Once withdrawals start from your portfolio, an early downturn can take a harder hit than a later one. That’s sequence-of-returns risk.
In this illustration (example returns, not market history)
Age 88
the money runs out, with the three bad years first
$1.7 million
left at 95, with the same three bad years last
25% more shares
sold to raise the same $50,000 after a 20% drop
Not a forecast or any portfolio’s results. Before taxes, fees and inflation.
Changing the order
Take $1 million at 65, with $50,000 withdrawn at the start of each year. The returns are example numbers I chose, not market history.
Put three bad years (down 20%, 12% and 6%) last, and about $1.7 million is left at 95. Put the same three years first, and the money runs out at 88. The average return is the same, 5.5%. Only the order changed.
Selling after a drop
Withdrawals usually mean selling shares. Near a high, at an example price of $2,500 a share, $50,000 takes 20 shares. After a 20% drop, at $2,000 a share, the same $50,000 takes 25 shares: 25% more. Those extra shares are gone when prices recover.
If you weren’t taking money out, the same returns in any order would end at the same balance.
Setting aside a reserve
No one knows what the next few years will bring, and this example isn’t a prediction. But money set aside after a good run comes from selling shares at higher prices than after a drop. That’s why, as a financial planner, I’d rather look at a portfolio after a good run than a bad year.
One approach is to set aside a few years of withdrawals in cash or short-term bonds. After a drop, you can draw on that reserve for a while instead of selling stocks. If the downturn lasts longer than the reserve, you’ll still have to sell.
A reserve can cost some long-term growth: if markets keep rising, the shares you sold for it would have been worth more. Bonds can lose value, cash may not keep up with inflation, and a reserve doesn’t remove the risk of loss. Investing involves risk, including the loss of principal.
How much to set aside, if anything, depends on your situation: how much of your spending the portfolio covers after Social Security, a pension or work; whether your spending can flex; your mix of investments; inflation; and taxes on what you sell.
Moving the bad years
Moving the bad years later helps each time. If they start at 66, the money runs out at 90. At 67, it runs out at 93. From 68 on, it lasts all 30 years.
Research finds a similar pattern beyond this one example: in simulations, the withdrawal plans that run short tend to have below-average returns in their first years [1].
Same returns, two orders: the balance each year
- Bad years first
- Bad years last
Example returns, not market history, a forecast or any portfolio’s results. $1 million at 65, with $50,000 taken out at the start of each year, not raised for inflation. Before taxes, fees and inflation. Bad years shaded.
Show every year
The first two pairs of columns are the same 30 returns in two orders. The last pair is a reference with no bad years, explained below.
The full example, year by year
Swipe the table to see every column.
| Age | Bad years first | Bad years last | No bad years (reference) | |||
|---|---|---|---|---|---|---|
| Return | Balance | Return | Balance | Return | Balance | |
| 65 | −20% | $1,000,000 | +9% | $1,000,000 | +9% | $1,000,000 |
| 66 | −12% | $760,000 | +7% | $1,035,500 | +7% | $1,035,500 |
| 67 | −6% | $624,800 | +8% | $1,054,485 | +8% | $1,054,485 |
| 68 | +9% | $540,312 | +10% | $1,084,844 | +10% | $1,084,844 |
| 69 | +7% | $534,440 | +5% | $1,138,328 | +5% | $1,138,328 |
| 70 | +8% | $518,351 | +9% | $1,142,745 | +9% | $1,142,745 |
| 71 | +10% | $505,819 | +6% | $1,191,092 | +6% | $1,191,092 |
| 72 | +5% | $501,401 | +8% | $1,209,557 | +8% | $1,209,557 |
| 73 | +9% | $473,971 | +7% | $1,252,322 | +7% | $1,252,322 |
