How does sequence-of-returns risk affect two retirees with identical average returns?
Scenario
Two retirees, both with ₹10 crore corpus at retirement, both withdrawing 3.5% inflation-adjusted annually. Retiree A sees +15% returns years 1-10 then -2% years 21-30. Retiree B sees -5% returns years 1-10 then +15% years 21-30. Average geometric returns are similar.
Inputs
- Swr %
- 3.5
- Horizon years
- 30
- Inflation %
- 6
- Retiree a returns
- 15,15,5,-2
- Retiree b returns
- -5,5,15,15
- Starting corpus INR
- 10,00,00,000
Calculation
- 1.
Retiree A (strong early): corpus at end of year 10
compounded growth + withdrawals → ₹14.00 Cr
- 2.
Retiree A: corpus at end of year 20
continued compounding → ₹12.00 Cr
- 3.
Retiree A: corpus at end of year 30
weak final decade → ₹4.00 Cr
- 4.
Retiree B (weak early): corpus at end of year 10
drawdown during withdrawals → ₹5.00 Cr
- 5.
Retiree B: corpus at end of year 18
depletion → ₹0
Conclusion
Same average return over 30 years, completely different outcomes. Retiree A still has ₹4 crore after 30 years; Retiree B depleted by year 18. Early drawdowns combined with continued withdrawals can permanently impair corpus even when markets recover later.
Tradeoffs
The 2-3 year liquid buffer mitigates this by allowing withdrawals from debt rather than equity during early drawdown years. Bucket strategy and variable withdrawal rules further reduce sequence-of-returns vulnerability. Without these mitigations, the same starting corpus produces dramatically different survival outcomes depending on market timing.