Why the first five years matter

Compare two retirements with the same $3,000,000 portfolio, $120,000 of annual spending and an 80/20 allocation. One starts in 1966 and the other in 1982. The first runs out of money; the second finishes with a large balance.

The two retirements

The first-year withdrawal is 4.0% of the portfolio and rises with inflation. Fees and taxes are excluded. The only input that changes is the starting year.

The arithmetic mean of annual real returns was 5.55% for the 1966 retirement and 8.55% for the 1982 retirement. Those averages hide when losses occurred relative to withdrawals.

Why order matters when money is coming out

During accumulation, ongoing contributions buy more shares after a decline. During retirement, a decline forces the same real withdrawal to come from a smaller portfolio. More shares must be sold, leaving less capital to participate in a later recovery.

The timing of a loss matters once regular withdrawals begin.

Ways to reduce early sequence risk

• Reduce spending during an early decline. Flexible spending lowers the amount sold from a depressed portfolio. A Fat FIRE budget may contain travel, gifts or other categories that can pause temporarily.
• A cash or short-bond buffer for the early years. Two to three years of spending held outside equities means the first crash is not funded by selling equities. It costs you return in the good case; it buys you the ability to not sell in the bad one.
• Consider a rising equity glidepath. This approach holds more bonds near retirement and gradually increases the equity allocation during the first decade.
• Work one more year. This adds savings, shortens the withdrawal period and delays the starting return sequence by one year.

Each option changes withdrawals, allocation or timing. None removes market risk, and each has a cost in current spending, expected return or additional work.

Use the simulator to compare 1929, 1937, 1966 and 1973 with the same portfolio and spending inputs.