Taming the Sequence of Returns Beast in Early Retirement

Picture the following scene. It’s late fall of 2018 and the early retirement farewell BBQ parties of the summer are a fond memory. An exciting new life of FIRE awaits. Your next egg of $1,000,000 sits in a 70:30 mix of equities : bonds with a low cost provider like Fidelity or Vanguard. A planned withdrawal rate using the 4% Safe Withdrawal Rate guideline of $40,000 allows you to sleep well at night. Life is good, the plan is set. You retired early!

“What can possibly go wrong?”, you ask yourself. The market has been doing very well and seems on a never-ending upward trajectory. “The stock market generally goes up”, the reassuring voice of the highly respected blogger and author Jim Collins on the ChooseFI podcast ringing in your ear.

Then, “Boom!”.  Or actually a dull thud that got progressively louder. Four consecutive years of low or negative real returns in your whole portfolio plays out as follows:

  • 2019: -0.5%
  • 2020: -2.0%
  • 2021: -4.0%
  • 2022: +0.25%

Your nest egg now sits at ~$785,000 after that four year period of withdrawing 4% each year. Each year that went past, you were a little nervous but you kept hoping the good ol’ days of 6-8% real returns would be just around the corner. “Next year will be better”, you say to your partner over a glass of wine on New Year’s eve. Those real returns of 7% did not materialize and there are no clear economic indicators that they are coming back very soon. You need to take a dramatic cut in your expenses: about 20% in fact to stay on track with your 4% withdrawals. You can come up with a plan to only cut 10%. Crap! To make matters worse, a brutal winter of 2022 means the 15 year-old roof on your home needs major repairs, potentially complete replacement.  And your 8-year old car just got a new set of tires, brake-pads replaced and 120,000 miles service.  You are facing combined bills in the $10,000-$18,000 range, that will chomp into your already depleted portfolio. The roofing contractor and car mechanic needs to pay their bills and you need a roof over your head and a reliable car just to run basic errands.  The constant ache in the pit of your stomach tells you that things may not be so good financially as you would like. You start to have anxiety attacks that these low market returns in the first few years of FIRE will cause havoc to your long term plans and may not be recoverable. Yep, the proverbial feces has just hit the air flow circulation device.

This, readers, is the Sequence of Returns (SoR) beast. Early in your retirement your nest egg is at its most vulnerable to a sequence of low or negative market returns. We don’t mean to scare you but the scenario above may not be as unrealistic as you think given the nose-bleed valuations of US equities right now, as we see in the Shiller P/E ratio nudging above 30.  Continuing to make the same dollar value of withdrawals in this scenario can take your withdrawal rate from a safe 4% up to an unsafe 6% or even 8%. In these circumstances your portfolio will struggle to ever recover and will not last you into your golden years.

Let’s get down to how we can try to tame this beast. And you will need much more than a whip and wooden stool to handle this bad boy. “Everybody has a great plan until they are punched in the face”, the boxer Mike Tyson once famously said.

First, here is the definition of Sequence Risk from Investopedia

DEFINITION of ‘Sequence Risk ‘

Sequence risk, also called sequence-of-returns risk, is the risk of receiving lower or negative returns early in a period when withdrawals are made from an individual’s underlying investments. The order or the sequence of investment returns is a primary concern for retirees who are living off the income and capital of their investments….When retirees begin withdrawing money from their investments, the returns during the first few years can have a major impact on their (long term) wealth.

So what is there to do about it? The reality is that recognizing the issue 4-6 years into FIRE, as described in the scenario above, is clearly not the answer. The only way to deal with it is to plan ahead and have contingencies. Even better, contingencies for the contingencies. Ideally, if you can implement a variety of safety nets, you can go a long way to lowering the risk. Perhaps not kill the beast, but at least tame it.

We’re going to lay out the 6 strategies the PIE family has in place to tame the Sequence of Returns Beast. The “Safety Net Pyramid” summarizes our approach to the problem.

