Sequence of returns risk

During the accumulation phase (when you're contributing but not withdrawing), the order of returns doesn't much matter. A bad year early followed by a good year later leaves you in the same place as the reverse. But the moment you start withdrawing, order becomes critical.

Why order matters in withdrawal

When you're selling assets to fund living expenses, a bad return in year 1 forces you to sell shares at a low price, permanently reducing the base that future compounding can work on. A later rebound doesn't save you — you sold too much at the bottom. Two retirees with identical long-term average returns but different order can have radically different outcomes.

How to defend against it

• Keep 1–3 years of expenses in cash or short bonds so you don't have to sell stocks in a down market.
• Use a 'bond tent' — temporarily increase bonds in the years right around retirement, then gradually reduce.
• Build flexibility into your withdrawals. Cut spending in bad years. The fixed-dollar 4% rule is brittle; a dynamic rule is robust.
• Work one more year or phase into retirement. Both directly reduce sequence risk.