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Advanced · Lesson 6 of 6Retirement income and sequence risk
Sequence-of-returns risk means the order of returns matters once you are withdrawing. A crash in the first years of retirement, while withdrawals continue, can permanently damage a portfolio even if long-run average returns are fine.
The "4% rule" (William Bengen, 1994) found that, in US history, withdrawing 4% of the starting balance and raising it with inflation survived 30 years in most periods. It is a rule of thumb, not a guarantee, and depends on country, fees and asset mix.
Defences include a cash bucket of 1-3 years of spending, flexible withdrawals (spend less after bad years), annuities for a base income, and the Age Pension in Australia as a safety net. Vestora's retirement planner runs thousands of simulated paths to show the range.
Key takeaways
- Early-retirement crashes hurt most.
- The 4% rule is a historical guide, not a promise.
- Cash buckets and flexible spending reduce sequence risk.
Check your understanding
1. Sequence risk matters most...
- While saving early in a career
- In the years around the start of retirement withdrawals
- For cash-only investors
- Never
Show the answer
In the years around the start of retirement withdrawals. Withdrawals during a crash lock in losses.
2. The 4% rule was based on...
- A law
- Historical US market returns
- A bank guarantee
- Australian super rules
Show the answer
Historical US market returns. Bengen studied past US data.
Go deeper
- Wikipedia: Sequence risk
- YouTube videos: sequence of returns risk 4 percent rule explained
- Investopedia: sequence risk
- Wikipedia: Trinity study
- Moneysmart (ASIC): retirement income
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