Key idea
A subtle but serious danger: a crash in the early years of retirement can do far more damage than the same crash later, even with identical average returns.
Here is a risk that surprises even careful savers. When you are withdrawing from a corpus, the order in which good and bad years arrive matters enormously, not just the average return. A crash in the first years of retirement is far more damaging than the same crash later.
Why the order matters so much
While you are still saving, a crash is almost welcome, your ongoing investments buy cheaply. But once you are withdrawing, a crash early on means you are selling investments at low prices to fund your living costs, permanently shrinking the corpus before it can recover. The same average return, with the bad years early instead of late, can be the difference between a corpus that lasts and one that runs dry.
| Crash while | Crash early in | The order |
|---|---|---|
| saving | retirement | |
| buys cheap, helps | sells cheap, hurts | matters, not just the average |
How people guard against it
A common defence is holding a buffer of safer assets (a few years of expenses in stable, low-risk holdings) so that in a downturn you can draw from the buffer instead of selling equity at the bottom. This lets the growth portion recover before you touch it.
Near retirement, protecting against a badly-timed early crash matters as much as the average return. A safe buffer to draw from in downturns is the usual guard. The specifics are yours to plan.
Finished reading?
Marking this complete counts today, and your streak becomes day 1.