22% / $2,706,547 | -3% / $818,752 | 24% / $0 |
The first five years
Same 30 returns, but what happens in years 1 to 5 differs a lot.
| Order | Compound return, years 1-5 | Balance after year 5 | Spending taken in years 1-5 |
|---|---|---|---|
| Best years first | 161.4% | $2,241,231 | $252,304 |
| Mixed order | 66.0% | $1,381,353 | $252,304 |
| Worst years first | -56.0% | $237,837 | $252,304 |
Balance paths
All 30 years: return and balance for each order
| Age | Best years first | Mixed order | Worst years first |
|---|---|---|---|
| 66 | 24% / $1,192,000 | 22% / $1,172,000 | -22% / $732,000 |
| 67 | 22% / $1,405,040 | 15% / $1,298,600 | -18% / $551,040 |
| 68 | 21% / $1,649,668 | 9% / $1,365,044 | -15% / $417,954 |
| 69 | 20% / $1,927,911 | 18% / $1,559,061 | -12% / $316,109 |
| 70 | 19% / $2,241,231 | -8% / $1,381,353 | -8% / $237,837 |
| 71 | 18% / $2,590,346 | 12% / $1,492,808 | -6% / $169,259 |
| 72 | 16% / $2,949,136 | 6% / $1,526,711 | -4% / $106,824 |
| 73 | 15% / $3,334,449 | -15% / $1,240,648 | -3% / $46,562 |
| 74 | 14% / $3,742,788 | 24% / $1,479,920 | 1% / $0 |
| 75 | 13% / $4,169,406 | 3% / $1,464,372 | 2% / $0 |
| 76 | 12% / $4,608,290 | 10% / $1,549,365 | 3% / $0 |
| 77 | 11% / $5,052,222 | -22% / $1,145,525 | 5% / $0 |
| 78 | 10% / $5,492,889 | 14% / $1,241,343 | 6% / $0 |
| 79 | 9% / $5,921,081 | 7% / $1,262,069 | 7% / $0 |
| 80 | 9% / $6,386,155 | 19% / $1,434,039 | 8% / $0 |
| 81 | 8% / $6,827,530 | -4% / $1,307,159 | 9% / $0 |
| 82 | 7% / $7,234,200 | 11% / $1,379,691 | 9% / $0 |
| 83 | 6% / $7,595,215 | 1% / $1,320,450 | 10% / $0 |
| 84 | 5% / $7,900,112 | -12% / $1,087,132 | 11% / $0 |
| 85 | 3% / $8,060,380 | 20% / $1,227,823 | 12% / $0 |
| 86 | 2% / $8,142,934 | 8% / $1,247,396 | 13% / $0 |
| 87 | 1% / $8,143,743 | 13% / $1,328,937 | 14% / $0 |
| 88 | -3% / $7,816,796 | -6% / $1,166,566 | 15% / $0 |
| 89 | -4% / $7,419,423 | 16% / $1,268,515 | 16% / $0 |
| 90 | -6% / $6,887,438 | 2% / $1,207,066 | 18% / $0 |
| 91 | -8% / $6,247,454 | -18% / $900,805 | 19% / $0 |
| 92 | -12% / $5,406,545 | 21% / $998,760 | 20% / $0 |
| 93 | -15% / $4,502,069 | 5% / $955,204 | 21% / $0 |
| 94 | -18% / $3,595,865 | 9% / $945,340 | 22% / $0 |
| 95 | -22% / $2,706,547 | -3% / $818,752 | 24% / $0 |
The 30 returns are made up for this demonstration; they are not market history. Their simple average is 5.90% a year and their compound (geometric) average is 5.16% a year in all three orders. Only the order changes.
How to read it
- If you invested a single lump sum and then made no deposits or withdrawals, the order would not change the final balance, because multiplying the same growth factors gives the same product in any order. Once money moves in or out each year, the order matters.
- With withdrawals, losses early in retirement shrink the pot you are still drawing from, so later gains apply to a smaller balance. This is called sequence-of-returns risk.
- "Best years first" and "Worst years first" are deliberately extreme orderings (the list sorted high to low and low to high). The mixed column is one unsorted ordering of the same returns. It is not a forecast; the extremes show how much range the order alone can create.
- The returns are an invented set with large swings. They are for illustration, not an estimate of future markets and not historical data.
Assumptions
- Age 65 to 95, 30 yearly steps. Spending is taken at year end after that year's return, and rises with the inflation rate you enter.
- No fees, taxes, Social Security or other income are modelled in this example.
- The balance cannot go below zero.
To test your own numbers with a constant return, use how long will my savings last. The full calculator is on the home page.
Educational illustration; not financial advice. By Hommer Zhao, not a licensed financial adviser. See methodology.