Sequence Of Returns Risk

Friend asked over Saturday chai if he could retire at fifty. One crore in the corpus. Wanted to pull seven lakh a year out of it. The brochure CAGR was twelve pct and on paper it looked safe. Pulled out a napkin and showed him the same returns can either fund him to eighty with six crore left over, or send him back to work at sixty nine. The order matters more than the average.

Same thirty annual returns. Same set of numbers. Just shuffled.

Sequence A puts three drop years at the start. Minus twenty, minus ten, minus five. Then twenty seven years at twelve pct. Corpus runs out in year nineteen. Eleven retirement years left, zero rupees to fund them.

Sequence B puts the same three drops at the end. Year thirty ending balance roughly six point two eight crore. Multi-generational corpus left over.

Same arithmetic mean of nine point six three pct. Without withdrawals both sequences end at fourteen point five eight crore because order does not affect compounding when there are no flows. The moment you start drawing seven lakh a year, the order becomes the entire story.

Three things I would do before the first withdrawal lands.

Build a two to three year cash bucket alongside the equity sleeve. A bad early year is only fatal if you have to sell into it. The bucket is order insurance, not a yield call.

Stress test the plan on a bad first three years, not the average. If only the average survives, you have a sales pitch.

Make the withdrawal rate flexible. A guard rail rule, four point five pct of current balance with a floor and a ceiling, lets the spend shrink in bad years and breathe in good ones.

In accumulation the average is the story. In withdrawal the order is the story