| 74 | +6% | $462,128 | +9% | $1,286,484 | +9% | $1,286,484 |
| 75 | +8% | $436,856 | +6% | $1,347,768 | +6% | $1,347,768 |
| 76 | +7% | $417,804 | +8% | $1,375,634 | +8% | $1,375,634 |
| 77 | +9% | $393,551 | +10% | $1,431,685 | +10% | $1,431,685 |
| 78 | +6% | $374,470 | +5% | $1,519,853 | +5% | $1,519,853 |
| 79 | +8% | $343,939 | +7% | $1,543,346 | +7% | $1,543,346 |
| 80 | +10% | $317,454 | +9% | $1,597,880 | +9% | $1,597,880 |
| 81 | +5% | $294,199 | +6% | $1,687,189 | +6% | $1,687,189 |
| 82 | +7% | $256,409 | +8% | $1,735,420 | +8% | $1,735,420 |
| 83 | +9% | $220,858 | +7% | $1,820,254 | +7% | $1,820,254 |
| 84 | +6% | $186,235 | +8% | $1,894,172 | +8% | $1,894,172 |
| 85 | +8% | $144,409 | +6% | $1,991,705 | +6% | $1,991,705 |
| 86 | +7% | $101,962 | +9% | $2,058,208 | +9% | $2,058,208 |
| 87 | +8% | $55,599 | +7% | $2,188,947 | +7% | $2,188,947 |
| 88 | Runs out | $6,047 | +8% | $2,288,673 | +8% | $2,288,673 |
| 89 | — | $0 | +6% | $2,417,767 | +6% | $2,417,767 |
| 90 | — | $0 | +7% | $2,509,833 | +7% | $2,509,833 |
| 91 | — | $0 | +8% | $2,632,021 | +8% | $2,632,021 |
| 92 | — | $0 | −20% | $2,788,583 | +7.52% | $2,788,583 |
| 93 | — | $0 | −12% | $2,190,866 | +7.52% | $2,944,483 |
| 94 | — | $0 | −6% | $1,883,962 | +7.52% | $3,112,106 |
| 95 | — | $0 | — | $1,723,924 | — | $3,292,331 |
How to read it. Each balance is at the start of the year. That year’s $50,000 comes out first, and what’s left earns the year’s return. With the bad years first, only $6,047 is left at 88, not enough for that year’s $50,000. Balances are rounded to the nearest dollar.
How the reference is built. The reference keeps the 27 ordinary years and swaps the three bad years for three years at the ordinary years’ average, 7.5185% (+7.52% in the table; balances use the exact rate). Its average is higher than the two orders beside it, so it isn’t a same-average comparison. Until 92, it matches the bad-years-last column.
Assumptions. $1,000,000 at 65, with $50,000 taken out at the start of each year, not raised for inflation. The same 30 example annual returns, not market history, in two orders: three bad years of −20%, −12% and −6%, and 27 years between +5% and +10%. A simple average of 5.5% (about 5.3% a year compounded). Before taxes, fees and inflation. Figures: Toft Wealth calculation [2].
This is an illustration. The returns aren’t market history, a forecast, or the results of any Toft Wealth portfolio, model or strategy. Actual results will differ.
If you’d like to talk through how this fits your situation, start with a call.
Sources
- Larry R. Frank Sr. and David M. Blanchett, The Dynamic Implications of Sequence Risk on a Distribution Portfolio, Journal of Financial Planning 23(6), 52–61, June 2010.
- Toft Wealth, illustrative calculation for this note (October 2026, re-run with exact arithmetic November 3, 2026), kept with the video’s records.
The example is an illustration. Its returns are example numbers chosen for illustration, not market history, a forecast, or the results of any Toft Wealth portfolio, model or strategy, and it ignores taxes, fees and inflation. Actual results will differ. This note is general education, not personalized advice. The views in it are not a recommendation for any particular person: whether a reserve fits, and how much, depends on each household’s situation. Toft Wealth, LLC is an investment adviser registered with the Illinois Secretary of State. Registration does not imply a certain level of skill or training. Because Toft Wealth is paid for financial planning and investment management, it has an interest in readers hiring an adviser. Clark wrote this Note from his video, with help from an AI assistant. He reviewed every figure and source.
This is general education, not individual investment, tax, or legal advice, and reflects rules and figures as of the date shown. Please read our Disclosures.
