Sequence risk is the retirement problem nobody plans for

This is less a set of instructions about sequence of returns risk than an argument, and it is worth saying so at the start.

Order matters once you are withdrawing

While accumulating, the order of returns is largely irrelevant; only the compounded total matters. Once you are selling units to live on, a fall early in retirement permanently reduces the base that later returns apply to. This is why two retirees with the same average return can end up in very different positions.

The buffer approach

Holding one to three years of spending in cash or short-dated assets means you need not sell equities during a decline. The buffer is replenished from growth in good years rather than on a fixed schedule. It costs some expected return in exchange for removing the worst mechanism of failure.

Flexibility is worth more than precision

Retirees who reduce withdrawals modestly during poor years dramatically improve the sustainability of a portfolio. A rigid inflation-linked withdrawal is the assumption behind most safe-withdrawal-rate research and is not how people actually behave.

Even small, temporary reductions have a large effect on the arithmetic.

Withdrawal rules are guides, not laws

Rules of thumb about safe withdrawal rates come from specific historical periods, markets and asset mixes. They vary considerably by country and by the fee level assumed, which is frequently unrealistic. Treating them as a planning starting point rather than a guarantee is the appropriate use.

Guaranteed income changes the problem

State pensions, annuities and defined-benefit entitlements cover baseline spending regardless of markets. The larger that guaranteed floor, the less sequence risk matters for the remainder. Deciding how much of your essential spending should be guaranteed is arguably the central retirement decision.

The takeaway

Cover essential spending with something that does not depend on markets, and keep a buffer for the rest.

The version you keep doing is the version that works.