Why the First Few Years of Retirement Matter More Than the Average

Here is a fact that surprises most people: two retirees can earn the exact same average return over 25 years and end up in completely different places. One dies with money to spare. The other runs out.

The difference is not the average. It is the order the returns show up in.

Financial planners call this sequence-of-returns risk. Michael Kitces has written about it extensively for advisors. The plain-English version goes like this.

When you are still working and saving, a market crash early on is almost a gift. You are buying at low prices for years. But once you retire and start withdrawing, a crash early on is the opposite. You are selling investments to live on while they are down, and those dollars never get the chance to recover.

Consider two retirees who both average 7% over their retirement. The one who hits a rough patch in years one through five is in real danger. The one who gets those same bad years at the end is usually fine. Same average. Very different outcome.

So what protects you? Not prediction. You cannot know when the bad years will come. What protects you is having money you do not have to sell.

That is why keeping one to two years of spending in cash, and several more in bonds, matters so much in early retirement. It lets your stock investments ride out a storm instead of being cashed in at the worst moment.

You can explore how different market sequences affect a plan using tools like ProjectionLab (https://projectionlab.com), which lets you test your plan against real historical downturns.

Your trusted advisor builds this protection into your plan from the start, so a bad first year is a bump, not a catastrophe.

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