One of the biggest risks for retirees who want to generate their retirement income from a volatile investment portfolio is large negative returns early in retirement. We often call this sequence of returns risk. When you withdraw money from an investment portfolio, negative returns early in retirement can cause the portfolio to fail faster than if those same negative returns instead occurred later in retirement.
This risk of premature portfolio failure in retirement as a result of poor investment returns early in retirement was highlighted by research done by Bill Bengen in the 1990s. His research demonstrated that historically, the safe withdrawal rate from a 50-50 large cap U.S. stock mix with bonds was only 4% for a 30-year period.
This surprised many people because the average returns over 30-year periods in the U.S. would still be higher than an average of 4%. What the research really highlights is that your average return is not what you can spend in retirement, because the sequencing of returns can deplete portfolios quickly.