Sequence-of-returns risk is the risk that the order in which investment returns occur damages a portfolio that is being drawn down, even when the average return over the whole period is unchanged.
With no contributions or withdrawals, the order of returns is irrelevant. The same set of returns in any sequence produces the same ending value.
Introduce withdrawals and that stops being true. A loss early in retirement removes capital that is also being spent, and the remaining balance has less to recover with.
The years immediately before and after the start of drawdown. That window is when the balance is at its largest and the ability to compensate — by working longer, saving more, or waiting — is at its smallest.
This is why risk capacity and risk tolerance are different things. A retiree's comfort with volatility does not change the arithmetic of withdrawing from a reduced balance.
Approaches include holding a cash or short-duration reserve to fund near-term withdrawals, varying spending with portfolio value, and adjusting allocation through the transition years.
Each has trade-offs. None of them is a solution, and describing any of them as one would be overstating what is possible.
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