Sequence-of-returns risk is a subtle but serious danger in retirement: the order in which your investment returns arrive can matter as much as their average. Two retirees with the same average return over time can end up in very different places depending on when the good and bad years happened.
While you are saving and not withdrawing, the order of returns barely matters; what counts is the average over the whole period. But once you are retired and withdrawing money, order becomes critical. A market downturn early in retirement, when your portfolio is largest and you are pulling money out, forces you to sell more of a depleted portfolio to fund your spending, leaving less to recover when markets rebound. The same downturn later in retirement does far less damage.
This means a retiree can experience a perfectly reasonable average return and still run into trouble simply because a bad stretch hit early, combined with withdrawals, in a way that permanently shrinks the portfolio's ability to recover. It is a risk that averages hide, which is why retirement planning cannot rely on average-return assumptions alone.
Because the risk concentrates around the transition into retirement, common approaches people discuss with advisors include holding a cushion of less-volatile assets or cash to draw from during downturns so growth assets are not sold at lows, and being flexible with spending in bad years. The point is to avoid being a forced seller early on. This is general information; the right strategy depends on your situation.
When the bad years come matters most near the start.
This is general educational information, not personalized investment, tax, or legal advice. Consult a qualified professional about your situation.