Before retirement, an average return can be a rough summary of many good and bad years. After withdrawals begin, the order of those years starts to matter a great deal.
Imagine two portfolios earning the same long-term average. One suffers large losses early while income is being withdrawn; the other suffers them later. In the first case, more units may need to be sold at depressed prices to fund spending, leaving less capital available for a recovery. This is called sequence-of-returns risk.
It does not mean every market fall requires action, or that one investment mix prevents the problem. Income flexibility, cash reserves, guaranteed income, asset allocation, drawdown level and rebalancing can all affect the result. Each carries its own cost or compromise.
Try this now
Ask to see a retirement-income scenario with poor returns in the first five years, not only a smooth average. Note which spending or investment response the model assumes.
Ask your advisor
- How would early market losses affect withdrawals and remaining capital?
- Which income is protected from market timing?
- What rules would guide spending or rebalancing after a sharp fall?
Scenario testing demonstrates risk; it does not predict the sequence that will occur or prescribe a particular response.