Sequence-of-Returns Risk Is the Retirement Threat Nobody Budgets For

When you are accumulating, the order of your annual returns does not matter. A 30 percent loss followed by a 30 percent gain lands in the same place regardless of sequence, because you are not withdrawing anything. Everyone internalizes this and then wrongly assumes it stays true in retirement.

Once you start drawing down, sequence becomes everything. A bad market in the first few years of retirement forces you to sell more shares at low prices to cover the same spending, permanently shrinking the base that has to recover. Two retirees with the identical average return over 30 years can see one run out of money and the other die wealthy, purely based on whether the crash came early or late.

You cannot control the sequence, but you can blunt it. Hold one to three years of spending in cash and short bonds so you are not forced to sell equities into a downturn. Stay flexible on withdrawals, trimming spending in bad years. Those two levers do more for retirement survival than chasing an extra point of return ever will.