How sequence of returns can make or break a portfolio

When you begin taking income from a portfolio, the subsequent sequence of returns can have a critical impact on its value over time. While early positive returns can help grow a portfolio to a point where it could withstand a downturn, early negative returns can cause a portfolio to lose value at a faster rate – jeopardizing your plans for future income.

Sequence of returns comparison

Say you invest $500,000 in the stocks that make up the S&P 500^® and decide to take an initial withdrawal of $25,000 during your first year of retirement. In each of the following years, you increase that amount by 2% to account for inflation. The two scenarios below show how a poor sequence of returns early on can impact your portfolio over the years.

In both scenarios, the average return is the same. However, early negative returns caused the portfolio to deplete to $0 over fifteen years, where early positive returns left a portfolio balance of over $381,000.

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