Retirement risks: sequence of returns, inflation and longevity
A retirement plan is built on assumptions: what you will spend, what your savings will earn, how prices will move and how long the money needs to last. Each assumption can turn out differently. This guide gives an overview of the main risks to a retirement plan, explains each one in plain words and shows what our calculators do and don’t capture. It describes risks; it doesn’t predict them or tell you how to invest.
An overview of the main risks
| Risk | In one sentence | Covered in our calculators? |
|---|---|---|
| Sequence of returns | Bad years early in retirement hurt more than the same bad years later. | No: tools #1–#3 use one steady return |
| Inflation | Rising prices reduce what a fixed amount buys. | Yes, as one average rate you choose |
| Longevity | The money may need to last longer than planned. | Partly: you choose the horizon or see how long it lasts |
| Market volatility | Investment values rise and fall from year to year. | No: a steady return is assumed |
| Healthcare costs | Health spending can rise and differs by country. | Only if you include it in your spending |
| Rule changes | Pension ages, benefits and tax rules can change. | No: check official sources |
| Currency | Retiring abroad means spending in another currency. | No conversion: every amount in one currency |
The next sections explain each risk briefly.
Sequence-of-returns risk: why the order of returns matters
When you are only saving a lump sum and nothing goes in or out, the order of good and bad years doesn’t change where you end up. Growth factors multiply, and multiplication doesn’t depend on order. Once you start withdrawing, that changes. A fall early in retirement means you sell more of your investments at low prices to fund the same withdrawal, and that money is no longer there when markets recover.
Example (hypothetical, arithmetic only): you start with $100,000 and withdraw $5,000 at the start of each year.
| Order of returns | After year 1 | After year 2 |
|---|---|---|
| −20%, then +20% | ($100,000 − $5,000) × 0.8 = $76,000 | ($76,000 − $5,000) × 1.2 = $85,200 |
| +20%, then −20% | ($100,000 − $5,000) × 1.2 = $114,000 | ($114,000 − $5,000) × 0.8 = $87,200 |
| Either order, no withdrawals | $100,000 × 0.8 × 1.2 = $96,000 |
Same two returns, different result, purely because of the order combined with withdrawals. Over a real retirement of 20 or 30 years, with larger swings, the effect can be much bigger.
The research behind the 4% rule tested withdrawals against actual historical sequences of US returns, so bad starting periods are part of its results; see Withdrawal strategies. Tools #1–#3 use one steady return, so they can’t show this risk. Our withdrawal scenarios calculator compares four withdrawal approaches under three hypothetical return paths with the same average: steady, bad years first and good years first. A separate, more detailed guide on sequence-of-returns risk is planned.
Inflation risk: what rising prices do to a fixed income
Inflation is the general rise in prices over time. If your income stays the same while prices rise, it buys less each year. After n years at an average inflation rate i, one unit of money buys 1 ÷ (1 + i)^n of what it buys today.
Example: the Trinity study (Cooley, Hubbard and Walz, 1998) notes that at 3% inflation a year, the purchasing power of a fixed $70,000 a year is cut roughly in half by the end of 25 years. The formula gives the same: 1 ÷ 1.03^25 ≈ 0.48.
Some retirement income rises with inflation, which reduces this risk for that part of your income:
- US Social Security benefits are adjusted each year by a cost-of-living adjustment (COLA) tied to the CPI-W price index.
- The UK new State Pension rises each year by the highest of average earnings growth, price inflation (CPI) or 2.5%, according to GOV.UK.
Withdrawals from savings don’t adjust themselves; under the 4% rule you raise them with inflation, which is exactly what makes inflation a risk for the savings.
How inflation is measured
Each country publishes official price indices:
- United States: the Bureau of Labor Statistics publishes the Consumer Price Index (CPI), which measures the average change over time in prices paid by urban consumers for a basket of goods and services. Social Security’s COLA uses a version called the CPI-W.
- United Kingdom: the Office for National Statistics publishes the CPI and the CPIH, which also includes owner occupiers’ housing costs.
We don’t repeat changing figures in our guides. Current official numbers, with source and date, are on our numbers pages, for example US retirement numbers for 2027. A separate, more detailed guide on inflation is planned.
In our calculators you choose one average inflation rate. Results are shown in today’s money, and where a future amount is shown, it is grown by the rate you entered.
Longevity risk: planning for a longer life
Longevity risk is the risk that you live longer than your plan assumes, so the money has to last more years. Nobody knows their own lifespan, and averages say little about any one person.
Two things to keep in mind:
- The best-known withdrawal research tested periods of up to 30 years. A retirement that starts early, or simply lasts long, can go beyond that. More on long retirements: all retirement guides.
- Income that is paid for life, such as a state pension or Social Security, keeps paying however long you live. The more of your spending it covers, the less your savings depend on how long you live. See Where retirement income comes from.
How long will my money last? shows how many years a withdrawal could last with your inputs, which you can compare with the horizon you want to plan for.
