The two years that decide your retirement.

The two years that decide your retirement

An average return says almost nothing about whether the money lasts.

Almost every retirement plan rests on an average. Six percent a year, maybe seven. An average is a comforting number, because it smooths the ugly years into the good ones and hands you one tidy figure.

Markets pay out one year at a time, in an order nobody gets to choose. Once you are living off the portfolio, that order starts to carry more weight than the average does.

The heaviest years are the first two or three after the paychecks stop. A rough stretch then does damage that an identical stretch, ten years later, would not.

Same money, same returns, different order. The arithmetic is worth seeing once.

Two retirees, the same three years

Identical returns, identical withdrawals, one difference.

Give two retirees $1,000,000 each. Over the next three years their portfolios return minus 30 percent, minus 10 percent, and plus 50 percent, in some order.

One of them gets the two losses first. The other gets the same three numbers in reverse, with the good year up front.

If neither one touches the money, both finish those three years in exactly the same place, at $945,000. The order changes nothing at all.

Now have each of them withdraw $60,000 at the end of every year, $180,000 across the three years. After three years the one who took the losses first has $714,000. The one who got the good year first has $805,200 after those same three years, about $91,000 ahead.

The risk worth naming in plain language: a withdrawal in a down year is paid for by selling shares cheap, and those shares are gone for good. When the recovery finally arrives, it lifts a smaller pile. Nobody gets to choose which years come first.

A good first year only buys room. The plan still has to survive whatever arrives after it.

Illustrative example with round numbers and assumed returns, not a forecast. General education, not advice.

An average describes the whole road. You drive it one mile at a time.

Averages are easy to plan with and easy to trust. An average also hides the one variable that decides whether a plan holds, which is the order the years arrive in.

There is a second reason this one catches people. In the building years a market drop is a discount, because every contribution buys more shares. That instinct gets reinforced for thirty years, and then it quietly stops working on the day the selling starts.

The most useful test on any retirement plan takes one line. Run it again with the worst years moved to the front, and see whether it still holds.

That is the issue. Short, on purpose. This week's move takes two minutes: add up the cash you could live on without selling a single share, then divide it by what you spend in a month.

That number is how many months of a falling market you could sit through without touching the portfolio. It is worth knowing in the building years too, since the habit is easier to start early than to invent under pressure.

Hit reply and tell us what number you got. We read every response, and it shapes what we write.

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