Two retirees can earn the same average investment return over thirty years and end up with wildly different outcomes. The difference is not luck in the usual sense; it is the order in which the returns arrive. If bad years strike early in retirement, while you are withdrawing money to live on, your portfolio shrinks from both directions at once, and it may never recover, even if good years follow. This is sequence of returns risk, and for early retirees, whose retirements last longest, it is one of the most important risks to understand.

Imagine a portfolio that falls sharply in its first two years of retirement, then recovers strongly. Because you withdrew spending money during the fall, you sold investments at low prices, permanently reducing the number of shares that could benefit from the recovery. Contrast that with the same returns in reverse order: strong years first, when withdrawals barely dent a growing portfolio, then weak years later, when the portfolio is larger and more resilient. The average return is identical, but the outcome is not, and that asymmetry is the heart of sequence risk.

Traditional retirees face sequence risk for thirty years, which is already a long time. Early retirees may face it for forty or fifty years, with more time for a bad sequence to occur and more years of withdrawals ahead. They also retire with less certainty about future costs, from healthcare to family needs, which makes the early years even more sensitive. This does not mean early retirement is reckless, but it does mean early retirees should plan for bad early years explicitly, rather than assuming average returns will save them.

Several defences help. Holding one to three years of spending in cash or short-term bonds lets you avoid selling investments during a market fall. A flexible withdrawal strategy, spending less in bad years and more in good ones, dramatically improves survival odds. Some retirees use a bond tent, holding more bonds around retirement and gradually shifting back to shares, to cushion the critical early years. A lower initial withdrawal rate, or part-time income in the first years, also adds resilience. No single defence is perfect, but combined, they transform the risk.

The practical step is to stress-test your plan. Ask what happens if the market falls sharply in your first three years of retirement, and whether your plan survives. If it does not, adjust now: save a little more, plan a cash buffer, or build flexibility into your spending. Sequence risk cannot be eliminated, but it can be managed, and the retirees who think about it before retiring are the ones best placed to handle it if it arrives.

The best time to prepare for sequence risk is before you retire, not after a market fall has already begun. Aim to enter retirement with a cash buffer covering one to three years of spending, held separately from your invested portfolio, so a downturn never forces you to sell at low prices. Decide in advance how you will cut spending if markets fall, choosing the discretionary expenses you would trim first, so the decision is calm and planned rather than panicked. Write these rules down in a short retirement policy you can revisit when headlines turn alarming. Preparation made in calm times is what carries a portfolio through stormy ones.

The key message is simple: average returns are not enough to plan on. Prepare for bad years early, keep a cash buffer, stay flexible with spending, and your portfolio will stand a far better chance of lasting as long as your retirement does.