Investing
Two retirees can earn the exact same average return over thirty years and still end up in very different places. The reason is the order in which those returns arrive.
What sequence-of-returns risk is
Average returns hide a crucial detail: the order they happen in. While you are saving, order barely matters. But once you begin withdrawing, a stretch of poor returns early on can do lasting damage.
That is because you are selling assets to fund spending at the same time they have fallen in value, leaving less invested to recover when markets eventually rebound.
Why the first years matter most
A bad market in the first few years of retirement, combined with withdrawals, can permanently shrink your portfolio’s base. The same downturn late in retirement barely registers, because there are fewer years of withdrawals left and more time has already compounded.
This is why two identical portfolios can diverge so sharply: one simply had the misfortune of a rough start.
How to soften the blow
You cannot control markets, but you can prepare. Holding a year or two of spending in cash lets you avoid selling into a downturn. Staying flexible — trimming discretionary spending in bad years — protects the base. And a sensible withdrawal order helps you draw from the right places at the right time.
Planning for a rough start, even if it never comes, is one of the most valuable things you can do before you retire.
Key takeaways
- The order of returns matters enormously once you are withdrawing.
- Early losses combined with withdrawals can permanently shrink your portfolio.
- A cash buffer, flexible spending, and a smart withdrawal order reduce the risk.