1. Low Safe Withdrawal Rate

It may seem obvious that an approach to mitigate low equity returns is to have in place a low withdrawal rate. This is going to depend highly on the balancing act between portfolio size and annual expenses. It is  a tough decision to work beyond the date you became financially independent and build extra savings into your post-tax and tax-deferred accounts. For some, the concept “affectionately” known as One More Year (OMY) syndrome, may not be not very palatable at all. One More Beer (OMB) syndrome is actually much more appealing to Mr. and Mrs. PIE.  As we approach FIRE in July, 2018 our anticipated SWR will be 2.5%, considerably lower than the often touted “4% rule”. That’s the plan at least…

Working 1-3 more years may not be the preferred choice of the aspiring early retiree who is itching to leave the cubicle or office in the corporate world. But it’s a personal choice to work a bit longer and build in extra buffer that will translate into tremendous upside over the long haul. After all, we all expect retirement to be a long game….right?

It is our view that a low withdrawal rate is the biggest factor to mitigate the risk of SoR. Here is an XLS for you to download and use as a reference guide. It’s a heat map that show various expenses (baseline; 10% budget cut; 20% budget cut) mapped against portfolios of different sizes, with corresponding withdrawal rates color-coded according to “safer”, “moderate risk” and “higher risk”. These are ranges that we use in planning for our SWR, based on reading a wide array of literature from the likes of Michael Kitces, Wade Pfau and our PF blogger friend, Big ERN.

Click Here For Safe Withdrawal Rate Spreadsheet Download

You can use the XLS in many ways. For example, take the early retiree who has built a very nice portfolio of $1.75M and anticipates $60K in annual baseline expenses. This corresponds to a low SWR of 3.4% as seen in the lower table of the XLS. As you walk along that row you can see what a sustained market drop resulting in 28% portfolio decline will do to the SWR.  The diminished portfolio value of $1.25M will require a 4.8% withdrawal rate to sustain the same expenses, which is likely to be untenable for the long term.

Conversely, the aspiring early retiree who socked away a ton more money in his/her peak earning years with 2-3 years of further saving and investing in the tail-end of a bull market, has much more wiggle room in the event of a similar market drop. Let’s say they have $2.5M with $60K expenses. The lower tables shows this is a 2.4% SWR. That retiree could still maintain a withdrawal rate below 4% even if their portfolio drops 30% to $1.75M.

The two upper tables in the XLS give you a feel for what a 10% or 20% budget reduction can do to the SWR. Extrapolate at your leisure for budget cuts in between those numbers.

2. Flexibility in Expenses

The scenario in the introduction to this post is not how the smart early retiree would approach things. In reality, one would immediately make budget adjustments after that first year of negative real returns. How to do that? It makes sense to map out your budget in a detailed manner and look at what areas could be cut first in the event of a market downturn. Agreeing what is in scope/out of scope up front with your partner will likely make for a much easier conversation if things do go pear-shaped down the line.

For the PIE family these cuts could look like this:

  • Cutting that fat (fat FIRE) travel budget by 20-50% e.g. make it an extended camping trip in Acadia instead of 4 weeks on the Greek Isles. PS – If you are not already travel hacking now, please get started before FIRE!
  • Dialing back the restaurant/dining out budget
  • Prolonging the shelf-life of equipment for our hobbies e.g. skis, outdoor wear, camping equipment, instead of splurging on the new stuff at REI
  • Taking an even harder look at our grocery budget
  • Does the vehicle replacement plan for new car(s) make complete sense? Used, 2-3 yrs old, will likely do just fine
  • That sporty little Lotus Mr. PIE always dreamed of to zip around retirement? Perhaps delay acting on it….
  • Downsizing our home- we will have already done it once – could we sell, free up equity and downsize even more? Probably yes.

Unlike the equities market, these are all things that WE can control. And it may be hard choices, simply based on the fact that much of the areas described are why we FIRE in the first place – extended travel, passion about our hobbies.  Depending on your personal lifestyle choices, some of these may be completely off-limits. Yet, flexibility is the key to stability. It is much better to bend than to break.

3. Diverse Income Sources

Rather than drawing down from your hard-earned portfolio, the idea here is to have distinct sources of income that come from outside of your classical investment portfolio and as such are more independent of market fluctuations. Such sources of income may be a side hustle business, rental income from property(ies),  income from your blog, or a pension.

