Published on Jan 22, 2026 • Updated on Sep 20, 2026
This article was written by Salvatore M. Capizzi
Salvatore M. Capizzi, CEPA, CBDA, is Dunham's Chief of Sales & Marketing and a 2026 Wealthies CMO of the Year Finalist. His work focuses on retirement planning, emerging trends for financial advisors, and advanced tax, trust, and estate strategies.
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Long before the grand ball, Cinderella's father bequeathed $1 million to her and her two stepsisters. This sum was intended for their retirement at the age of 65, a distant future event for the three young ladies.
However, in his trust, he stated that the trustee would offer a rate of return for each of them, but they were to decide on the return during the reading of the trust.
"Take heed," cautioned the trust document, "once you have made your decision, it is irreversible. Make a thoughtful calculation, for this is the only money you will have when you retire."
The trust provided two choices:
Option A
A negative – (8)% rate of return for the first 10 years of their retirement, but then a positive 40% rate of return for the next 20 years. This equated to a 22% average annual return.
Option B
A 10% return for the first 15 years of their retirement and a 0% return for the next 15. This yielded a much more modest 4.7% annual rate of return.
Cinderella's Evil Stepmother used her laptop to open Excel and run calculations. After analyzing the projected $1 million they would receive at retirement, she found that by the end of the 30th year, Option A would accumulate an impressive $363 million, thanks to the magic of compounding interest. In contrast, Option B would reach just slightly over $4.1 millio
Sir David Osgood, the Trustee for Cinderella’s father’s estate, told the young women to decide.
The two stepsisters quickly chose Option A, and their mother nodded with her approval.
To the astonishment of Cinderella’s stepmother and two stepsisters, Cinderella said, in a loud, confident voice, “Option B. Thank you most kindly.” Her confidence sent a chill up and down their spines.
You see, Cinderella understood the impact of “Sequence Risk” when it comes to retirement and generating income from your assets.
Sequence of returns risk is the danger that poor returns in the first years of retirement, combined with ongoing withdrawals, permanently shrink a portfolio's lifespan, even if returns improve later. It matters most in the five years before and after retirement, when a downturn hits at the same time as the largest withdrawals relative to portfolio size.
In short, it revolves around the order in which investment returns occur and can significantly impact portfolio outcomes, especially for retirees who begin taking income from their portfolios at the start of a market downturn.
The concern is that experiencing poor market performance early in retirement makes it challenging to maintain income sustainability, even if the market recovers later, and can deplete your retirement portfolio faster.
This was a key point that Cinderella recognized but was overlooked by her stepsisters and their mother.
Option A provided the two stepsisters with an average rate of return of 22%, while Option B provided Cinderella with an average 4.7% rate of return. This is where the concept of sequence risk comes into play.
Cinderella considered a crucial factor ignored by her stepsisters, which was that they each needed $40,000 a year in income, with this amount growing at 2% annually for inflation. It is the income being withdrawn from the retirement portfolio that sequence risk feasts on when the order of the returns starts out poor for the retiree, as it did for Cinderella’s stepsisters.
Take a look at the graph below comparing the investment portfolios in the retirement of Cinderella and one of her stepsisters.
Due to the poor sequence of returns, the stepsister will run out of money and have no remaining assets within 19 years after retiring, at the age of 84.
On the other hand, although Cinderella had a lower average rate of return over the 30-year period, the sequence of her returns would result in a retirement account valued at over $2.5 million within the same 19 years post-retirement.
After 30 years, at age 95, Cinderella would find herself with over $1.8 million in her retirement account despite experiencing a 0% return for the last 15 years. This showcases the impact of sequence risk working in favor of the retiree, thanks to a sound rate of return in her early years. That was the key factor at play.
This reworked fairy tale illustrates the profound impact of sequence risk. Cinderella's choice of Option B created favorable early returns that became the foundation of her financial stability as the years unfolded. Even in the face of a 0% return during the latter part of her retirement, she emerged at age 95 with a robust $1.8 million in her retirement account. She didn’t need Prince Charming to rescue her, and she didn't need to worry about her riches disappearing at midnight.
In a twist of fate, Cinderella's stepsisters, who had once lived a life of privilege, taking advantage of Cinderella, now found themselves in a different reality. Running out of money, the stepsisters turned to Cinderella for support. The roles were reversed, and the stepsisters were now penniless and on the other end of doing chores around the house.
For both retirees and financial planners, this creates an important planning conversation.
Clients nearing retirement may need help understanding why the early retirement years require a different mindset than the accumulation years.
The goal is not simply to chase the highest possible return, but to build an income strategy that can withstand volatility, withdrawals, and changing market conditions.
Advisors can help clients by focusing on three key areas:
Prioritize stability in the early retirement years - Clients should understand that early market losses can have an outsized effect once withdrawals begin.
Discuss withdrawal flexibility - Reducing or adjusting withdrawals during periods of market stress may help preserve long-term income sustainability.
What is a good example of sequence of returns risk? Picture two retirees who each start with $1 million and withdraw $40,000 a year, adjusted for inflation. Both earn the same average return over 20 years. The one who hits a market downturn in the first few years runs out of money much sooner than the one who retires into a rising market, even though their long-term average return is identical.
How does sequence of returns risk affect retirement income? It front-loads the damage from bad markets. When you withdraw money during a downturn, you're forced to sell assets at depressed prices. That locks in losses the portfolio may never fully recover from, no matter how well markets perform in later years.
Can you avoid sequence of returns risk? Not completely, but you can soften the blow. Common tactics include keeping one to three years of expenses in cash, using flexible withdrawal rules like Guyton-Klinger guardrails that cut spending in down years, and shifting to a more conservative mix (sometimes called a bond tent) in the years right around retirement.
Is sequence of returns risk the same as market risk? No, they're related but different. Market risk is just the chance of losing money at any point. Sequence risk is about timing. The same loss hits much harder early in retirement, while you're withdrawing, than it would late in retirement or during your working years when you're still adding money.
Why does an early downturn hurt a retirement portfolio more than a later one? Early losses shrink your balance right when withdrawals are also pulling money out, so there's less capital left to grow when the market eventually recovers. A downturn in year 15 hits a smaller slice of your remaining withdrawal years and gives the portfolio less time to compound the damage.
Dunham — Sequence Risk in Retirement: When Diversification Isn’t Enough [dunham.com]
Vanguard — Vanguard’s Principles for Retirement Income [vanguard.com]
Vanguard — Safeguarding Retirement in a Bear Market [vanguard.co.uk]
Morningstar — How Retirees Can Defend Against Sequence Risk [morningstar.com]
Charles Schwab — Timing Matters: Understanding Sequence-of-Returns Risk [schwab.com]
Retirement Researcher — Navigating One of the Greatest Risks of Retirement Income Planning [retirementresearcher.com]
SSRN — The Lifetime Sequence of Returns: A Retirement Planning Conundrum [ssrn.com]
Capital Group — Rethinking Sequence-of-Returns Risk [capitalgroup.com]
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family's unique circumstances and objectives.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification does not guarantee profit or ensure against loss.
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