The Retirement Risk That Averages Hide

Almost every retirement projection you will see works the same way: pick an average return, apply it every year, watch the balance. It produces a smooth line and a comforting number.

The line is the problem. Real returns do not arrive smoothly, and once you are withdrawing money rather than adding it, the order they arrive in matters enormously — sometimes more than the average itself.

Why saving and spending are opposites

While you are accumulating, a bad year early is close to harmless. You are still adding money, so you buy at lower prices, and by the end the average has done most of the work. Order barely registers.

Retirement inverts the arithmetic. Now money is leaving. A bad year early means selling into a decline, and what you sold is gone — it is not there to participate in the recovery. Every year afterwards has to be funded from a permanently smaller base.

The same bad years arriving twenty years later do far less damage. By then the portfolio has grown, and there are fewer years left to fund.

Same returns. Same average. Different retirement. You can watch this happen in the withdrawal stress test — three scenarios with identical average returns, differing only in when the bad years land.

What this does to "safe" withdrawal rates

Any single percentage presented as a safe withdrawal rate is a summary of many possible outcomes, not a promise about yours. It describes what held up across a range of historical sequences. It does not mean a given rate is safe in whatever sequence you personally get.

Two people retiring three years apart, with identical portfolios and identical withdrawal rates, can face very different sequences purely by timing. Neither made a mistake. One simply started into a worse decade.

This reframes the useful question. Not "what withdrawal rate is safe" but: what would I actually do if the first five years went badly? A plan with an answer to that survives sequences that break a plan built on an average.

What genuinely reduces the risk

Flexible spending, by a distance. A retiree who trims withdrawals after a bad year survives sequences that destroy a fixed withdrawal. The stress test deliberately withdraws blindly regardless of conditions, which is the worst case and nothing like how a sensible person behaves. Willingness to spend less temporarily is worth more than any amount of optimisation.

Near-term spending held outside volatile assets. A couple of years of expenses in cash or short bonds means an early downturn does not force selling at the bottom. It gives the rest of the portfolio time to recover.

Reducing withdrawals early, not late. Part-time work in the first few years, or delaying retirement slightly, cuts withdrawals in precisely the years where they do the most damage. The effect is disproportionate.

Not treating a projection as a forecast. A smooth line is a model, not a prediction. Any plan that only works if returns behave smoothly is not a plan.

The point

Averages are useful for describing what happened. They are misleading when used to describe what a retirement will feel like, because a retirement is lived one year at a time and the early years carry far more weight than their share of the average suggests.

If you take one thing from this: a retirement plan needs an answer for a bad first five years. Not a better average — a response.

Drawdown depends on your tax position, other income, health, and how much flexibility you genuinely have. It is one of the few areas where paying a licensed professional for a second opinion is straightforwardly worth it.