Mr. PIE has 19 years integrated service with his current employer and is eligible for a corporate pension as soon as he retires. This is a cash-balance pension which we could roll over into an IRA. The alternative approach, and the one we are taking, is to take it in the form of an annuity. It amounts to ~25% of our anticipated annual expenses in retirement, a considerable chunk of our outgoings.

This annuity is not inflation adjusted which is very common for most corporate pensions. Over long periods of time, this will have an effect on the real value of the pension – an aspect of selecting the annuity option that we have chosen to accept. But inflation will not hit the pension value so hard in the first 5-10 years, and that is when the SoR beast is most voracious.  This pension allows us to lower our expected withdrawal rate from 3.3% to 2.5% and serve as a solid income floor.

If the market was to tank horribly like 2008/2009, we might be forced to up our game and look for some type of work. Yet in a very depressed market, companies will likely be tightening belts all around, so that strategy is no guarantee either.

Bottom line, have a diverse income source if you can. More than one income source, even better.

4. Social Security

Perhaps another example of an annuity! Certainly one of the upsides of a married couple who have both pursued careers over a 20-year period are their individual contributions to Social Security (SS). Combine that for a double income stream from Social Security and you can have a nice future pay-check developing, assuming there are no major changes to the funding. SS is fully funded through 2034, incidentally the year Mr. PIE turns 67, his “full” retirement age.

For high earners who retire with less than 35 years of SS contributions, the Average Indexed Monthly Earnings (AIME) can still be sizeable and compensate for years of zero contribution. The SS web-site walks you through how to calculate your AIME and hence your Social Security income. Alternatively, head over to the Physician on Fire blog and read his tremendous post on Social Security and Early Retirement: Know Your Bend Points. He also provided a handy-dandy XL file to help make things easy for you once you input your earnings. It will calculate your expected income at whatever age you wish to see from age 62-70.

Both Mr. and Mrs. PIE will have contributed to SS for just shy of 20 years by the time we retire next year. If we assume that we will each take SS at in our late 60’s to maximize the benefit, the projected future total annual benefit amounts to ~2.5% of our current investment portfolio. Again, the fine work from ERN tells us the impact that benefit may have on our withdrawal rate. The helpful table near the end of his post captures it all. In short, we could be looking at being able to increase our withdrawal rate by ~0.3-0.4%. Put another way, we have an additional nice buffer to the SoR risk based on the combined future SS income stream.

For the very early retiree in late 30’s / early 40’s, there may not be much to expect from SS but still, go run the numbers. You might be surprised, especially if there have been two high earners making contributions for even 12-15 years.

5. Asset Allocation

Our portfolio on our FIRE date will basically be 75/20/5 in equities/bonds/cash.  We factor REIT’s into the equities portion while understanding they are strictly an asset class of their own. In the equities bucket, US : International is ~3:1. We still firmly believe in the US economy yet anticipate decent returns (and of course increased volatility that come with it) with international equities over the next decade. The total international equity fund (VTIAX) expense ratio of 0.11% is the highest of all the Vanguard funds we own. The overall expense ratio of the portfolio will be 0.08%, a number that we are very comfortable with.

We’ll hold bonds primarily in our tax-advantaged account and also some in our taxable account. Although bonds are tax inefficient when held in a taxable account, we’d still like to be able to sell bonds in the event of a depressed equities market during the early years before our 401K’s can be accessed. It is the taxable account that we will be withdrawing from early in what we hope will ultimately be a capital preservation strategy as opposed to a draw-down strategy. The taxable account alone will hold about 5 years of expenses in bonds.

Cash at 5% simply reflects tolerance for risk and it is understood that it can be a drag on portfolio growth. That 5% stash reflects 2.5 years of living expenses.  Thus, a total of 7.5 years living expenses in bonds/cash in the taxable account alone will provide the feed-stock for the beast in the event of a depressed market during the first 5-7 years.

Looking ahead to beyond the 5-10 year post-FIRE horizon, we may gradually adjust our asset allocation to a higher equity / lower bond and lower cash position, proposed by the likes of Michael Kitces and others. Once the beast has left the room that is.

