Why Sequence of Returns Risk Matters in Retirement
- admin104625
- Dec 5, 2025
- 2 min read
Even if your average investment return looks great on paper, the order in which those returns arrive can make or break your retirement income and nest egg.
What Is Sequence of Returns Risk?
Sequence of returns risk refers to the danger that poor market returns early in retirement - when you’re first drawing down your assets - can permanently damage your portfolio’s longevity. You might earn the same long-term average return as someone else, but if your bad years happen at the start, your nest egg may not recover.
This happens because withdrawals amplify losses. Selling assets during a downturn locks in losses and reduces the financial base your future returns are built on.
Why It's Especially Dangerous in Early Retirement
The first 5–10 years after retiring are the “danger-zone decade.” You’re no longer contributing, but you are withdrawing. A big market drop during this period can shrink your portfolio so quickly that even strong later returns can’t rescue it.
Example: What Could Go Wrong
Imagine two retirees with $1,000,000 drawing $50,000 per year.
Both average 7% per year over 20 years.
One experiences negative returns early; the other experiences them late.
The retiree with poor early returns can run out of money years sooner, even though both had the same average return. That’s the power of sequence risk.
How to Protect Yourself
1. Bucket Strategy - Divide your retirement assets into multiple buckets:
Bucket 1: Cash (e.g. 1–2 years of income)
Bucket 2: Income/Defensive (e.g. 3–5 years)
Bucket 3: Growth (long-term investments)
During market downturns, income comes from buckets 1 and 2 rather than selling growth assets at a loss.
2. Cash Buffers
Holding 12–24 months of expenses in cash gives your portfolio breathing room during downturns.
3. Conservative Drawdown Planning
Use flexible withdrawal rules:
Reduce withdrawals slightly after negative market years
Use a base percentage approach
Plan for longevity by assuming a longer retirement (e.g., 30+ years)
Key Takeaways:
Early negative returns + withdrawals = potentially running out of money.
Averages don’t tell the whole story - timing matters.
Using buckets, cash buffers, and flexible withdrawals helps protect against early-retirement market shocks.
If you want a retirement income strategy resilient enough to survive market downturns, book a personalised retirement planning session today with a fiduciary advisor.
Simon
Alternatively, book a free 15-minute consultation here to discuss your specific situation and explore how to optimise your retirement plan with an experienced fiduciary advisor now.
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