The Hidden Cost of 'Set and Forget' Super

Sequence of Returns Risk

Asset allocation in retirement accounts carries different mathematical properties than asset allocation during accumulation. The difference relates to cash flow direction.

During accumulation, negative returns combined with ongoing contributions result in purchasing assets at lower prices. This is dollar-cost averaging. During decumulation, negative returns combined with ongoing withdrawals result in selling assets at lower prices. The mathematics are not symmetric.

Consider two hypothetical retirees, both starting with $1 million, both experiencing 7% average annual returns over 25 years. Retiree A experiences a 30% decline in year one. Retiree B experiences a 15% gain in year one. Both withdraw $50,000 annually.

After year one:
Retiree A: $700,000 minus $50,000 = $650,000
Retiree B: $1,150,000 minus $50,000 = $1,100,000

Same starting point, same average returns, same withdrawal amount, but Retiree B has $450,000 more capital. This is sequence of returns risk. The order of returns matters when cash flows change direction.

For a 30-year-old experiencing a 30% market decline, continued contributions at lower prices represent a mathematical advantage. For a 65-year-old withdrawing funds, the same decline represents permanent capital reduction. The damage does not reverse when markets recover because the withdrawn capital is no longer invested.

Asset allocation as retirement approaches involves this asymmetry. What worked during accumulation operates under different mathematics during decumulation.