6. Taxes

This is actually where geographic arbitrage and taxes converge. If you have not been over to Jeremy and Winnie’s site at GoCurryCracker, get over there now. You will get a great schooling in minimizing taxes in early retirement. This crew are so good, they get a little irritated by throwing Uncle Sam even a dollar in their 2016 taxes, despite a six-figure income!

In all honesty we have learned a lot very quickly by studying Jeremy’s posts on taxes. Where previously income taxes have remained rather a mystery to us, our rapidly growing knowledge has allowed us to sketch out a spreadsheet of predicted income and taxes, and adjust it to allow for a predicted future income tax bill of close to zero. This even allows for some wiggle room for Roth Conversions and Tax Gain Harvesting. The real benefit here is the control we now have over our tax rate. Lower taxes means lower withdrawal rate. See point 1!

The second part to the tax equation is in our choice of our FIRE location. We will be literally running away to the mountains, and putting down some roots in the tax friendly state of New Hampshire. Our own version of geographic arbitrage. While New Hampshire has to get it’s revenue from somewhere and we will be paying 5% on dividends and interest, we will benefit from tax free 401K and IRA withdrawals, tax free pension income and tax free social security. New Hampshire is also known to have having higher property taxes, and while this is true our location is within one of the lower property tax regions of New Hampshire, and our town is one of the lower tax towns within this area.

For the PIE family, low taxes are the icing on top of the Safety Net Pyramid.

Wrapping Up

These six strategies are our personal approach to limiting the damage that the Sequence of Returns beast may cause. As with anything FIRE related, we remain flexible and open to new learning as our plans evolve. Some or all of these may be applicable to you. You may have an entirely different strategy. Tell us about it in the comments!




  1. It is a tough thing, balancing OMY and the security it brings with the value of time. Time is the one thing we have the least of, the most precious resource of all, and I struggle to give it the value it so richly deserves.

    We are planning a withdrawal rate of somewhere between 3 and 3.5, depending on where in the world we land up, and we are going to rely greatly on flexibility and geographical arbitrage to keep our precious stash safe when it is in its infancy.

    1. You will do just fine with that WR coupled to living in a different country. I assume it is international geo-arbitrage. ….

      Our only salvation in the OMY syndrome is short term pain, long term gain. At least that is how we convince ourselves of the situation!

  2. My father just retired and that was one of my biggest concerns for him – that there would be a severe market downturn early on. I consider it a real possibility, and never really considered a well thought-out plan. It’s nice to know there’s a name for this, and that there’s a way to limit this damage. This post is extremely helpful, thanks!

    1. Thanks for swinging by PIMD. Watch out for the SoR and don’t be SoRry!

      Glad you found it helpful. Putting this stuff down in writing helps us think through it also. It ain’t easy and I am sure there will be bumps along the road for us. I do wonder whether the 2017-2019 early retiree cohort could be in for some very choppy sequence waters.

  3. Thanks for the shout-out. Wow, it looks like you are in great shape with your plan. Making ends meet with a 2.5% WR is much easier because of the extra wiggle room.
    Also, just like you, I’m concerned about not just about another bear market around the corner. Just a few years of mediocre returns in stocks and sub-1% real bond returns will get the 4% Rule in trouble. Essentially, the Bogle scenario: https://earlyretirementnow.com/2017/06/07/the-ultimate-guide-to-safe-withdrawal-rates-part-16-early-retirement-in-a-low-return-world/
    I also like the idea of taking the company pension as an annuity. It’s the one annuity that is fairly priced and not subject to exorbitant fees (outside of Social Security). For peace of mind, I might do the same at age 55. It’s a smaller pension (discontinued not too long after I started) and it looks like a good deal from an actuarial point of view.
    Best of luck!

    1. Here’s to hoping that we don’t need the wiggle room factor.

      4% is starting to look quite appealing. Strike that last statement from the record. Let’s keep having positive vibes.

      The pension annuity has been a real hot discussion for us. We debated back and forward on rolling it over into an IRA but ultimately liked the locked in income floor as it played nicely into a defensive strategy for SoR. The projected growth for another 4 years in my plan did not seem attractive hence I’ll take it age 51 and not age 55.

