Why a Single Straight-Line Projection Is Not a Plan

Most retirement projections you’ve seen share a shape: a smooth line, climbing politely to the right, usually built on “7% a year.” It’s tidy, it fits on one slide, and it answers the wrong question. The useful question isn’t “what happens if everything averages out?” It’s “what’s the range of what could happen to my spending money, after taxes, and how bad is the bad end?”

The straight-line fallacy

A straight-line projection assumes your portfolio earns the same return every single year. Seven percent in year one, seven percent in year two, seven percent forever, like a bond coupon with a sunny disposition.

Markets don’t work that way. Returns arrive lumpy: some years up a lot, some down a lot, a few in between. The straight line skips the lumps and quietly makes two mistakes.

First, it overstates growth. A portfolio that swings around its average compounds at a lower rate than one that hits the average every year. Lose 20% and you need 25% just to get back to even.

Second, and more important for anyone taking withdrawals, it ignores the order in which returns arrive.

Sequence-of-returns risk, in plain English

Sequence-of-returns risk is the risk that bad years show up early, right when you start withdrawing. While you’re still saving, the order of returns barely matters to where you end up. Once you’re withdrawing, it matters a great deal.

Here’s why. When you sell assets after a decline to fund spending, you sell more shares at lower prices. Those shares aren’t around for the recovery. The same bad year ten years later does far less damage, because by then the portfolio has had a decade to grow and you’ve taken withdrawals out of a bigger base.

Taxes make it worse. If your spending comes from a traditional IRA or 401(k), every dollar you spend has to be grossed up for income tax first. To net $150,000, you may need to withdraw quite a bit more. That larger withdrawal is what the bad early years chew on.

A HYPOTHETICAL example: same average, three retirements

Hypothetical assumptions (illustration only; not a forecast):

• $3,000,000 starting portfolio, 25-year horizon.
• Withdrawals taken at the start of each year, held flat (no inflation adjustment, for simplicity).
• Pre-tax view: $150,000 a year withdrawn, ignoring taxes.
• After-tax view: $150,000 a year of spending money, assuming a hypothetical 20% blended effective tax rate on withdrawals, which requires a $187,500 gross withdrawal.
• Three return paths: (1) a straight line at 7% every year; (2) a made-up 25-year sequence that averages exactly 7% but starts with −18%, −12%, and −6%; (3) the same sequence in reverse, so good years come first.
• No fees, no inflation, no rebalancing effects. Paths 2 and 3 contain identical returns, so only the order differs. (Their compound rate is about 6.65%, below the 7% average, which is the volatility drag described above.)

Same average return. Same starting balance. One path more than doubles the money; another runs dry with a decade still to go. And looking at the plan after taxes moves the trouble seven years closer.

Why a range beats a line

None of us knows which sequence we’ll get. That’s the point. A Monte Carlo simulation runs thousands of plausible return sequences and shows the spread of outcomes instead of betting the plan on one.

To illustrate, we ran a simple hypothetical simulation: 10,000 paths, returns drawn at random around a 7% average with 12% annual volatility, using the same $3M and 25-year setup.

Two things stand out. Even the median outcome ($4.63M pre-tax) lands well below the straight line’s $6.13M, because volatility drags on compounding. And moving from a pre-tax view to an after-tax view more than triples the share of paths that run out of money in this model. The straight line said the plan was fine both ways.

HYPOTHETICAL ILLUSTRATION. The figures above are hypothetical and for illustration only. They do not reflect any actual investment, account, client, or product, and they are not a prediction or guarantee of future results. They are based on simplified assumptions (listed above) that will differ from real-world conditions, including actual returns, inflation, fees, and taxes. Actual results will vary, and losses are possible. Monte Carlo simulations generate many possible outcomes from assumed return and volatility inputs. Results depend entirely on those assumptions, vary with each run, and are not guarantees. A simulated “probability” describes the model, not the future.

A range doesn’t predict the future any better than a line does. What it does is show you where the plan is fragile, so you can decide in advance what you’d adjust (spending, withdrawal order, account mix, a cash reserve) if the early years disappoint. That’s a plan. A line is a hope with a y-axis.

Questions worth asking your advisor

1. Is my projection a single straight line, or a range of outcomes? If a range, what return and volatility assumptions drive it?
2. Are withdrawals modeled after taxes, by account type, or as one pre-tax number?
3. What happens to my plan if the first three to five years of retirement are poor?
4. What would we change, and when, if the bad end of the range starts showing up?
5. How much of the “probability of success” depends on assumptions I haven’t seen?

If you’d like to talk through how this applies to you, Todd’s email is on the contact page.