Two Retirements, Same Average Return

Madhav and Girish spent twenty-seven years sitting across from each other in the administrative office of a foundry in Belagavi. They shared an umbrella during the monsoon, packed identical stainless steel lunch tiffins, and discussed their families with the quiet familiarity of men who had watched each other turn grey.

When they retired, each man had accumulated a nest egg of ₹60,00,000 in a retirement portfolio split between fixed-income instruments and diversified mutual funds. Both men needed ₹40,000 a month—₹4,80,000 a year—to cover household groceries, electricity, medicines, and the occasional train ticket to visit grandchildren in Pune.

There was only one difference between them, and neither man had any control over it. Madhav retired in January of a year when the market entered a sharp, punishing downturn. Girish retired five years later, at the beginning of an extended upswing.

To see how their lives drifted apart, imagine an illustrative ten-year stretch where both men experienced the exact same five market returns: a bad year of minus 12%, a flat year of 0%, a modest year of 8%, a good year of 14%, and an exceptional year of 22%. Over that five-year cycle, the simple average return is 6.4% per year. These numbers are purely illustrative assumptions to explain the arithmetic, not forecasts or records of any actual fund.

Now consider what happened when those returns arrived in reverse order.

Madhav caught the bad weather first. In his first year, his portfolio dropped 12%. Because his portfolio had shrunk, withdrawing ₹4,80,000 meant cutting directly into his core capital. To generate that cash, his portfolio had to sell units while prices were depressed. He was doing the exact opposite of what every saver is taught during their working years: instead of buying low, he was forced to sell low just to pay the milkman and the pharmacy bill.

In his second year, the market remained completely flat at 0%. His living costs did not stop, so another ₹4,80,000 had to be redeemed from an already bruised balance. By the time the good years finally arrived—the 14% and 22% gains—Madhav had far fewer units left in his account to participate in the recovery. His portfolio worked hard, but it was working with a depleted engine.

At the end of ten years, Madhav had spent a decade worrying. He had trimmed his household budget, switched to cheaper tea, and felt a quiet, persistent dread whenever the newspaper headlines mentioned falling share prices.

Girish lived through the exact same numbers, but in mirror image. In his first year, the portfolio surged by 22%. After withdrawing his ₹4,80,000, his balance was still significantly higher than the day he walked out of the foundry. When he sold units for his monthly income, he sold them at high prices, meaning he had to part with very few units to raise the needed cash.

By the time the flat year and the minus 12% downturn hit Girish in the fourth and fifth years, he was playing with a deep cushion. His portfolio had grown so much during the early rally that the bad years barely touched his original principal. Even after ten years of steady withdrawals, Girish still held a comfortable, growing surplus.

When the two friends met at a café near the railway station to compare notes, Madhav was bewildered. They had saved the same amount. They had withdrawn the same amount each month. Over the decade, their portfolios had produced the exact same average annual return. Yet Girish was planning a pilgrimage to Varanasi, while Madhav was wondering whether he would need to ask his son for financial help before he turned seventy-five.

Madhav assumed he had done something wrong, or that Girish had been blessed with superior financial wisdom. In truth, neither man had made a mistake, and neither was cleverer than the other. Madhav had simply been caught by timing.

During the accumulation years, when a person is regularly investing through a Systematic Investment Plan (SIP), falling markets are actually helpful because the fixed monthly sum buys more units at cheaper prices. But in retirement, the flow reverses. When someone takes regular withdrawals from an equity-linked portfolio, a market crash in the early years forces them to sell more units at rock-bottom prices. Once those units are gone, no future market recovery can bring them back. In personal finance, this hazard is known as sequence of returns risk: the danger that the order of your returns will be unfavourable, even if the long-term average looks perfectly healthy on paper.

The moral

An average return tells you where a journey ended, but not how painful the road was along the way. In retirement, when bad years happen is just as critical as how bad they are. A portfolio that must fund regular living expenses cannot rely on long-term averages alone, because money withdrawn during a slump is gone permanently.