The Average Return Is Lying to You

Will it last?

Everyone asks the same question, usually sideways. Do you think we're going to be okay?

What they mean is: will this money last as long as I do.

The way that question normally gets answered is with an average. Your portfolio should return something like six or seven percent a year. You're withdrawing four. So you're fine — the math works out.

Except the math doesn't work that way once you're withdrawing, and the reason why is the most important thing on this calendar that almost nobody explains.

The order matters more than the average

Take two retirements. Identical starting balance. Identical spending. Identical average return over thirty years — same returns, in fact. The only difference is what order they arrive in.

One of them has a rough first five years and a strong finish. The other has a strong first five years and a rough finish.

The averages are identical. The outcomes are not close. One household ends with money left over. The other runs out — sometimes a decade early.

Same portfolio. Same spending. Same returns. Different order.

That's sequence-of-returns risk, and it's the thing that actually determines whether a retirement works.

Why it doesn't matter until it does

Here's the part that trips people up, because it seems to contradict everything they learned while they were saving.

While you're accumulating, order is irrelevant. If you're adding money and not taking any out, you can shuffle thirty years of returns into any sequence you like and you end up at exactly the same number. Multiplication doesn't care about order. A bad year early is genuinely fine — it's actually good, because your contributions buy more shares cheaply.

The moment you start withdrawing, order becomes everything.

Because now a down year isn't just a paper loss. You're selling shares to pay for groceries, and you're selling them at the bottom. Those shares are gone. They aren't there to recover when the market comes back.

Every dollar you withdraw during a decline is a dollar that permanently leaves the portfolio at the worst possible price — and it takes all of its future growth with it.

That's the asymmetry. Everything you learned about "stay the course, it always comes back" was true for the person you were at fifty. It's only half true for the person you become at sixty-five.

The vulnerable window

The risk isn't spread evenly. It concentrates hard in roughly the five years before and the five years after you stop working.

That's when your balance is at its peak — so a percentage decline costs the most dollars it ever will. It's when you've just started withdrawing, or are about to. And it's when you have the least time to recover, because you're no longer adding anything.

A 30% decline at age 63 is a fundamentally different event from the same 30% decline at age 45 or age 85. Same percentage, wildly different consequence.

About the 4% rule

You've heard it. Withdraw 4% the first year, adjust for inflation, and historically the money lasted thirty years.

That was a finding, not a law. It came from studying historical American market data, and it described what would have survived the worst starting years in that record.

It's a useful reference point and a terrible plan.

It assumes you spend exactly the same amount every year regardless of what happens. It assumes a specific portfolio mix. It says nothing about taxes, which come out of a different pocket depending on which account you draw from. And it treats a thirty-year retirement and a twenty-year retirement as the same problem, which they aren't.

Use it as a rough sanity check on the number you're withdrawing. Don't use it as a plan.

What actually protects you

This is the part worth remembering, because it's counterintuitive.

The defense against sequence risk isn't a better portfolio. It's not having to sell at the bottom.

You can't control returns or their order. What you can control is whether a bad year forces you to liquidate. And there are exactly three things that determine that.

One — the coverage ratio. The number from January. Every dollar of essential expense covered by guaranteed lifetime income is a dollar you don't have to sell anything to produce. A household at 90% coverage barely notices a bad year in their spending. A household at 40% is selling into every decline whether they want to or not. This is the single largest lever, and it's structural — you build it once.

Two — flexibility that's real. If you can genuinely reduce spending in a down year, sequence risk falls sharply. But it has to be honest. The flexibility only counts if you'd actually use it. That's why January's split mattered: discretionary spending you'd never cut isn't flexibility, it's just spending you labeled optimistically.

Three — a buffer you don't have to sell. Holding a couple of years of withdrawals in cash and short-term bonds means a decline doesn't force a sale. You spend from the buffer, let the portfolio recover, and refill in a good year. It's not sophisticated and it isn't free — that money earns less over time. What you're buying is the ability to wait, which in a bad first decade is worth more than the return you gave up.

A better rule than a fixed rate

Rather than picking a percentage and holding it forever regardless of what happens, most sustainable plans use guardrails: a starting withdrawal, plus a rule that reduces it if the portfolio falls past a threshold, and allows an increase if it grows past another.

The specific numbers matter less than the principle, which is simply this — spending that responds to what actually happens survives far longer than spending that doesn't.

What February is for

Take January's numbers and stress them. What's the withdrawal rate. How long does the money last on a steady path. How much shorter does it get with a rough first decade. And how much of that damage disappears if you're willing to flex.

You aren't looking for a guarantee. Nobody has one. You're looking for the answer to a narrower and much more useful question: how much has to go wrong before this stops working, and is that a risk I'm willing to live with?

If the answer makes you uncomfortable, that's not bad news. That's February doing its job, twenty years early, while there's still time to change something.