Market volatility
Investment values go up and down, sometimes sharply. Volatility is what turns the order of returns into a risk once you withdraw (see above). The mix of investments, called asset allocation, affects how large those swings can be. More on investment terms: all retirement guides. Our calculators assume one steady return, so treat their results as a what-if, not a forecast.
Healthcare costs
Health spending can rise with age and depends heavily on the country you live in: what public cover applies, from what age, and what you still pay. In our calculators, healthcare is only included if you include it in your yearly spending. See Retirement budget.
Rule changes
Pension ages, benefit rules and tax rules can change over time. A plan based on today’s rules may need updating. Check your own figures with the official services: for example, the State Pension age checker on GOV.UK or the retirement planner pages of the Social Security Administration in the US.
Currency risk if you retire abroad
If your income is paid in one currency and you spend in another, exchange rates change what your income is worth where you live. Our calculators do no currency conversion: you pick one currency and enter every amount in it. A retire-abroad comparison tool is planned.
What our calculators do and don’t model
- They do model: spending, other income, a withdrawal rate and one steady inflation rate, in any currency. Tools #1–#3 use one steady return; the withdrawal scenarios calculator also compares hypothetical return paths with the same average: steady, bad years first and good years first.
- They don’t model: historical market crashes, taxes, fees (enter a return after fees), rule changes or exchange rates.
That makes them useful for understanding the basic arithmetic, and a reason to test several scenarios rather than rely on one result.
FAQ
What is sequence of returns risk?
The risk that weak returns come early in retirement, when withdrawals sell investments at low prices. The same returns in a better order can leave more money. It matters most in the first years of withdrawals.
Can you show it with an example?
Hypothetical: $100,000, withdraw $5,000 at the start of each year. Returns of −20% then +20% leave $85,200; +20% then −20% leave $87,200. Without withdrawals, both orders end at $96,000.
Why doesn’t the order matter while I’m only saving a lump sum?
With no money going in or out, the end value is the same whatever the order of returns, because the growth factors multiply. Withdrawals (and deposits) change that.
How does inflation affect retirement savings?
It raises what the same lifestyle costs, so a fixed income buys less each year. The Trinity study gives an example: at 3% inflation, a fixed $70,000 a year loses about half its buying power by the end of 25 years.
Which inflation figure should I look at?
Each country publishes its own: in the US the Bureau of Labor Statistics (CPI; Social Security’s COLA uses the CPI-W), in the UK the Office for National Statistics (CPI and CPIH). Current figures are on our numbers pages.
Do your calculators include market crashes?
Partly. Tools #1 to #3 use one steady return and inflation rate. The withdrawal scenarios calculator shows what happens when bad years come first, using hypothetical return paths with the same average; it does not replay historical crashes.
Sources
- Cooley, P. L., Hubbard, C. M. & Walz, D. T. (1998). “Retirement Savings: Choosing a Withdrawal Rate That Is Sustainable.” AAII Journal, February 1998. PDF: https://www.aaii.com/files/pdf/6794_retirement-savings-choosing-a-withdrawal-rate-that-is-sustainable.pdf (accessed 2026-10-17). Supports: inflation example (section “What About Inflation?”); tests over all overlapping historical payout periods from 1926 to 1995 (table notes).
- Bengen, W. P. (1994). “Determining Withdrawal Rates Using Historical Data.” Journal of Financial Planning, October 1994. PDF: https://www.financialplanningassociation.org/sites/default/files/2020-05/7%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf (accessed 2026-10-17). Supports: origin of the 4% rule; withdrawal research based on historical US returns. Verified finding (p. 173): “In no past case has it caused a portfolio to be exhausted before 33 years”, for a 4% initial withdrawal adjusted for inflation each year, a portfolio of 50% common stocks and 50% intermediate-term Treasury notes, and US data from 1926 (Journal of Financial Planning, October 1994, pp. 171–180).
- U.S. Bureau of Labor Statistics, Consumer Price Index: https://www.bls.gov/cpi/ (accessed 2026-10-17). Supports: what the CPI measures.
- Social Security Administration, press release, October 14, 2026: https://www.ssa.gov/news/en/press/releases/2026-10-14.html (accessed 2026-10-17). Supports: the COLA is tied to the CPI-W.
- Office for National Statistics, Inflation and price indices: https://www.ons.gov.uk/economy/inflationandpriceindices (accessed 2026-10-17). Supports: UK CPI and CPIH.
- GOV.UK, The new State Pension: What you’ll get: https://www.gov.uk/new-state-pension/what-youll-get (accessed 2026-10-17). Supports: how the new State Pension rises each year.
- GOV.UK, Check your State Pension age: https://www.gov.uk/state-pension-age (accessed 2026-10-17). Supports: official State Pension age checker.
- Social Security Administration, Starting your retirement benefits early: https://www.ssa.gov/benefits/retirement/planner/agereduction.html (accessed 2026-10-17). Supports: official SSA retirement planner pages.
Last reviewed: 2026-10-17. See our methodology and editorial policy.
Educational estimate, not personal financial, tax or legal advice. Rules differ by country; verify with official sources or a licensed professional. See our disclaimer.