A 20% first-year decline can reduce a $1.5 million retirement fund’s duration from 40 to 15 years due to sequence risk.
A 20% drop in the first year of retirement forces a $1.5 million portfolio to recover from a $300,000 loss while withdrawing $60,000 annually, permanently altering its trajectory. The damage occurs because withdrawals compound market declines when the portfolio is largest, locking in losses that later gains cannot offset.
Two identical $1.5 million portfolios with the same average return can last 15 to 40 years solely based on the timing of bad years. The first five years of retirement are the most vulnerable, as early losses erode the principal needed for future growth. This sequence-of-returns risk persists regardless of total savings, making withdrawal timing critical.
Guaranteed income streams covering essential expenses can mitigate the risk by eliminating forced equity sales during downturns. Without such protection, retirees face irreversible portfolio depletion even with strong long-term returns.