Sequence of returns risk (SORR) is the danger that poor investment returns in the first few years of retirement—when you are withdrawing from your portfolio—can permanently damage your nest egg, even if long-term average returns are fine.

Why It Matters

If the market drops 30% in year one of retirement and you withdraw 4%, you are selling more shares at low prices. Recovery becomes harder because you have fewer shares left to benefit from the eventual rebound. Two retirees with identical portfolios and the same long-term average return can have very different outcomes depending on whether the bad years came first or last.

Mitigation Strategies

• Build a cash buffer (1–2 years of expenses) to avoid selling during downturns
• Reduce withdrawal rate in early retirement (e.g., 3.5% instead of 4%)
• Flexible spending—cut discretionary spending when markets fall
• Bond tent—hold more bonds early in retirement, then shift to equities over time

India Context

Indian equity markets can be volatile. Consider keeping 12–24 months of expenses in liquid funds or FDs to ride out downturns without selling equity.