Imagine two retirees, Alice and Bob. They both invest $1M, withdraw $50k/year, and average a 7% return over 30 years.

However, Alice experiences a market crash in her first three years of retirement, while Bob experiences the same crash in his final three years.

Alice goes broke after 15 years because she had to sell off her portfolio at rock-bottom prices just to pay for groceries. Her portfolio never recovered. Bob dies with $3M in the bank.

Sequence risk is the danger of experiencing poor market returns early in retirement. When you are withdrawing money during a crash, you permanently destroy your portfolio's ability to bounce back.

A static withdrawal strategy (adjusting for inflation no matter what) is dangerous. Guardrails (Guyton-Klinger) dynamically adjusts your spending based on market conditions.

• The Pay Cut (Floor): If your portfolio shrinks so much that your current withdrawal rate is 20% higher than your initial rate, you take a 10% pay cut.
• The Pay Raise (Ceiling): If your portfolio grows so much that your withdrawal rate falls 20% below your initial rate, you get a 10% pay raise.
• The Inflation Rule: If your portfolio lost money last year, you do not take an inflation increase this year.

This prevents you from running out of money by forcing you to tighten your belt during bad years, while letting you enjoy the good years.