Protection · 6 min read
Why the First Five Years Matter Most
Sequence-of-returns risk explained without jargon: the same average return, two very different outcomes.
Two retirees can earn the exact same average return over twenty years and end up in completely different places. The difference is the order the returns arrived in — and whether they were withdrawing while it happened.
Why order matters once you withdraw
While you are saving, a downturn buys shares cheaply. Once you are withdrawing, a downturn forces you to sell more shares to produce the same dollar of income, and those shares are not there when the recovery comes.
That is the whole idea behind sequence-of-returns risk. It is arithmetic, not pessimism.
Time is the defense
A reserve of stable, accessible money exists so that a bad year does not have to be funded by selling into it. How large that reserve should be depends on fixed costs, other reliable income and personal comfort — there is no universal number.
Flexible spending is underrated
Households that can defer a large discretionary expense for a year during a decline preserve far more of their plan than the same households would by chasing a slightly different allocation.
Key takeaways
- • Withdrawing during a decline locks in the loss
- • A cash or stable reserve buys time to recover
- • Flexible spending is the most underrated defense
- • Average returns hide the order they arrive in
See how your own picture fits together
The Retire Atlas assessment builds a preliminary snapshot of how income, taxes, healthcare and protection work together in your situation. It takes a few minutes and asks for ranges, never account numbers.
Start my Atlas assessmentEducational information only. This article is general education and is not investment, insurance, tax or legal advice, and it is not a recommendation about any specific product, account or person. Retire Atlas is not a fiduciary, registered investment adviser, insurance carrier or government agency. Rules, thresholds and product features change and vary by state and by individual circumstances. Confirm anything here with a qualified professional before acting. No outcome is guaranteed.