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Average returns can hide a practical problem for someone drawing from a portfolio. Withdrawals change the amount exposed to the next period’s return, so the sequence matters.
Work through a simple illustration
Start with 100 hypothetical units. Apply a 20% gain, then withdraw 10 units: 110 remain. Apply a 20% loss and withdraw another 10: 78 remain.
Reverse the order. A 20% loss followed by a 10-unit withdrawal leaves 70. A subsequent 20% gain and another withdrawal leaves 74.
Without withdrawals, both return sequences finish at 96. The example excludes fees, taxes, inflation and real-world constraints. It illustrates arithmetic, not expected market returns or a withdrawal recommendation.
Test the timing assumptions
Specify when withdrawals occur and which obligations are flexible. Compare several hypothetical paths rather than treating a smooth average as the complete plan. Record the reasons a particular scenario was included.
Separate a model from a spending decision
An illustration cannot establish a universally safe withdrawal rate or predict how a particular portfolio will perform. It helps identify the questions that a detailed assessment must address.
Our financial-independence framework starts with the life and spending being modelled. The sequence exercise adds another dimension to that conversation without promising that a chosen reserve or allocation removes the risk.
