Sequence-of-Returns Risk: Why Flexible Spending Beats Glide Paths and Cash Buckets

Executive summary for Australian investors

Ben Felix, CIO at PWL Capital, argues that the widely-feared “sequence-of-returns risk” is better framed as sequence-of-withdrawals risk. Traditional defences—higher bond allocations, cash wedges, or rigid 4 % rules—often reduce lifetime spending and increase failure odds. Instead, a static, globally-diversified equity-heavy portfolio combined with amortisation-based flexible withdrawals materially improves outcomes.

Key take-aways

• Definition clarified: Sequence-of-returns risk is the danger that large negative returns early in retirement, paired with fixed real withdrawals, permanently impair capital.
• Illustrative numbers: Two retirees with identical 4 % real annualised returns but opposite 5-year sequences show Alex broke in year 26 while Jamie finished with ample capital.
• Glide paths underperform: A 2016 study across 19 countries (1900-2009) found static 100 % equity allocations had the lowest failure rates under a 4 % rule versus declining or rising equity glide paths.
• 2024 global update: 2,600+ years of country-month data confirm an optimal 100 % equity mix (33 % domestic, 67 % international) dominates 60/40 or target-date funds when withdrawals are fixed.
• Cash buckets add no value: A 2019 paper covering 1900-2014 shows two-bucket (cash + equities) strategies are consistently outperformed by static stock/bond mixes on every metric.
• Inflation is the silent killer: Real long-term losses are more common in cash and nominal bonds than in equities; equities historically recover post-crash and outpace inflation.
• Flexible spending is the fix: Amortisation-based withdrawals (recalculating the sustainable “payment” each year) turn potential late-retirement catastrophes into early, modest spending adjustments.
• Quantified benefit: Worst-case 30-year safe withdrawal rate = 3.2 % (0 % failure). Same data under amortisation = 3.65 % average lifetime spending with mid-stream adjustments.
• Behavioural caveat: Historical outperformance does not guarantee future results; high-equity allocations demand discipline. If a small cash reserve improves sleep, the utility gain may outweigh statistical cost.

Action checklist for advisers and retirees

1. Model retirement cash-flows using dynamic amortisation (Excel PMT function with annual updates) rather than fixed 4 % rules.
2. Maintain a globally-diversified, low-cost equity portfolio; resist the urge to shift heavily into bonds or cash at retirement.
3. Review spending annually: adjust withdrawals in response to portfolio value, updated return expectations and remaining life expectancy.
4. Stress-test plans against Australian inflation spikes (1970s) and global crashes (1930s, 2008) using historical simulators.
5. Document a behavioural policy: pre-agree on spending bands (e.g., ±15 % of the amortised amount) to reduce panic-driven changes.