Sequence of Returns Risk: Why Timing Matters in Retirement

Important Disclosure — Scope of Advice: This article is general financial education about the concept of sequence of returns risk. It is not investment advice or a recommendation regarding any security, withdrawal strategy, or retirement-income plan. Designing a portfolio withdrawal or decumulation strategy involving securities is investment advice that requires registration with CIRO (the Canadian Investment Regulatory Organization). Jose Salloum and CWCC are licensed insurance professionals and are NOT CIRO-registered; they do not provide securities or investment advice. Retirement-income and withdrawal decisions should be made with a CIRO-registered advisor, and tax aspects with a qualified tax professional. Annuities, segregated funds, and life insurance are insurance products within insurance licensing. This article is educational only.

Two people retire on the same day with the same savings, and over the next thirty years their investments earn exactly the same average return. You would expect them to end up in the same place. They don’t. One enjoys a comfortable retirement with money to spare; the other runs dangerously low. The only difference between them is the order in which their returns arrived — good years first for one, bad years first for the other. This is sequence of returns risk, and it is one of the most important and least understood dangers in retirement planning. While you’re saving, it barely matters. The moment you start drawing income, it can quietly determine whether your money lasts. This article explains how the same average can produce such different fates, why retirement is when this risk bites hardest, and what can be done about it — including where insurance-based tools genuinely help.

What Sequence of Returns Risk Means

Most people, quite reasonably, think about investment returns in terms of averages: if a portfolio earns a certain average return over many years, that average is what shapes the result. For someone who is saving, that intuition is roughly correct. But for someone withdrawing money, it misses something crucial — the order in which those returns arrive.

The key insight is that withdrawals change everything. When you are simply holding investments, only the average matters in the end, because the portfolio is left alone to recover from any decline. But when you are taking money out at regular intervals, the timing of good and bad returns suddenly matters enormously. A bad year early in withdrawals does lasting harm that a bad year later on does not, even if the long-term average is identical. The sequence — the order — becomes a force in its own right. This is why a retirement plan cannot be judged on average returns alone, and why two retirees with the same average can face such different outcomes.

Why Order Matters: The Same Average, Different Outcomes

To see why order matters, picture the two retirees from the opening. Both withdraw a steady income from their portfolios each year. Both earn the same average return over their retirement. The only difference is timing: one experiences strong returns in the early years and weak returns later, while the other suffers weak returns early and enjoys strong returns later.

The retiree who hits poor returns early is in real trouble, and the reason is the interaction of declines and withdrawals. When the portfolio is down and the retiree still needs to withdraw income, they must sell investments at depressed prices to raise the cash. Selling when prices are low means selling a larger share of the portfolio to fund the same withdrawal — and that leaves fewer holdings behind to benefit when the market eventually recovers. The early damage compounds: a smaller portfolio, drained further by ongoing withdrawals, may never fully recover even when good returns finally arrive. The other retiree, who enjoyed strong early years, built a larger cushion before the weak years came, and could absorb the later declines far more comfortably. Same average return, profoundly different result — entirely because of the order. This is the heart of sequence risk, and it is why the early years of withdrawals carry such outsized importance.

Why It Barely Matters While Saving — and Everything While Withdrawing

One of the most useful things to understand about sequence risk is that it is almost entirely a problem of the withdrawal phase. While you are still building your savings, the order of returns has remarkably little effect on where you end up — and can even work in your favour.

During the saving years, if the market falls, your ongoing contributions simply buy in at lower prices, and the long horizon ahead gives the portfolio ample time to recover and grow. A downturn early in your saving life can actually be helpful, because you accumulate more at bargain prices before the recovery. Time and steady contributions smooth out the bumps. But the moment you flip from adding money to taking it out — from accumulation to decumulation — the entire dynamic reverses. Now a downturn is harmful rather than helpful, because you are selling rather than buying, and you have less time remaining to recover. The same market decline that helped you while saving hurts you while withdrawing. This reversal is why retirement planning is fundamentally different from saving for retirement, and why a strategy that served you well for decades of accumulation may need to change as you approach the years of drawing income.

The Retirement Danger Zone

Because sequence risk concentrates in the withdrawal phase, there is a particular window where it is most dangerous: the years immediately before and after the start of retirement. This period is sometimes called the retirement danger zone, or the fragile decade.

The reason this window is so sensitive is a combination of two factors. First, the portfolio is typically at its largest size around the point of retirement — a lifetime of saving has accumulated, so a percentage decline represents the biggest possible dollar loss. Second, this is precisely when withdrawals are beginning, so a decline collides with the start of selling for income. A severe market drop in the first few years of retirement, while withdrawals are underway, can inflict damage that the portfolio may never fully recover from across the rest of a long retirement. By contrast, the same drop occurring a decade into retirement — after years of solid returns have enlarged the cushion — would be far more survivable. This is why so much careful retirement planning focuses on protecting against poor returns specifically in those early withdrawal years. Getting through the danger zone without a damaging sequence is one of the central challenges of turning savings into a lasting income — and it is an investment-planning question for a CIRO-registered advisor.

Strategies That Help Manage Sequence Risk

The good news is that sequence risk is well understood, and several broad strategies exist to manage it. None of these is a recommendation for your situation — how and whether to use them is an investment-planning decision for a qualified professional — but understanding the general approaches is valuable.

