Two retirement portfolios earning the same average return over twenty years can end in completely different places. The difference is the order in which those returns arrived.
Order is irrelevant while saving and critical while spending
For a lump sum left untouched, the sequence of annual returns makes no difference to the final balance. Multiplication is unaffected by ordering.
Once money is being withdrawn, that stops being true. A withdrawal after a decline removes a larger share of the remaining capital than the same withdrawal after a rise.
The portfolio has fewer units left to participate in any subsequent recovery, and the shortfall compounds forward for the rest of the drawdown.
Early years carry disproportionate weight
A poor run at the start of retirement is far more damaging than the same run a decade later, because it acts on the largest balance and has the longest time to compound.
By contrast, weak returns late in retirement affect a smaller balance over fewer remaining years, and the plan often absorbs them without difficulty.
This asymmetry means the risk is concentrated in a window of a few years around the transition from accumulating to spending.
The risk is created by fixed withdrawals
Selling a constant amount regardless of price means selling more units when prices are low, which is the mechanism converting a temporary decline into a permanent loss of capital.
A retiree who reduces withdrawals during a downturn sells fewer units and preserves more of the base for the recovery.
Flexibility is therefore the most direct mitigation available, though it requires spending that can genuinely be reduced.
Cash buffers separate spending from market timing
Holding several years of expenses in cash or short-dated bonds allows withdrawals to come from that reserve during a decline, leaving growth assets untouched.
The reserve is replenished from the portfolio when markets recover, which breaks the link between the timing of a downturn and the timing of forced sales.
The cost is the lower expected return on the reserve, paid continuously in exchange for protection against a risk concentrated in a short window.
Glide paths address the same problem in advance
Reducing exposure to volatile assets as retirement approaches lowers the size of the possible early decline, at the cost of lower expected growth.
Some approaches reverse the glide after retirement, holding less risk at the transition and increasing it again once the vulnerable window has passed.
All of these are trade-offs rather than solutions, and which is appropriate depends on circumstances that merit individual professional review.