Most people plan retirement around an average return. They pick a number, maybe 6% or 7%, apply it across twenty or thirty years, and see whether the plan holds up.
That math works fine while you are saving. It breaks the moment you start spending.
Averages Hide What Matters Most
Here is what surprises people. When you are not withdrawing money, the order of your returns doesn’t matter.
Picture a hypothetical $1,000,000 portfolio over twenty years. Seventeen of those years return positive 10%. Three of them return negative 15%. The average works out to 6.25% a year.
Leave that money alone and the order is irrelevant. Put the three bad years at the beginning and you finish with $3,104,077. Put them at the end and you finish with $3,104,077. The same number, to the dollar. Multiplication doesn’t care about sequence.
Now add withdrawals. Everything changes.
The Same Twenty Returns, Two Very Different Outcomes
Same hypothetical portfolio. The same twenty annual returns, so the same 6.25% average in both cases. This time our retiree withdraws $50,000 at the end of each year.
Portfolio A gets the three losing years first, in years one through three. After twenty years, its value is about $427,000.
Portfolio B gets those same three losing years last, in years eighteen through twenty. After twenty years it’s value is about $1,730,000.
Identical returns. Identical average. Identical withdrawals. A gap of roughly $1.3 million, decided entirely by when the bad years showed up.
These figures are hypothetical and are shown only to illustrate the arithmetic of withdrawals. They are not a prediction of any actual result. They don’t reflect any particular investment, and they ignore taxes, fees, and inflation.
The reason is simple once you understand it. Portfolio A had to sell assets at depressed prices to fund those first three years of spending. Those assets were gone before the recovery arrived. Portfolio B sold into strength and kept far more shares working through the good years.
Loss arithmetic compounds the damage. A 15% decline needs roughly an 18% gain to get back to even, and a 30% decline needs about 43%. The retiree who is selling into that hole is climbing out with less every year.
The Retirement Danger Zone
Sequence risk isn’t spread evenly across retirement. It concentrates in a window of roughly five years before and five years after your retirement date.
Two things collide there. Your portfolio is at or near its largest, so a given percentage loss costs more dollars than it ever will again. At the same time, your paycheck is ending, so you lose the ability to ride out a decline by not touching the account.
A 25% decline at 45 is an inconvenience. The same decline at 64 can reshape the next thirty years.
Strategy One: Maintain a Cash Buffer
The simplest defense is refusing to be a forced seller. Holding one to three years of planned spending in cash means a bad market year doesn’t have to be funded by selling stocks at a loss.
Bank deposits are insured up to $250,000 per depositor, per insured bank, per ownership category. Larger buffers can be spread across ownership categories or across institutions.
The tradeoff is real. Cash drags on long-run returns. That drag is the price of not having to sell at the wrong moment, and inside the danger zone it’s often worth paying.
Strategy Two: A Bond Ladder
A ladder extends the same idea further out. You buy high-quality bonds that mature in the specific years you plan to spend the money, so each rung funds a year of living expenses no matter what stocks are doing.
Treasury securities can be bought directly from the Treasury at auction, with no account or purchase fees and a $100 minimum. Corporate and municipal bonds can work as well, with credit quality to weigh.
The point of a ladder is not yield. It is knowing which dollars fund which years.
Strategy Three: Flexible Withdrawal Rules
A withdrawal that never changes is the assumption that does the most damage in a bad sequence. Rules that flex may reduce that damage.
Common approaches skip the inflation raise after a down year, or set upper and lower guardrails and adjust spending when the withdrawal rate crosses one of them. Modest, temporary trims early in a decline preserve capital exactly when preservation matters most.
Flexibility has limits worth naming. Required minimum distributions may begin at age 73 or 75, depending on the investor’s birth year, and they set a floor on what has to come out of a tax-deferred account whether or not markets cooperate.
Strategy Four: TALS™
For clients with substantial taxable portfolios, our Tax-Aware, Long-Short Investing & Tax Strategy™ (TALS™) addresses a different part of the problem.
Long-held taxable accounts often contain significant embedded gains. When a retiree needs to raise cash, rebalance, or reduce a concentrated position, those gains can restrict the available choices. The investor may postpone a sensible portfolio decision to avoid a tax bill or incur the tax at an especially inconvenient time.
TALS™ uses a diversified combination of long and short positions designed to maintain investment exposure while creating more opportunities to realize losses. Those losses may become valuable tax assets. Capital losses can offset realized capital gains dollar for dollar.
Certain limited-partnership structures may produce different tax results, including losses that may be treated as business losses rather than capital losses. Depending on the structure, the investor’s income, and applicable tax limitations, those losses may potentially offset a broader range of income. These results are highly fact-specific and should be evaluated with your tax adviser.
Having usable tax assets available before they are needed may provide greater freedom to raise cash, rebalance, or reduce a concentrated holding without allowing taxes alone to dictate the decision.
TALS™ doesn’t eliminate market losses or sequence-of-returns risk. Although its long-short structure may provide diversification and may moderate some market movements, its principal role is as a tax-management and portfolio-flexibility tool. It carries risks and costs that don’t arise in traditional long-only investing. These strategies are generally available only to accredited investors, with some structures limited to qualified purchasers.
Why “Just Ride It Out” is Only Half The Advice
Ride it out is genuinely good counsel for a 40-year-old with a paycheck and twenty more years of contributions before they contemplate retirement. That investor is buying during the decline. Time is working for them.
The retiree is doing the opposite. They are selling during the decline. Telling them to sit still is not a plan. It is the absence of one.
The work is not predicting which years will be bad. Nobody can do that. The work is building a plan that survives those years arriving at the worst possible time, because eventually, for someone, they do.
Where This Leaves You
If you are within five years of retiring on either side, the most useful question is not what return you expect. It is what happens to your plan if the first three years disappoint.
Run that scenario before you need the answer. Where the cash comes from in a bad year should be decided in advance and in writing, while nothing at all is going wrong.