      Sounds like your plan is structured a bit more favorably so good move to delay it.

  4. Nice plan! It’s easy to get stuck in OMY syndrome for sure, if you couldn’t tell by my latest posts about it, lol. We had discussed taking our megacorp pensions as annuities and haven’t yet. They’re not huge, but would still cover the groceries and more each month. With the annuity it would cover way less but we’d know it’s consistent and it would “pay out” in our late 60’s to the lump sum. But then the lump sum could grow in the market, so… 🙂

    SoR is pretty tricky to calculate. In our spreadsheet, Mrs. SSC decided to add in a randomized number, positive or negative, to simulate potential market returns. Some years it’s 6% some years it’s -4% some years it’s 1%. It was interesting running those and seeing how our lifestyle could be affected by some up and down years or continued down years. It also more accurately reflected the variability in the market rather than a straight 4% growth or 3% growth we’d used on our more conservative case.

    Nice article and definitely something to keep in mind.

    1. Yeah, OMY is real for us. If returns are iffy going forward, we will call it our friend. If returns are marvelous, we will spend, spend, spend….kidding…..

      The pension annuity works for us as an income stream that does not depend on the equities market forces. We did debate endlessly on pros/cons. Big ERN likes our approach with the pension and from an economical tactics perspective, that is solid support.

      The random returns are about as good as we can predict, to be honest! Better than Wall St pundits!! Like how you model that in to your projections on a Y2Y basis.


      Mr. PIE

  5. I’m far more comfortable with a 3.5% SWR, but I also have some healthy ability to geo-arbitrage. I have good connections and abilities that should allow some low COL countries to let me hang out for a spell if my assets plunge too far in a short time frame. My “early” retirement will actually be to my business part-time. Enough work to keep my mind and heart active, and enough income to not worry as my investments compound. I will definitely have 15 years of SS payments in. Only the more recent years would be considered high income.

    1. Having that flexibility is key. Bit of fun, bit of work in a location of your choice sounds great.

      The careers that Mr and Mrs PIE chose dictated really two main geographies. Boston or San Francisco area. So once we are done with working, that’s it!

      The Physican on Fire post on SS is worth a look to estimate your SS income. It was entitled “SS – Know your Bend Points ”

      Thanks for swinging by ZJ!

  6. Very thoughtful analysis. We plan to target a 3% withdrawal rate and keep around 3 years of living expenses in cash to avoid drawing down a depleted portfolio if a bear market develops in the first few years following retirement.

    1. Thanks. Smart approach. Yet some bear markets can extend more than 5 years so having the fortitude to stick with the plan is still a must. Good luck and keep on investing on.

  7. I’m not a FIRE guy but thought I would toss in a different approach because it is on topic. I’ve followed the more “traditional” path, working at megacorp and my wife and I are preparing to retire next year at 62 and 59. We are concerned about SoR risk and market risk, amongst others including longevity risk. We will both have small cash balance pension pensions from megacorp which will we annuitize and I have a small pension for some time working for Uncle Sam. And we both plan to delay SS and take a QLAC for longevity insurance. So that is a reasonable amount of guaranteed income. Although we have a reasonably significant risk capacity, we decided to take SoR and market risk off the table and self “annuitize” with a TIPS bond ladder which is pretty low risk and keeps up with inflation. This will be 60% of our portfolio and 30% will be in equities, the rest in short term reserves. In short, this is not the SWR model that is followed a lot in the FIRE blogs-it’s Floor (that’s the 60%) and Upside (that’s the 30%). It’s a safety first, conservative approach that requires a big chunk of change be devoted to safe, guaranteed income-we won’t go broke and we won’t die with multi-millions but we can enjoy our life, sleep at night and are prepared for a 35 year (or more) retirement. Having lived through 2007/8 with a portfolio drop of 50%, we want to address the possibly that occurs right after we retire as we wont have the time to recover like we did then. Good luck to the FIRE crowd-I’m learning some good stuff from you guys!

