Why the Same Average Return Can End Differently
Two retirees can experience exactly the same average return over thirty years and end up decades apart, because the order the returns arrive in interacts with the withdrawals. Selling units to fund spending in a falling market removes more units than selling in a rising one, and those units are not there to recover when the market does.
- The answer: Withdrawals in a falling market sell more units for the same dollars, permanently reducing the base that later returns apply to.
- The trap: It is asymmetric in time. The same crash is far more damaging in the first five years of retirement than in the last five.
- The recommendation: Hold enough outside the growth assets to fund one to three years of spending, so a bad year does not force a sale.
Where the AI summary above gets this wrong
"Sequence of returns risk means you could get unlucky with market timing when you retire."
That's surface-true. Here's what it misses:
- It is not about timing the entry, it is about withdrawals — The risk exists because you are selling units to fund spending. The same market path with no withdrawals produces the same end balance whatever order it arrives in.
- It runs in both directions during accumulation — While contributing, a falling market buys more units, so a poor early sequence during accumulation is beneficial. The risk reverses at the point cash flow reverses.
01 Why the order matters at all
With no cash flows in or out, the order of returns is irrelevant: multiplication is commutative, and a portfolio that gains 20% then loses 10% ends where one that loses 10% then gains 20% ends.
Withdrawals break that. Taking $40,000 from a portfolio that has fallen 25% sells a larger share of the remaining units than taking $40,000 from one that has risen, and those units are gone before the recovery arrives.
The effect compounds with every subsequent year, because the recovery applies to a smaller base. That is why two retirements with identical average returns and identical withdrawals can end a decade apart in how long the money lasts.
02 When the risk is highest
The first decade of withdrawals carries most of the risk, because that is when the balance is largest and the remaining horizon is longest. A crash in year two damages thirty years of compounding; the same crash in year twenty-five damages five.
The risk is also concentrated for anyone retiring before Age Pension age, because the withdrawal rate during the bridge years is higher than it will ever be again. Those are the years in which the portfolio is doing all the work.
During accumulation the effect runs the other way. Regular contributions into a falling market buy more units, so a poor early sequence while working improves the outcome — which is the counterintuitive half of this and the reason the risk cannot be described as 'markets falling is bad'.
Shows: the balance after a period where a fall happens in the first year, against the same fall happening in the last year, with identical withdrawals and identical returns otherwise. Ignores: inflation, tax, the Age Pension, any change in spending behaviour after a fall, and every path other than the two compared.
03 What actually reduces it
Holding one to three years of planned spending outside the growth assets is the main defence. It does not improve the average return; it removes the requirement to sell in a bad year, which is what converts a market fall into a permanent loss.
Flexibility is the second. A household that reduces discretionary spending after a poor year sells fewer units at the worst prices, and the improvement in outcomes from that behaviour is larger than from most asset allocation changes.
A guaranteed income layer is the third, and in Australia it is partly free: the Age Pension is an indexed floor that rises as assets fall. Households that have calculated theirs are considerably less exposed than they feel, which is the argument made in the withdrawal rate post.
The thing that makes this hard to act on is that it looks like bad luck and it is not entirely. The defence is boring and cheap: hold a couple of years of spending somewhere that does not fall, so a bad year never forces a sale. That costs a little return and removes the mechanism that does the damage.
FAQ
What is sequence of returns risk?
The risk that the order in which returns arrive, combined with withdrawals, produces a much worse outcome than the average return suggests. Selling units in a falling market removes more of them, and they are not there for the recovery.
How does sequence-of-returns risk threaten me most in my first years of retirement?
Because the balance is largest and the remaining horizon is longest. A fall in year two damages thirty years of compounding on a reduced base; the same fall in year twenty-five damages five.
Does sequence risk apply while I am still working?
It applies in reverse. Regular contributions into a falling market buy more units, so a poor early sequence during accumulation improves the outcome. The risk flips when the cash flow flips.
Sources
Regulator references
- ASIC Moneysmart — Choose your investments · ASIC Moneysmart · 2026Choosing investments: risk, diversification and time horizon.Last verified: 2026-09-07
- ASIC Moneysmart — Retirement income · ASIC Moneysmart · 2026The sources of retirement income in Australia and how they combine.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.