Order matters more
than average
Two portfolios can have identical long-run average returns and end up with wildly different balances. The difference is which years the good returns — and the bad ones — arrived.
The core problem
During accumulation — when you're adding money — sequence of returns mostly doesn't matter. A −30% year when you're 40 stings, but you have decades to recover and you're still adding money every month.
The danger is in the early years of withdrawal. When you're pulling $60k/year from a $1M portfolio and the market drops 30% in year one, two bad things happen simultaneously:
The result: your portfolio is permanently impaired. Even if markets fully recover, you own fewer shares to benefit from that recovery. This is called sequence of returns risk, and it's the primary reason why a "you'll earn 7% on average" analysis is dangerously misleading.
See it in action
Three portfolios below all earn the same average return — only the ordering differs. The green line retires into bull markets. The red line retires into bear markets. The purple line is the impossible baseline: exactly the average every single year.
Notice: raise the withdrawal rate and watch "Bad first" deplete much faster. The good-first scenario survives because early gains create a buffer that later losses can't erase.
Why the early years matter most
The mathematics are unforgiving. If you lose 30% in year one of retirement and withdraw $60k on top of that, you need your remaining portfolio to grow much faster just to recover — and that growth has to come from fewer dollars.
| Scenario | Year 1 return | Balance after year 1 | Impact |
|---|---|---|---|
| Bull market start | +25% | $1,190,000 | Buffer built, future withdrawals < 6% |
| Flat | +7% | $1,010,000 | Slight gain, roughly break-even |
| Bear market start | −30% | $640,000 | Now withdrawing 9.4% of a shrunk base |
Starting with $1M and $60k/year withdrawals. Same average 7% return over 20 years. The early bear market portfolio is so impaired by year 5 that it can't recover even in good markets.
What you can do about it
Keep 1–2 years of expenses in cash or short-term bonds. During market crashes, draw from the buffer instead of selling equities at depressed prices.
The classic '4% rule' was designed with sequence risk in mind. A 3–3.5% withdrawal rate is much more resilient to bad early years.
Spending slightly less in bad market years (reducing discretionary spending) and more in good years dramatically improves long-term survival rates.
Temporarily hold a higher bond allocation during the first 5–10 years of retirement, then shift back to more equities as you survive the vulnerable window.
Apply this to your numbers
Monte Carlo simulation accounts for sequence of returns risk automatically — every simulation samples a different ordering of good and bad years. Run yours to see how your plan holds up.