  8. Nice post.

    Why is a Bogelhead portfolio considered efficient? It has a low expense ratio for sure but it has a terrible risk profile. If you put Bogelhead 3 or Bogelhead 4 into a efficient frontier analyzer those portfolios have BIG volatility and its the VOL that is responsible for SORR given equal return.


    I had an efficient portfolio which had about 2/3 of the S&P risk in 2008. All hell broke loose. My portfolio returned to zero 2 YEARS before the SPY and by the time the SPY was even I was 18% ahead. The above analyzer will teach you a lot about risk/reward. Not to criticize but this is missing from your treatment.

    When I FIRE’d I needed to do some Roth conversions. MY RMD would put me far into 25% taxes. My assets were 2:1 post tax:pretax in other words my aggressive saving resulted in a lot of post tax stock. 2 recessions had given me the ability to aggressively tax loss harvest (about $500K loss). I don’t have any pension. So when I FIRE’d I sold 5 years of stock worth my monthly projected living expense, and mixed it with about 100K of LTcap loss for a zero dollar tax bill and put the cash into a short term muni bond fund. With this I can cover my monthly expense tax free, while I Roth convert up to the 15% tax level. I call the cash my home brew annuity, and it divorces me from SORR during early retirement. The rest of my portfolio remains invested 70/30 but the MUNI’s tilt my asset mix decidedly toward 55/45 which is a more recommended ratio for early retiree. As I spend my homebrew the portfolio will automatically rebalance toward a more aggressive AA. I will have to make some decisions at 70 when RMD and SS kicks in on how to keep my taxes low, but since I have 400K left in LT cap loss I should be pretty protected from SORR. If I need some living expense or a car or something, I just slice off a little post tax stock, pair it with some LTcap loss and have a nice life. My SWR is 3% but Big ERN’s calculator says I could do 3.75%-4% with the same risk as my present 3% once SS and RMD kicks in. ERN’s calculator is VERY useful.

    So what are the points?

    1. Make your portfolio efficient decreased VOL is your friend. Remember if you lose 50% you have to recover 100% to get back to zero. If you lose 30% you only have to get back 60%

    2. Make yourself protected as much as possible from SORR (home brew annuity in my case). There are a lot of papers that suggest 45:55 to 55:45 are the best ratios for early retirement. As you then age you can become more aggressive because your chances of dieing start to overtake the chances of your portfolio dieing. The problem is you are planning for 2 the chances of one surviving goes up. My plan is for 45 years

    3. Make enough money. Don’t be so hellbent on retiring you miss the boat. Sometimes I read these blogs (not this one) and to me they are way too optimistic and simplistic in their planning. Don’t bet on a side gig to save you. Pretty soon the robots will be doing all that stuff. It’s interesting on the regular FIRE forums everybody hawks 4% and 25x, but on the Doctor FIRE forums 3% and 33 to 40 times is more often quoted. I just read over on Big ERN’s site it only takes a few more years of aggressive saving to go from 25x to 33x

    4. Save early and save aggressively and don’t put all your chickens in the same basket. Just because tax law advantages pretax accounts doesn’t mean it will always be so. The govt is money hungry and there is a nice plumb of not taxed money sitting in those pretax accounts waiting to be picked. You don’t believe they would do it? One day SS was not taxed, the law was changed, the next day it was taxed. PUT MONEY in post tax accounts and tax loss harvest the hell out of it.

    Thanks for a nice read.

    1. Thanks for a very thoughtful comment, clearly speaking from experience.

      Our portfolio may well end up more like 65/30/5 at FIRE once we finish mulling things over. We love the work of ERN and will adopt a glide path strategy, ramping up equities over a 10 year period. Regarding our pension, we have been going back and forward on annuity versus rolling cash balance pension over into a IRA and creating a bond ladder with a chunk of the proceeds. Big ERN got us thinking about that strategy. We will be more like a 2.5% SWR all being well. We agree with you on that for sure. Our taxable portfolio is about 35% of our total portfolio. We plan Roth conversions but will be careful not to convert too much and increase AGI that will hurt healthcare subsidies.

      Again, excellent comment here and glad you enjoyed the read.

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