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Retirement planning often feels like a game of projections, estimates, and hopeful calculations. But lurking behind all the spreadsheets and financial apps is one dangerous assumption that can quietly sabotage an entire retirement plan. It’s the belief that average investment returns will behave predictably year after year.
This false sense of security can lead to overspending, under-saving, and ultimately a shortfall just when stability is needed most. When the timing of returns is ignored, even a portfolio that performs “well on average” can leave retirees in trouble.
The Deceptive Comfort of Averages
Most people build their retirement plans on the assumption that their investments will earn a steady average return. They see historical numbers, like an 8% average annual return for the stock market, and plan accordingly without considering the path those returns might take. This assumption feels safe—consistent, clean, and easy to plug into a calculator.
But investment returns don’t arrive like clockwork; they bounce, soar, dive, and recover at unpredictable intervals. And when money is being withdrawn during those down years, the math behind averages stops working in a favorable way.
Sequence of Returns Risk: The Hidden Threat
The timing of market gains and losses matters much more than most realize, especially once withdrawals begin. If poor returns hit early in retirement, the damage can be irreversible, even if strong returns eventually follow. That’s because each dollar withdrawn during a market dip locks in losses that the portfolio may never recover from. It’s not just about how much the market returns over time, but when it returns it. This concept, called “sequence of returns risk,” is one of the most underestimated dangers in retirement planning.
A Real-World Scenario Can Clarify the Problem
Imagine two retirees with identical portfolios and average returns, but different sequences. One experiences strong gains early on, the other endures a market drop in their first few years. Even though they end up with the same average return over 20 years, their final account balances—and lifestyles—will be drastically different.
The one who faced early losses while making withdrawals will likely run out of money far sooner. This stark contrast reveals how harmful one bad assumption about returns can be when it overlooks the timing of gains and losses.
Why the Early Years of Retirement Matter Most
The first five to ten years of retirement are incredibly sensitive to market performance. If those years coincide with a bear market, the withdrawals made to cover living expenses can gut a portfolio. The lower the account balance gets, the harder it becomes to benefit from future market recoveries. Even a strong bull market afterward might not be enough to compensate for the losses taken early on. That’s why assuming a flat, average return ignores the true vulnerability of the early retirement window.
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The Psychological Trap of Overconfidence
People often enter retirement feeling confident, especially after a long bull market. This can lead them to expect returns will continue their upward climb, reinforcing an overly optimistic projection of portfolio growth. That overconfidence may lead to larger withdrawals, more aggressive spending, and less caution. Unfortunately, markets rarely cooperate with such rosy expectations, and a downturn can quickly expose the flaw in this assumption. Believing that “the market always bounces back” is dangerous when withdrawals are permanent and time is not on your side.
The Role of Inflation and Its Compounding Effect
Inflation adds another layer of pressure to retirement portfolios already exposed to sequence risk. Even if investment returns are solid, inflation erodes purchasing power, requiring larger withdrawals over time to maintain the same lifestyle. This compounding demand can accelerate portfolio depletion, especially if returns are underwhelming in the early years. Many retirees assume their returns will outpace inflation without fully appreciating how variable that gap can be. Assuming too much and planning too little for inflation creates a second hit to already stressed finances.
Diversification Helps, But It’s Not a Cure-All
A well-diversified portfolio is essential, but it can’t fully shield against bad timing. Market downturns tend to hit multiple asset classes at once, and even safe-haven assets like bonds may not provide the protection people expect. Diversification reduces risk, but it doesn’t eliminate the need to understand and plan for return variability. Relying solely on asset mix while still assuming steady average returns is a common mistake. Without a deeper strategy, even a diversified portfolio can fall victim to poorly timed losses.
Guardrails and Flexibility Are Key
One of the most effective ways to counter sequence of returns risk is to build in flexibility. This might mean adjusting withdrawal rates based on market performance or having a separate reserve of cash or bonds for tough years. Many retirees fail to create these safeguards because they assume the market will average out favorably. But guardrails give breathing room when the market doesn’t cooperate, helping preserve the long-term health of the portfolio. Flexibility can’t prevent bad returns, but it can soften their impact at critical moments.
Financial Advisers See This Mistake All the Time
Financial planners often report that the most common mistake they see is clients assuming linear growth from their retirement funds. They come in with spreadsheets showing an 8% return every year, ignoring volatility and drawdowns. It’s not that clients don’t want to be cautious—it’s that they don’t know what they don’t know.
This blind spot can lead to painful mid-retirement course corrections or even financial ruin. Sound retirement planning is as much about preparing for the worst-case scenarios as it is about hoping for the best.
Planning for Variability, Not Just Averages
Averages don’t pay for groceries or medical bills—actual returns do. That’s why retirement planning should focus on strategies that work across a wide range of outcomes, not just one. Monte Carlo simulations, dynamic withdrawal strategies, and contingency plans should be part of the conversation. It’s not enough to ask, “What’s the expected return?” The better question is, “What happens if things don’t go as expected?”
Don’t Let a Simple Mistake Derail Your Future
One bad assumption about average returns can quietly unravel decades of careful saving. The belief that markets deliver steady growth year after year can create a false sense of financial security. Retirement doesn’t allow for do-overs, and poor early returns combined with withdrawals can deal a blow from which portfolios can’t recover.
Savvy planning means respecting uncertainty, building in flexibility, and not trusting averages to tell the whole story.
If this is something that has resonated with you, share your thoughts or experiences in the comments below—others may learn from your insight.
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