Two retirees can earn the same average return and end up in completely different places, because the order returns arrive in matters enormously once you are withdrawing. A short-term reserve plus spending guardrails is how we keep a bad early market from doing permanent damage.
Long-term market averages look smooth on a chart. The path is not smooth, and once you are taking money out rather than putting it in, the path is what determines the outcome.
This is sequence-of-returns risk, and it is the risk most retirement plans quietly ignore.
Why the order of returns matters once you are withdrawing
While you are saving, a bad market early is arguably good news — you are buying at lower prices for years afterward. Once you are withdrawing, the same bad market is the opposite. Selling into a decline permanently removes shares that would otherwise have participated in the recovery.
The result is that two retirees with identical average returns over thirty years can have wildly different outcomes based purely on whether the poor years arrived at the start or at the end. One runs out decades before the other.
Buckets: not selling at the wrong time, by design
The first half of the response is structural. We identify what income the household needs over roughly the next five years and hold that amount in stable, short-duration instruments — Treasury bills and high-quality bonds rather than equities.
That reserve is not there to earn a return. It is there so that when markets fall, the next several years of spending comes out of the stable side and the growth side is left alone to recover.
Guardrails: a rule decided in advance, not in a panic
The second half is a spending rule. Rather than a fixed withdrawal percentage held regardless of what happens, we set a sustainable distribution rate with an upper and a lower boundary around it.
If the portfolio sits below the lower guardrail for a sustained period, spending tightens temporarily. When it recovers above the upper guardrail, spending increases — a raise in retirement, decided by a rule rather than by nerve. The value of writing this down beforehand is that the decision is already made when the market is falling and nobody is thinking clearly.
The years you should be spending the most are usually the early ones, because those are the years you can most enjoy it. A plan that manages sequence risk properly is what lets a household do that without gambling that the first decade cooperates.