The Sequence-of-Return Risk
Sequence-of-return risk is the danger of experiencing poor market returns in the early years of your SWP. If your corpus drops 20% in year one and you keep withdrawing, the remaining balance may never recover. A ₹1 crore corpus losing 20% becomes ₹80 lakhs, minus ₹6 lakhs SWP = ₹74 lakhs. It now needs 35% returns just to get back to ₹1 crore.
Protection Strategies
- Cash bucket strategy: Keep 2-3 years of withdrawals in a liquid fund or savings account. During market downturns, draw from this bucket instead of redeeming equity units.
- Reduce withdrawal temporarily: If markets drop 20%+, reduce your SWP amount by 10-15%. Even a temporary reduction can significantly improve corpus longevity.
- Dividend route in downturns: Switch any equity holdings to dividend options temporarily. Dividends provide income without redeeming units at depressed prices.
- Rebalance annually: If your equity allocation has grown significantly in good years, rebalance to lock in gains and increase the safety buffer.
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