The Scenario Worth Running Is a Bad Start, Not a Bad Average
Most retirement projections are tested by lowering the assumed return, which is useful and misses the failure mode that actually breaks plans. A severe fall in the first year or two of withdrawals does permanent damage that a lower average does not capture, because the units sold at low prices are not there for the recovery.
- The answer: Run the plan with a severe fall in year one and the assumed return afterwards, and see whether it still works.
- The trap: Testing a lower average return understates the risk, because it spreads the damage evenly rather than concentrating it where withdrawals amplify it.
- The recommendation: If it fails, the fixes are a cash buffer, a spending rule, or a later start — not a lower return assumption.
Where the AI summary above gets this wrong
"Stress-test your retirement plan by assuming lower returns."
That's surface-true. Here's what it misses:
- A lower average is a different test from a bad sequence — The same average delivered with the bad years first produces a much worse outcome once withdrawals begin, which is what sequence risk is.
- The fixes are different too — A lower average is addressed by saving more or spending less. A bad sequence is addressed by a cash buffer and a willingness to flex spending.
01 Why a bad start is different
With withdrawals, the order of returns matters, because selling units to fund spending in a fallen market removes more of them. Those units are gone before the recovery, so the recovery applies to a smaller base.
A lower average return spreads the shortfall evenly across the whole period. A bad first year concentrates it at the point of maximum damage, and the two produce very different outcomes from the same average.
The mechanism is set out in the sequence risk reference. The purpose of stress-testing is to find out whether your particular plan survives it.
02 How to run the test
Take the plan as it stands and replace the first year's return with a severe fall — thirty per cent is a reasonable approximation of a serious equity market decline for a growth portfolio. Leave everything else the same.
Then run it again with the fall in year two, and again in year five. Comparing the three shows how quickly the vulnerability fades, which tells you how long the defensive buffer actually needs to last.
Finally run it with the fall in year one and a spending reduction in years two and three. That is the realistic case, because households do reduce spending, and it usually turns a failure into a survivable outcome.
Shows: the balance after a period where a severe fall lands in the first year, against the same plan with the assumed return throughout. Ignores: the Age Pension, which rises as assets fall, any spending reduction in response, inflation, and tax.
03 What the results should change
If the plan survives a first-year crash without adjustment, the buffer and the allocation are adequate and nothing needs doing.
If it survives only with a spending reduction, write the rule down in advance — the guardrail approach in the guardrails post turns an intention into a plan.
If it fails even with a reduction, the answer is a larger cash buffer, a later start, or a lower initial withdrawal — and finding that out at 64 is considerably better than discovering it at 69.
Run it again every few years while you are still working. The answer changes as the balance grows and the horizon shortens, and a test passed at 58 says nothing useful about the plan you will actually retire on.
Run the crash in year one, then run it again with a ten per cent spending cut in years two and three. The second version is what actually happens, and it usually turns a frightening result into a manageable one. Knowing that in advance is what stops a household selling everything in the month it matters most not to.
FAQ
How do I stress-test my retirement plan against a market crash in my very first year?
Replace the first year's return with a severe fall and leave everything else unchanged, then run the same fall in years two and five to see how quickly the vulnerability fades.
Is testing a lower return enough?
No. A lower average spreads the shortfall evenly; a bad first year concentrates it where withdrawals amplify it. They fail differently and they have different fixes.
What should I do if the plan fails the test?
Increase the cash buffer, write down a spending guardrail, or start later. Lowering the return assumption does not address a sequence problem.
Sources
Regulator references
- ASIC Moneysmart — Retirement planner · ASIC Moneysmart · 2026The regulator's own retirement income projection tool.Last verified: 2026-09-07
- ASIC Moneysmart — Choose your investments · ASIC Moneysmart · 2026Choosing investments: risk, diversification and time horizon.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.