Two portfolios can experience exactly the same set of annual returns in different orders. During accumulation the outcome is identical; during withdrawal it is not.
Order is irrelevant when nothing is withdrawn
Compounding is multiplication, and multiplication does not care about sequence. A run of returns applied to an untouched balance produces the same result in any order.
This is why an investor still contributing can largely ignore the arrangement of good and bad years and concentrate on the average achieved.
A decline early in the accumulation period is even helpful in some respects, since ongoing contributions buy at lower prices.
Withdrawals break the symmetry
Once money is being taken out, each withdrawal removes units from the portfolio. Selling into a fall removes more units to raise the same amount of cash.
Those units are gone permanently, so the subsequent recovery applies to a smaller base. The portfolio cannot fully participate in the rebound.
The same decline occurring later, after years of growth, removes a smaller proportion of a larger balance and does far less lasting damage.
The early years carry disproportionate weight
Poor returns in the first years of retirement can reduce the capital base to a level from which the planned income is no longer sustainable.
Good returns in the same period build a cushion that absorbs later declines, which is why identical average returns produce very different outcomes.
The vulnerable window is roughly the first stretch of drawdown, after which the portfolio has either established a buffer or has not.
Flexible spending is the most direct defence
Reducing withdrawals during a decline preserves units, which is precisely the mechanism that sequence risk attacks. Even modest flexibility changes the outcome substantially.
Spending rules that adjust with portfolio value, or that skip inflation increases after a bad year, formalise this without requiring judgement in the moment.
The trade-off is a variable income, which is harder to plan around than a fixed one and may not suit those with rigid commitments.
Holding a cash buffer changes what is sold
Keeping some years of spending in cash or short-dated bonds allows withdrawals to come from those assets while volatile holdings recover.
The buffer is refilled during better periods, which converts the timing problem into a question of how long the reserve can last.
The cost is a lower expected return on the portion held in cash, which is the premium paid to avoid selling growth assets at the wrong moment.