Money & Pensions

Sequence-of-Returns Risk: Why the Timing of Market Falls Matters So Much in Retirement

An old wooden fishing boat resting on a pebble beach, with another boat at sea behind.

A boat drawn up on the shingle, waiting out the weather for a better tide.

Photo: Zoltan Tasi / Unsplash

Key takeaways

  • Sequence‑of‑returns risk is the danger that poor investment returns arrive early in retirement, while you are withdrawing money, permanently reducing how long your savings last.
  • While you are saving, the order of returns does not change your final result much. Once you start withdrawing, order matters enormously.
  • The years just before and just after retirement are the "danger zone", because your pot is at its largest and you are about to depend on it.
  • Defences include secure income for essentials, a cash buffer, flexible withdrawal rules, a gradually adjusting asset mix, and delaying large spending after bad years.
  • You cannot predict when markets will fall. You can build a plan that survives a bad start.
  • This is a principle, not a forecast. Your adviser can model it with current assumptions for your situation.

Imagine two people retire on the same day with identical savings, identical investments and identical spending. Over the next thirty years, their portfolios earn exactly the same average return. Yet one runs out of money in their eighties, and the other dies with more than they started with. The only difference is the order in which the good and bad years arrived.

That is sequence‑of‑returns risk, often called sequence risk. It is one of the most important, and least understood, ideas in retirement planning. This guide explains it in plain language and sets out the practical ways people protect themselves, wherever they live and whatever their pension system. It complements Retirement Drawdown: How to Make Your Savings Last and The 4% Rule Explained.

Why order does not matter while you save, but does when you spend

Accumulation: order mostly washes out

If you invest a lump sum and add or remove nothing, the final value depends only on the returns, not their order. Multiplication is commutative: a 20% loss followed by a 30% gain leaves you in the same place as a 30% gain followed by a 20% loss.

When you are adding money regularly, order matters somewhat (a crash late in your career hurts more than one early, because more money is exposed), but steady contributions after a fall buy investments at lower prices, which helps.

Decumulation: order matters a great deal

When you withdraw money each year, the arithmetic changes. After a fall, you must sell more units to raise the same income. Those units are gone; they cannot participate in the recovery. A bad early sequence permanently shrinks the base on which future growth compounds.

A simple illustration (hypothetical numbers)

These figures are invented to show the mechanism, not to predict anything.

Two retirees each start with 100,000 and withdraw 6,000 at the start of each year for three years. Their returns over three years are the same three numbers in different orders: −20%, +10%, +25%.

Retiree A (bad years first: −20%, +10%, +25%)

  • Year 1: 100,000 − 6,000 = 94,000; × 0.80 = 75,200
  • Year 2: 75,200 − 6,000 = 69,200; × 1.10 = 76,120
  • Year 3: 76,120 − 6,000 = 70,120; × 1.25 = 87,650

Retiree B (good years first: +25%, +10%, −20%)

  • Year 1: 100,000 − 6,000 = 94,000; × 1.25 = 117,500
  • Year 2: 117,500 − 6,000 = 111,500; × 1.10 = 122,650
  • Year 3: 122,650 − 6,000 = 116,650; × 0.80 = 93,320

Same returns, same withdrawals, different order: Retiree B ends this short period noticeably better off. Stretch the effect over decades, and the gap can decide whether money lasts.

The "danger zone" around retirement

Many planners describe the years roughly five to ten either side of retirement as a period of heightened sequence risk:

  • Your savings are usually at or near their peak, so a percentage fall is a large absolute loss.
  • You have little or no time to recover through new contributions.
  • You are about to start, or have just started, withdrawals.
  • Your plans, such as retirement date and spending, may depend on the pot's value at a specific moment.

A severe market fall in this window does more lasting harm than the same fall fifteen years into retirement, when the pot is smaller and the remaining horizon shorter.

Inflation is part of the same story

Sequence risk is usually discussed in terms of market returns, but high inflation early in retirement does similar damage: it raises the amount you need to withdraw just as real returns may be weak. Historically, some of the hardest periods for retirees combined poor market returns with high inflation. Plans that hold up in those conditions are robust.

How to protect yourself

No single tool eliminates sequence risk. Combining several makes a plan resilient.

