The same average return can fund a comfortable retirement — or run dry years early. The difference is the order.
In 2008, Walter Higgins did everything according to plan. He’d spent a career with the postal service, saved steadily, and at sixty-six he claimed Social Security and settled into retirement. Then the bottom fell out. The S&P 500 lost 37 percent that year, the worst calendar-year decline since the Great Depression, and Walter’s portfolio took a hit it had no time to recover from before he needed to draw on it.
Walter didn’t wait to see what would happen. He went back to work immediately, and suspended his Social Security rather than keep collecting it. Continuing to withdraw from a portfolio that had just lost a third of its value would have meant locking in those losses for good: selling shares at the bottom and permanently shrinking the base that needed to recover. Going back to work removed the need to touch the portfolio at all, so it could wait out the downturn.
Financially, Walter’s story has a recovery in it. What it cost him doesn’t show up on a balance sheet: the first-year trip to see his daughter’s three kids never happened, and neither did the next few. By the time his finances were steady, the grandchildren were teenagers. That risk has a name, and it isn’t really about how the market performs. It’s about when.
Picture two retirees, each starting with exactly $2,000,000, each withdrawing exactly $200,000 a year for fifteen years. Over those fifteen years, both portfolios experience the exact same set of annual returns, averaging 11.31 percent a year. The only difference between them is the order those returns arrive in.
| Year | Start of Year | Return | Withdrawal |
|---|---|---|---|
| 1 | $2,000,000 | 5.78% | $200,000 |
| 2 | $1,904,040 | 18.59% | $200,000 |
| 3 | $2,020,821 | 31.16% | $200,000 |
| 4 | $2,388,189 | 31.16% | $200,000 |
| 5 | $2,321,231 | 22.33% | $200,000 |
| 6 | $2,694,902 | 20.38% | $200,000 |
| 7 | $2,882,983 | (4.64%) | $200,000 |
| 8 | $2,558,492 | 31.65% | $200,000 |
| 9 | $3,104,955 | 18.53% | $200,000 |
| 10 | $3,443,243 | 6.59% | $200,000 |
| 11 | $3,456,973 | (7.03%) | $200,000 |
| 12 | $3,028,008 | 23.72% | $200,000 |
| 13 | $3,498,811 | 36.90% | $200,000 |
| 14 | $4,516,072 | (25.95%) | $200,000 |
| 15 | $3,196,051 | (14.42%) | $200,000 |
| Total | $2,564,021 | 11.31% avg | $3,000,000 |
After fifteen years and $3,000,000 in total withdrawals, this portfolio still has $2,564,021 left in it.
| Year | Start of Year | Return | Withdrawal |
|---|---|---|---|
| 1 | $2,000,000 | (14.42%) | $200,000 |
| 2 | $1,540,483 | (25.95%) | $200,000 |
| 3 | $992,686 | 36.90% | $200,000 |
| 4 | $1,085,202 | 23.72% | $200,000 |
| 5 | $1,095,142 | (7.03%) | $200,000 |
| 6 | $832,251 | 6.59% | $200,000 |
| 7 | $673,935 | 18.53% | $200,000 |
| 8 | $561,760 | 31.65% | $200,000 |
| 9 | $476,246 | (4.64%) | $200,000 |
| 10 | $263,427 | 20.38% | $200,000 |
| 11 | $76,351 | 22.33% | $76,351 |
| 12 | $0 | 31.16% | $0 |
| 13 | $0 | 31.16% | $0 |
| 14 | $0 | 18.59% | $0 |
| 15 | $0 | 5.78% | $0 |
| Total | $0 | 11.31% avg | $2,076,351 |
By year eleven the portfolio can’t even fund a full withdrawal — only $76,351 is left to take — and from year twelve on, there is nothing left at all.
Same starting balance. Same fifteen annual returns. Same average: 11.31 percent. The only thing that changed was the order — and the retiree in Scenario A finishes with more than two and a half million dollars still working for them, while the retiree in Scenario B runs out five years before the table even ends.
This is the part to remember at the next backyard barbecue. Ask either retiree, “Is your financial planner any good?” and both could truthfully answer, “They’re great — I’ve averaged 11.31 percent for fifteen years.” One is describing the best decade and a half of their financial life. The other is describing how they ran out of money. The average never lies. It’s just rarely the whole truth.
Start with a piece of arithmetic that catches almost everyone off guard: losses and gains are not mirror images of each other. A 20 percent loss doesn’t need a 20 percent gain to break even — it needs a 25 percent gain, because the loss happened on a larger number than the recovery has to work with. A 50 percent loss is worse still: it takes a full 100 percent gain, a complete doubling, just to get back to where things started.
“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
— Warren BuffettThe mechanism is simple once it’s visible. Withdrawing a fixed amount from a shrinking portfolio takes a bigger bite out of it, percentage-wise, than withdrawing the same amount from a growing one. A 20 percent loss in year one of retirement, with a withdrawal on top of it, can shrink a portfolio so far that even strong later returns are growing from a permanently smaller base. The same 20 percent loss in year fifteen barely matters — there’s no withdrawal compounding the damage and little time left for it to matter.
Walter’s story landed on the worst sequence-of-returns year in recent memory, but 2008 isn’t the only example. In 2022 the S&P 500 fell roughly 18 percent, the worst calendar year since 2008, driven by rising rates and inflation. Anyone who retired in early 2022, expecting steady income from a portfolio built over the prior decade, absorbed that loss in the very first year of withdrawals — the single most dangerous moment for it to happen.
Sequence-of-returns risk is the backdrop that Social Security, Medicare, and tax decisions all get planned against. The most direct tool for managing it is a volatility buffer — a deliberately built cash or short-term reserve with one job: covering living expenses during a downturn, so investments are never forced to sell at a loss simply to generate this month’s income.
Walter didn’t have one in 2008. He improvised under pressure exactly what a volatility buffer does on purpose — a paycheck became his “somewhere else.” A few other moves work alongside it:
Find out how many years of income would come straight out of your portfolio if a 2008 or 2022 landed in your first year of retirement — and how a volatility buffer would change the answer.
Request a Retirement AnalysisIllustration only. The scenarios above are hypothetical and were chosen to isolate one variable — the order of returns — while holding everything else constant. Real portfolios do not move in such a clean pattern, and these figures are not a forecast of any investment. A $200,000 withdrawal on a $2,000,000 balance is a 10 percent annual withdrawal, used to make the effect clearly visible. This material is educational and is not individualized investment, tax, or legal advice; consult a qualified professional about your own situation.