This is a follow-up to my episode on Dave Ramsey's belief that retirees can start with an 8% withdrawal rate, adjust the amount each year by inflation, and be perfectly fine in retirement. The problem that Dave seems to have overlooked is what is known as sequence of returns risk.

In his analysis, he uses average market returns and average inflation. But nearly 30 years ago Bill Bengen debunked this approach in a 1994 paper. The problem is that two retirees can enjoy the same average returns and inflation yet have two very different results. How?

Sequence of returns. If one retiree enjoys strong markets and low inflation in the first decade of retirement, their financial results may indeed support a higher initial withdrawal rate. In contrast, if the second retiree suffers through bad markets and high inflation during the first decade, they could run out of money using an 8% withdrawal rate in as little as 10 years.

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