Two retirements with the same average return over thirty years can end very differently. The order in which those returns arrive matters once money is being withdrawn.
Withdrawals convert a fall into a permanent loss
A portfolio that falls and then recovers loses nothing if it is left alone. The recovery applies to the whole balance and restores the position.
Once withdrawals begin, units sold during the fall are gone. The recovery applies only to what remains, so the account never returns to its previous path.
The same percentage decline therefore has a materially different effect depending on whether money is being taken out at the time.
Early years carry the largest balance
The portfolio is at its largest at the start of retirement, so a decline then removes the greatest absolute amount. The same fall later applies to a smaller base.
Withdrawals in those early years also represent the smallest proportion of a large balance, which is why a poor start can pass unnoticed for a while.
By the time the effect is visible in the balance, several years of selling into weakness have already occurred.
Accumulation behaves in the opposite direction
During the saving phase, contributions buy more units when prices are low. A decline early in a working life is unhelpful in the moment but not structurally damaging.
The order of returns matters far less when money is flowing in, because falls create opportunities rather than realising losses.
This is why the transition into drawdown is a genuine change in the nature of the risk rather than just a change in cash flow.
Structural responses rather than predictions
Because the sequence cannot be forecast, the usual responses are structural. Holding a cash or short-duration reserve allows spending to be met without selling into a decline.
Adjusting withdrawals in response to portfolio performance is another approach, trading certainty of income for a reduced chance of depleting the capital.
Each involves a trade-off between income stability and longevity of the portfolio, and neither eliminates the underlying risk.
Why averages mislead in planning
Projections built on a single average return assume a smooth path that no real portfolio follows. They cannot show the effect the sequence produces.
Modelling a range of orderings across the same average is what reveals the spread of outcomes, and the spread is wide in the early withdrawal years.
The specifics depend on individual circumstances, tax treatment and local rules, so retirement income planning is an area where professional advice is genuinely warranted.