During retirement, market performance and portfolio withdrawals are closely linked. The order in which returns occur (especially in the early years) can significantly impact how long your capital lasts. This is known as sequencing risk.
Early losses compound faster
If your portfolio suffers losses early in retirement, you may need to sell more units to fund the same level of spending. That means fewer assets remain to recover when markets rebound. Even with the same average return, two retirees could experience very different outcomes depending on the timing of those returns.
Once compounding is disrupted, recovery becomes harder, especially when capital is already being drawn down.
Timing matters more than most expect
Many investors underestimate how much early negative performance can impact long-term results. The first 5–10 years of retirement are particularly sensitive. If returns are strong early, a portfolio often lasts longer. If markets drop, consistent withdrawals can accelerate capital erosion.
This is particularly relevant for portfolios heavily weighted in public equities or exposed to economic cycles.
How to manage sequencing risk
You can’t control market returns, but you can manage how and when withdrawals occur:
- Maintain a cash buffer or short-term bond ladder to fund 1–2 years of expenses
- Use flexible withdrawal strategies that adjust based on market performance
- Align asset allocations to match time horizons: stable assets for early years, growth assets for later stages
- Diversify income sources: consider property income, annuities, or structured payouts
For higher-net-worth individuals, layering in alternative income streams or deferring major asset drawdowns can help preserve core capital.
Retirement strategy isn’t just about total return. Withdrawal timing matters. Managing sequencing risk protects your capital when it’s most exposed.
