Sequence of Returns Risk

During accumulation, the order of returns is irrelevant: the same set of annual returns produces the same ending balance in any sequence. Once withdrawals begin, that stops being true, and order becomes one of the largest determinants of whether a portfolio lasts.

The mechanism is that a withdrawal during a decline sells more shares to raise the same amount, permanently removing units that would otherwise have participated in the recovery. Two retirees with identical average returns over thirty years can end with very different balances, decided by which decade the bad years landed in.

This is why the first decade of retirement carries disproportionate weight, and why plans are stress-tested against sequences rather than averages. Commonly discussed responses include holding several years of expenses outside equities, and withdrawal rules that flex with portfolio performance rather than rising with inflation regardless.