When Average Returns Can Be Misleading
Most investors are taught to think about risk the same way it appears on their statements: long-term average returns. If the market averages six or seven percent, everything should work out. That belief works reasonably well during accumulation. It often collapses once distributions begin.
Retirement is not about averages. It is about order. Specifically, the order in which returns arrive while money is being withdrawn.
To illustrate why this matters, consider a simple but uncomfortable real-world example.
Two retirees both begin retirement at age 64 with a $1,000,000 portfolio. Both withdraw $50,000 per year. Both experience the exact same annual market returns over their retirement, producing an identical average annual return of 5.69 percent.
The only difference is when the market downturn occurs.
Below is a simplified retirement schedule showing the outcome.
Figure 1: Sequence of Returns Risk – Same Returns, Very Different Outcomes
Scenario A: Market Downturn Early in Retirement
(Withdrawals begin immediately)
Age | Annual Return | End-of-Year Portfolio |
64 | 0% | $1,000,000 |
65 | -33% | $620,000 |
66 | -15% | $477,000 |
67 | -12% | $369,760 |
70 | 5% | $373,591 |
73 | -35% | $179,064 |
76 | 6% | $111,385 |
79 | 5% | $16,588 |
80 | 25% | -$29,263 (depleted) |
Scenario B: Market Downturn Later in Retirement
(Same returns, different order)
Age | Annual Return | End-of-Year Portfolio |
64 | 0% | $1,000,000 |
65 | 25% | $1,200,000 |
68 | 35% | $1,728,355 |
71 | 27% | $2,466,561 |
72 | -35% | $1,553,264 |
75 | 5% | $1,825,226 |
77 | 25% | $2,397,186 |
80 | -33% | $1,089,398 remaining |
Average annual return in both scenarios: 5.69%
Same market returns. Same withdrawals. Radically different outcomes.
This is known as sequence of returns risk, and it is the single most misunderstood threat to retirement income.
Why ETF and Mutual Fund Allocation Models Miss the Mark
Most commonly suggested ETF allocation models are built for accumulation, not distribution. A 60/40 portfolio, a target-date fund, or a diversified mutual fund mix assumes that volatility evens out over time.
But in retirement, withdrawals reverse that math.
When markets fall early, retirees are forced to sell more shares at lower prices just to generate income. Those shares are gone forever. When markets eventually recover, there is less capital left to participate.
The left side of Figure 1 demonstrates this perfectly. Even though the portfolio experiences strong positive years later on, the damage is already done. The withdrawals magnify losses, and recovery becomes mathematically impossible.
Lower volatility does not solve this problem. It only masks it.
Why 100 Percent Stock Portfolios Don’t Fix It Either
Some investors respond by abandoning funds entirely and building portfolios of individual stocks, often dividend-focused. The belief is that dividends provide “safe” income while stocks grow over time.
In reality, this simply trades one risk for another.
Dividend cuts happen. Sectors fall out of favor. Correlations spike during market stress. And most dividend portfolios still require selling shares to meet spending needs.
Sequence risk does not care whether the portfolio is built with ETFs, mutual funds, or hand-picked stocks. If income depends on market pricing during downturns, the risk remains.
Distribution Requires Structure, Not Just Allocation
The key mistake is treating retirement investing as accumulation investing with withdrawals layered on top.
It is not.
Distribution planning requires separating dollars by job, not by ticker symbol. Some dollars must be insulated from market risk because they fund near-term spending. Other dollars can pursue growth because they will not be touched for years.
Figure 1 is not an argument against investing in markets. It is an argument against pretending markets behave conveniently around retirement timelines.
The Bottom Line
The most dangerous phrase in retirement planning may be, “The market averages X percent.”
As the schedule shows, averages hide the reality retirees live with year by year. Two investors can earn the same returns and end up in completely different financial positions based solely on timing.
When income is involved, risk is no longer theoretical. It is personal.
And average returns don’t pay for groceries.
Evan R. Guido, Senior Wealth Advisor, is the Founder of Aksala Wealth Advisors LLC, a 2026 Forbes Best in State Wealth Advisor, a 2018 Forbes Top Next-Gen Advisors award recipient. Evan heads a team of financial strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 Aksala.com eguido@aksalawealth.com 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. Securities offered through Cetera Wealth Services, LLC member FINRA/SIPC. Advisory Services offered through Cetera Investment Advisers LLC, a registered investment adviser. Cetera is under separate ownership from any other named entity. The views and opinions presented in this article are those of Evan R. Guido and not of Cetera or its subsidiaries. These opinions are based on Evan’s observations and research and are not intended to predict or depict performance of any investment. These views are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities and purely for education and entertainment. Past performance does not guarantee future results. The Top Next Gen list includes 250 rising advisors who help manage over $490 billion in client assets. Each advisor was nominated by their firm, then vetted and ranked by SHOOK Research. The rankings, developed by SHOOK Research, are based on an algorithm of qualitative criterion, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors who are considered have a minimum of four years' experience and the algorithm weighs factors like revenue trends, assets under management, compliance records, industry experience and those that encompass the highest standards of best practices. The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research, is based on an algorithm of qualitative data, rating thousands of wealth advisors with a minimum of seven years' experience and weighing factors like revenue trends, assets under management, compliance records, industry experience, and best practices learned through telephone and in-person interviews. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Neither Forbes nor SHOOK receive a fee in exchange for rankings. Listings in these publications and/or awards are not guarantees of future investment success. These recognitions should not be construed as endorsements of the advisor by any clients. No compensation was provided directly or indirectly by the recipient for participation or in connection with obtaining or using these third-party ratings or award. The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product or service.