1. Build a secure income floor

The more of your essential spending is covered by income that does not depend on markets, the less you must sell after a fall. Secure income includes state pensions, defined‑benefit workplace pensions and annuities. In many systems, delaying a state pension increases it for life, which can be a powerful hedge.

How to check: request a state pension forecast from your government. UK readers can see how payments work abroad on GOV.UK; US readers can consult the Social Security Administration; Australians can use Moneysmart's retirement income guidance.

2. Keep a cash buffer

Holding a year or two of planned withdrawals in cash or very low‑risk assets means you can keep spending after a fall without selling growth assets at depressed prices. Refill the buffer from investments when markets recover. Too large a buffer for too long, however, loses value to inflation.

3. Use flexible withdrawal rules

Agreeing in advance to adjust spending after bad years reduces the damage of a poor sequence dramatically. Options:

  • Guardrails: cut withdrawals by a set amount if your withdrawal rate rises above an upper limit after a fall; raise them if it drops below a lower limit.
  • Skip inflation increases after a negative year.
  • Separate essential and discretionary spending, flexing only the latter.
  • Percentage‑of‑portfolio withdrawals, with a floor.

Research by Morningstar and others has found that flexible methods support higher starting withdrawals than rigid inflation‑adjusted ones (Morningstar), largely because they blunt sequence risk.

4. Adjust the asset mix around retirement

Some planners recommend holding somewhat more in lower‑risk assets in the years around retirement, sometimes called a "bond tent", and then gradually increasing the share in growth assets as the danger zone passes. The idea is to reduce exposure when sequence risk is highest. Others prefer a steady balanced mix with a cash buffer. Either way, the mix should be deliberate.

5. Diversify

Holding a range of asset classes and regions reduces the chance that one market's bad decade dominates your outcome. Diversification does not eliminate falls, but it can soften them.

6. Keep a flexible retirement date, if you can

If a severe fall happens just before you planned to retire, working part‑time for a little longer, or phasing into retirement, can give the portfolio time to recover. Meaningful part‑time work can also bring structure and connection; see How to Find Purpose After Retirement and Volunteering in Retirement.

7. Time large expenses carefully

Postpone big discretionary spending, such as a new car, renovations or major travel, after a bad year, and bring it forward after a good one where possible.

8. Consider partial annuitisation

Converting part of your savings into guaranteed lifetime income reduces how much of your spending depends on markets. Buying in stages over several years spreads the risk of buying when rates are unfavourable.

9. Keep costs low

High fees magnify sequence risk because they reduce returns in every year, including bad ones. Regulator‑run investor education sites such as the SEC's Investor.gov explain how costs compound.

10. Have a written plan for bad markets

Decide now what you will do if markets fall sharply in your first years of retirement: which spending you will cut, which bucket you will draw from, what will trigger a review. Writing it down protects you from panic, which is its own form of sequence risk: selling everything near the bottom locks in losses.

The psychology of a bad start

Sequence risk is a mathematical idea, but it is experienced emotionally. Retiring into a falling market can be frightening: the number on the statement shrinks just as the salary stops. Common reactions include:

  • Freezing: avoiding statements, delaying decisions, hoping it passes.
  • Panic: selling everything and moving to cash, then missing the recovery.
  • Overcorrection: cutting spending so sharply that retirement becomes joyless and unnecessary.
  • Blame: within couples, disagreement about who made which choice.

The best protection is deciding in calm times what you will do in stormy ones. A written plan, agreed with your partner and adviser, turns a frightening moment into a pre‑planned routine: "Markets fell more than our trigger; we pause the travel budget and draw from the cash bucket, as agreed."

It also helps to measure progress by what matters. If your essential bills are covered by secure income and the buffer is doing its job, a fall in the portfolio is uncomfortable but not a crisis.

An example "bad market" plan (hypothetical)

A couple write the following on a single page and keep it with their financial records:

  1. Trigger: if the invested portfolio falls by a large amount from its last annual review value, this plan applies.
  2. Income: pensions continue to cover essentials. Discretionary withdrawals from investments pause; we draw from the cash bucket instead.
  3. Spending: the travel and home improvement budget is reduced for the year. Gifts to family continue at a lower level.
  4. Investments: no selling of growth assets to raise cash while the trigger applies. Rebalancing only by directing income and dividends.
  5. Review: we meet our adviser within three months, and again at the next annual review.
  6. Return to normal: when the portfolio recovers above an agreed level, or the cash bucket is refilled, we resume normal withdrawals.

