Two portfolios can earn the same average return and finish in very different places if their owners are withdrawing money. Losses early in a withdrawal period force more shares to be sold while prices are down, leaving fewer shares for a recovery.
Accumulation works differently
While saving, a market decline can let new contributions buy more shares. During retirement, the same decline can be harmful if living expenses require sales.
The cash-flow direction changes the math.
Averages hide the path
An average return does not show whether bad years came first or last. A projection that uses one smooth rate can miss that risk.
Testing several sequences gives a more honest range of outcomes.
Flexibility has value
A cash reserve, a conservative bond allocation, or the ability to trim withdrawals can reduce forced selling. Each choice has tradeoffs.
The goal is not to predict the next downturn. It is to avoid making one path fatal.
Sources
- U.S. Securities and Exchange Commission, Investor Bulletin on Retirement Investing.
- FINRA, Managing Retirement Income.