The same three years, in two orders
Take $500,000, three years of returns (+20%, +10%, −25%), and no withdrawals. In either order the balance ends at $495,000. The arithmetic doesn't care which year came first.
Now take $25,000 out at the start of each year.
| Loss first (−25%, +10%, +20%) | Loss last (+20%, +10%, −25%) | |
|---|---|---|
| Start | $500,000 | $500,000 |
| After year 1 | $356,250 | $570,000 |
| After year 2 | $364,375 | $599,500 |
| After year 3 | $407,250 | $430,875 |
Same returns, same withdrawals, and a gap of more than $23,000 after three years. Stretch the example across a thirty-year retirement and the gap decides whether the money lasts.
Why it happens
When the balance is down, a fixed withdrawal is a bigger share of what's left. You sell more units at low prices to raise the same cash, and those units aren't there for the recovery. The average return over the period can be perfectly healthy and the plan can still fail.
Who it affects
- Anyone in the five years before or after they start drawing income. This is the window where a bad year does the most damage and there's the least time to recover.
- Anyone taking a fixed dollar amount rather than a percentage.
- Anyone without other guaranteed income to lean on in a down year.
What people do about it
- Keep a few years of withdrawals in cash or short bonds, so a down year is spent from there.
- Put the part of the savings that funds essential spending behind a floor, such as a fixed indexed annuity, so a down year credits zero instead of a loss.
- Turn some of it into guaranteed lifetime income, through a pension, delaying Social Security, or an annuity income rider, so the withdrawal from the market portfolio is smaller.
- Keep the rest invested for growth. The point isn't to leave the market. It's to stop needing to sell in a bad year.