Hypothetical worked example and primary educational references; not observed market data.
Equal return sets can produce unequal outcomes
A retirement portfolio with withdrawals is not simply an investment left untouched. Investor.gov describes the challenge of making accumulated assets last through retirement. Once cash leaves between periods, a later gain applies to a different amount depending on what happened earlier. This makes the order of gains and losses relevant. The mechanism is easiest to understand with two periods, rather than a complicated simulation. Start with identical balances, impose the same two percentage changes in reverse order, and place an identical spending withdrawal between them. The comparison isolates sequence sensitivity. It does not estimate the probability of a particular sequence, and it does not identify a universally suitable investment allocation.
Supporting references: 1. SEC Investor.gov: Managing Lifetime Income
Specify exactly when money leaves
Investment costs and household withdrawals both change the amount remaining invested, but their timing can differ. Investor.gov explains that fees reduce portfolio value. In a model, a beginning-period fee, an end-period withdrawal, and a continuous expense deduction are not interchangeable. For the example here, the withdrawal occurs after the first return and before the second return. There are no fees. This convention is chosen to make the mechanism visible. A real retirement cash-flow model should instead match actual distributions and cost deductions as closely as its purpose requires. If the timing assumption is buried, apparent differences between two projections may come from different cash-flow conventions rather than different investment assumptions.
Supporting references: 2. SEC Investor.gov: How Fees and Expenses Affect Your Investment Portfolio
Hypothetical worked example
Two invented return orders
Model setup
Read these assumptions before comparing the scenarios.
- All monetary amounts in this example are hypothetical U.S. dollars (USD), not current prices, quoted account terms or observed market data. Percentages, counts, time periods and index levels retain their stated units.
- Initial balance is USD 100,000.
- One 10,000 withdrawal occurs between returns; no fees or taxes.
Final balance (USD)
- 1. -20%, then +25%
- 87,500.00
- 2. +25%, then -20%
- 92,000.00
Expanded comparison scale, not zero-based. Range: 86,600.00 to 92,900.00, in the units above. Case numbers match the labels; no probability or time trend is implied.
Hypothetical model, not observed market data or a forecast. Assumptions above; original values and calculations below.
| Return order | After first return (USD) | After withdrawal (USD) | Final balance (USD) |
|---|---|---|---|
| -20%, then +25% | 80,000 | 70,000 | 87,500 |
| +25%, then -20% | 125,000 | 115,000 | 92,000 |
Calculation details
- Loss-first ending balance
- 87,500.00 USD
(((100000 * 0.80000000000000004) - 10000) * 1.25) - Gain-first ending balance
- 92,000.00 USD
(((100000 * 1.25) - 10000) * 0.80000000000000004)
Follow the two paths by hand
Begin with USD 100,000. In the loss-first path, a hypothetical 20% decline leaves 80,000. A 10,000 withdrawal leaves 70,000, and a later 25% gain produces 87,500. In the gain-first path, a 25% increase produces 125,000. The same withdrawal leaves 115,000, and the later 20% decline produces 92,000. Without the withdrawal, both paths would finish at 100,000 because multiplying by 0.80 and 1.25 restores the initial amount. With the withdrawal, the endpoints differ by 4,500. These are invented arithmetic paths, not observed performance. Their purpose is to show that withdrawing after a decline removes capital before the subsequent gain can act on it.
Interpret the difference without inventing a rule
The example does not show that delaying every withdrawal is practical. Households have bills, and some spending cannot wait for favorable markets. It also does not prove that a particular cash reserve, product, or withdrawal rule eliminates sequence risk. Those choices introduce other costs and uncertainties. Instead, the comparison suggests a useful question: which spending commitments require asset sales on a schedule, and which could be adjusted if resources fall? A plan with no flexibility needs a different discussion from one that can postpone optional expenses. The model should expose that distinction rather than assume all withdrawals can be suspended. Essential spending, administrative costs, and contract restrictions constrain what flexibility actually means.
Stress-test the household decision
A practical sensitivity review can vary early investment changes, withdrawal size, and the timing of optional spending. Keep each change visible so the source of the result is clear. If many assumptions change together, the household cannot tell whether improvement came from spending less, assuming better returns, or changing the sequence. Describe investment assumptions as mathematical inputs, especially when smooth projected growth is used for convenience. Return order is only one part of retirement risk; longer life, price changes, care needs, and unreliable income can also matter. The strongest lesson from the two-period exercise is that a portfolio average cannot fully describe a plan that repeatedly removes money from the portfolio along the way. Keep the withdrawal timing visible whenever two model results are compared.
Test another situationSeparate an optional sale from necessary spending
A separate hypothetical case. Its inputs differ from the main worked example above.
Separate an optional sale from necessary spending
Start a hypothetical account at USD 80,000 and apply a 25% decline. Before the next period, remove USD 4,000 for an optional purchase, then apply a 20% gain. The ending balance is exactly USD 67,200. These invented returns are neither a forecast nor a full recovery of the initial balance. The purchase consumes capital before the subsequent gain applies. Delaying it could change exposure, but only if the purchase is genuinely movable. A household cannot treat rent or an essential service as optional merely because a model improves when its payment disappears. Preserve the distinction between a discretionary choice and an unavoidable funding need.
Track what eventually happens to deferred spending
The CFPB pension guide contrasts managing a lump sum with receiving continuing payments. Within the self-managed alternative, a useful sequence test holds essential spending fixed and changes only optional payment dates. Record whether the purchase later occurs; otherwise, the comparison silently converts deferral into cancellation. Also identify cash held outside the modeled account. A cash-funded purchase still consumes household resources even when it avoids a portfolio sale. If a larger buffer requires selling investments earlier, include that earlier movement. The model should explain the source and date of funding, leaving any improvement attributable to the actual change rather than an omitted expense.
Supporting references: 3. CFPB: Pension payout choices
Check this case’s calculations
- Decline, purchase and subsequent gain
- 67,200.00 USD
(((80000 * 0.75) - 4000) * 1.2)
Limits of this additional case
- The two-period illustration omits repeated withdrawals, fees, taxes and practical constraints on delaying purchases.
Limits of this analysis
- Two periods cannot describe the range of retirement outcomes.
- Actual withdrawals and fees may occur at different times.
- Spending flexibility and investment constraints differ across households.
Sources and scope
- SEC Investor.gov: Managing Lifetime Income
Distinguishes retirement balances from lifetime income.
Scope: US retirement education; no individualized adequacy finding.. Reference accessed 2026-10-06.
- SEC Investor.gov: How Fees and Expenses Affect Your Investment Portfolio
Explains ongoing and transaction costs.
Scope: US investment education; hypothetical prices are not market quotes.. Reference accessed 2026-10-06.
- CFPB: Pension payout choices
Payout form affects income continuity.
Scope: Primary educational concept only; the USD scenario is independent and illustrative, not personalized advice.. Reference accessed 2026-10-26.
Illustrative calculations are not forecasts or personal recommendations. Editorial standards