A common idea is to hold a reserve of stable, non-market money — often described as a cash buffer or bucket — that a retiree can draw from during a downturn, so that market investments are left untouched and given time to recover rather than being sold at low prices. Another is flexible withdrawals: reducing the amount taken during poor years and taking more in strong years, so that selling at the worst prices is minimized. Diversification and a thoughtful asset allocation, as discussed in our related articles, also soften the swings that drive sequence risk. And a portion of guaranteed income — income that does not depend on market performance at all — can cover essential expenses so that market declines never force a sale to pay the bills. Each of these approaches has trade-offs, and the right combination depends entirely on the individual. Designing a withdrawal strategy that manages sequence risk for your circumstances is exactly the kind of work that belongs with a CIRO-registered advisor, coordinated with the insurance and tax pieces of your plan.

Where Insurance-Based Solutions Fit

Among the tools that can help with sequence risk, two come from the insurance side and therefore fall within the scope of a licensed insurance professional. Because this site is operated by one, it is worth explaining how they fit — and being clear about what they are.

The first is guaranteed income through an annuity. An annuity is an insurance product that converts a sum of money into a guaranteed stream of income — for life or for a set period — that does not depend on market performance. Because that income arrives regardless of what markets do, it removes sequence risk entirely from the portion of retirement income it covers, which is why some retirees use guaranteed income to cover their essential expenses. The second is using a non-market asset as a buffer. The cash value of a participating whole life policy grows on a contractual basis rather than moving with markets, so some people draw on it during a downturn — leaving their market investments untouched to recover — as part of a buffer strategy. Both can be genuinely useful in the right situation. But they must be understood for what they are: insurance products, not investments, with their own features, costs, and trade-offs. An annuity typically involves giving up access to the lump sum in exchange for the income; accessing policy cash value has its own terms and reduces the policy’s available values until repaid, and a participating policy’s dividends are not guaranteed. These are planning tools, suited to certain situations, considered for the genuine role they play — never a guaranteed substitute for a complete, properly advised plan.

Important Disclosure: Annuities, segregated funds, and participating whole life insurance are insurance products, not investments, and are not deposits; they are not protected by CDIC. Insurer guarantees are obligations of the issuing insurer, depend on its financial strength, and are backed by Assuris, which is not a government body. Annuity income generally requires giving up access to the capital used to purchase it. Accessing a policy’s cash value has its own terms and reduces available policy values until repaid; participating policy dividends (participations) are not guaranteed and are declared annually by the insurer’s board. This article is not investment advice; withdrawal and investment decisions require a CIRO-registered advisor, tax aspects require a qualified tax professional, and the suitability of any insurance product requires a licensed insurance professional.

The Honest Takeaway

Sequence of returns risk is one of the quiet truths that separates a comfortable retirement from a stressful one. The lesson is humbling: it is not enough to earn a good average return: the order in which those returns arrive, once you begin drawing income, can matter just as much. A poor stretch early in retirement, colliding with withdrawals, can do damage that a strong average alone cannot undo. That is why retirement income planning is its own discipline, fundamentally different from saving, and why the years around retirement deserve such careful attention.

The encouraging side is that this risk is well understood and can be managed — through cash buffers, flexible withdrawals, thoughtful allocation, and a measure of guaranteed income. But none of it is do-it-yourself territory. Because designing a withdrawal strategy involving investments is investment advice, it belongs with a CIRO-registered advisor; the insurance-based pieces, where they fit, belong with a licensed insurance professional; and the tax consequences belong with a qualified tax professional. Coordinated well, these protections can carry a retiree safely through the danger zone. Understanding sequence risk is the first step toward making sure that the order of a few unlucky years never decides the security of your retirement.

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Important Disclosure: This article is general financial education about sequence of returns risk and is not investment advice or a recommendation regarding any security or withdrawal strategy. Retirement-income and withdrawal decisions involving securities require a CIRO-registered investment advisor; tax aspects require a qualified tax professional. Jose Salloum and CWCC are licensed insurance professionals, are not CIRO-registered, and do not provide securities or investment advice. Annuities, segregated funds, and life insurance are insurance products within insurance licensing. As licensed insurance professionals, Jose Salloum and CWCC may receive commissions on insurance products discussed on this site.

Frequently Asked Questions

What is sequence of returns risk?
It’s the risk that the order in which your returns occur — not just the average — affects your outcome, and it matters most when you’re withdrawing money, as in retirement. Poor returns early on, combined with withdrawals, can permanently shorten how long your money lasts even when the average is fine. Two retirees with the same average can end up very differently depending on when the bad years arrived.

Why does the order of returns matter?
When you’re withdrawing, a decline early on forces you to sell more of your holdings at low prices to fund withdrawals, leaving fewer to recover when markets rebound. If instead strong years come first, the portfolio has a larger base to absorb later declines. The average can be identical, but the experience and outcome are not — because withdrawals turn the order into a force of its own.

Why is sequence risk worse at retirement?
While saving, downturns can even help — you buy at lower prices and time smooths things out. Once you’re withdrawing, downturns hurt because you’re selling rather than buying and have less time to recover. The years just before and after retirement are especially sensitive: the portfolio is largest and withdrawals are beginning, so a poor sequence can do the most lasting harm.

Can insurance products help manage sequence risk?
In certain ways, yes. Guaranteed income products like annuities provide income unaffected by the order of market returns, and some people use a non-market asset such as policy cash value as a buffer to draw from during downturns. But these are insurance products (not investments), with their own terms and costs, and any such strategy should be coordinated with a licensed insurance professional and a CIRO-registered advisor.

Continue Learning

Read Risk Tolerance: How Much Risk Is Right for You? and Asset Allocation: Building a Balanced Portfolio for the foundations that shape how a portfolio weathers a poor sequence, and explore the full Investment Options hub.

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