The specifics will differ for everyone. The value lies in deciding them in advance.

Sequence risk when you live abroad

Retiring to another country can add layers:

  • Currency sequence risk: if your income or investments are in one currency and your spending in another, a fall in that currency early in retirement acts like a market fall. A local‑currency cash buffer helps.
  • Visa income tests: a fall in income or savings can threaten your residence status at renewal; see Retirement Visas Explained.
  • Healthcare costs: insurance premiums may rise regardless of markets; see International Health Insurance Explained.
  • Tax: selling investments may be taxed differently abroad, affecting how much you must sell. See How to Retire Abroad.

Sequence risk in different pension systems

  • Defined‑benefit or state‑pension‑heavy systems (common in much of continental Europe) expose retirees less, because more income is guaranteed.
  • Defined‑contribution‑heavy systems (such as the US, UK, Australia) place more of the risk on individuals who draw from their own pots.
  • Minimum drawdown rules, such as Australia's age‑based minimums for account‑based pensions (Moneysmart) or US required minimum distributions, can force sales after falls. Withdrawals taken as cash do not have to be spent; they can be reinvested in a non‑pension account where rules allow.

Sequence risk for couples

Couples face an extra layer: the plan must work for the survivor. If one partner dies early, some pension income may stop or reduce while many costs continue. A bad market sequence at the same time can compound the strain. Check survivor benefits on every pension, consider joint‑life annuities, and make sure both partners understand the plan and know where everything is kept. Our Power of Attorney Across Countries guide explains how to make sure someone can manage finances if one partner becomes unable to.

What sequence risk is not

  • It is not the same as low average returns. You can have good average returns and still suffer from a bad sequence.
  • It does not mean you should avoid shares. Very cautious portfolios carry their own risk: failing to keep up with inflation over a long retirement.
  • It is not something you can time away. No one reliably predicts market falls; the answer is resilience, not prediction.

A sequence‑risk checklist

  1. Calculate the share of essential spending covered by secure income.
  2. Decide whether to close any gap with an annuity or by delaying a state pension.
  3. Hold a cash buffer of one to two years' planned withdrawals.
  4. Choose a flexible withdrawal method and write down its rules.
  5. Review your asset mix for the years around retirement.
  6. Keep costs low and diversify.
  7. Write a "bad market" plan.
  8. If living abroad, add a local‑currency buffer and check visa income margins.
  9. Review annually.

How this connects to the rest of your plan

Sequence risk is ultimately about protecting the life your money pays for: a home in the right place (How to Choose Where to Retire), healthcare (Healthcare When You Retire Abroad, Types of Healthcare Systems), connection (Loneliness and Connection After Retirement) and what you leave behind (Wills and Estates Across Borders).

Frequently asked questions

What is sequence‑of‑returns risk in simple terms?

The risk that bad investment returns early in retirement, while you are withdrawing money, cause your savings to run out sooner, even if long‑term average returns are good.

Why does it matter more in retirement than while working?

Because withdrawals force you to sell after falls, and the money sold cannot recover. While saving, new contributions after a fall buy cheaply instead.

When is sequence risk highest?

In the years just before and after retirement, when your pot is largest and you are starting to depend on it.

How much cash should I hold to protect against it?

Many planners suggest one to two years of planned withdrawals. More than that for long periods can lose value to inflation.

Do annuities eliminate sequence risk?

For the portion of income they provide, yes, because payments do not depend on markets. The rest of your savings remains exposed.

Should I move to cash when markets look expensive?

Market timing is unreliable. A deliberate asset mix, buffer and flexible withdrawal rules are more dependable than predictions.

Does sequence risk affect people with defined‑benefit pensions?

Less, because their core income is guaranteed. It mainly affects any savings they draw on.

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This guide is general information, not financial or tax advice. Consult a regulated adviser in your country, and check current rules with official sources.