Sequence risk: why the first ten years of retirement decide

Average returns hide the danger. Two retirees can earn exactly the same average return over ten years and end in very different places, depending on the order in which the good and bad years arrived. For an early retiree with decades ahead, this is the main risk.

Two retirees, the same average

Both start with CHF 1,000,000 and withdraw CHF 40,000 a year. Both see the same ten annual returns, with an average of 5%. The returns are -20%, -10%, and then eight years of +10%.

• Retiree A gets the bad years first.
• Retiree B gets the same bad years last.

After ten years, A has CHF 901,000 and B has CHF 1,120,000. The difference is CHF 219,000, with no difference in average return and no difference in spending.

Why the order matters

When the pot falls and you keep withdrawing, you sell more units at low prices to raise the same cash. Those units are gone when the market recovers. A is left with a smaller base to grow from, while B has a larger base during the good years. The loss compounds, and the effect is strongest early, when the pot is largest and the horizon longest.

Early retirees are more exposed than 65-year-olds because they live through more sequences, and they have to wait longer for a pension to take over part of the load.

Defences

1. Start lower. A 3% to 3.5% first-year rate leaves more margin than 4%. See the 4% rule and why 3.5% is safer.
2. Hold a buffer. One to three years of spending in cash or short bonds means you do not sell shares in a crash. The cost is a lower expected return on that part.
3. Spend flexibly. Skip the inflation increase or cut 10% in a bad year. It helps a lot.
4. Earn something early. Part-time income in the first years, the barista idea, reduces withdrawals when they hurt most. See lean, fat, barista and coast FIRE.
5. Count your pensions. AHV and the pension fund start later and take over part of the spending. See the three pillars.
6. Keep costs and concentration low. See investing in Switzerland: ETFs, domicile and fees.

What a single line hides

A calculator that shows one smooth line for your pot cannot show this risk. Test your plan in a worse case: a lower return, a lower withdrawal rate, a retirement date a year later. If it still works, you have margin. If it only works on the smooth line, you do not.

For the other side of the question, how to avoid ending with a lot unspent, read rent for life, die with zero. For the target itself, see your FIRE number.

Next step

Open the calculator and lower the withdrawal rate step by step.