Highlights

  • Sequencing risk is the danger that early losses in retirement can drastically reduce how long your savings last.
  • Even with the same average returns, retirees who face market downturns early and keep withdrawing money can end worse off.
  • Planning strategies like liquidity cushions, bucket approaches, and careful withdrawal timing can help protect your nest‑egg.

Stepping into retirement is supposed to feel like the start of something great—you’ve worked hard, saved up, and now you’re ready to enjoy life. But there’s an often‑overlooked financial danger lurking at the door: sequencing risk (sometimes called sequence‑of‑returns risk). In simple terms, it’s the risk that the order in which your investment returns happen, especially early in retirement, can make a big difference to how long your savings last. 

What is sequencing risk?

Picture this: You retire with a nest‑egg that you plan to draw on year after year. If the market is kind and your investments grow early on, your withdrawals may feel comfortable, and your portfolio might even grow. But what if you start retirement during a downturn? The combination of withdrawals and falling asset values can punch a much bigger hole in your savings. That’s sequencing risk.

Defined as: “Sequence risk refers to the danger that the timing of withdrawals from a retirement account will harm the investor’s overall rate of return. Simply put, if a portfolio experiences negative returns right when any withdrawals are happening, it can have a lasting and adverse effect on the portfolio’s value.”

In other words, even if two retirees earn the same average return over a decade, the one who experiences losses early on and is also taking money out will likely end up worse off. 

Why early retirement losses hit hardest

Entering retirement is a unique phase: your focus shifts from accumulating wealth to drawing it down. At that point, your portfolio isn’t being replenished with fresh earnings from a paycheck – instead you’re depending on it to generate income. So, when losses come early:

  • You’re forced to withdraw during low asset prices, which means selling more shares or units than if the market were up.
  • With fewer dollars left in the portfolio, even when markets recover, the “base” to benefit from growth is smaller. 
  • Because retirement may last 20‑30 + years, this early damage compounds into a much larger problem. 

A clear example: A 15 % drop in the early years of retirement (even with the same long‑term portfolio average) could shrink a nest‑egg enough that it lasts maybe 25 years instead of a comfortable 40. 

What can you do about it?

Unfortunately, sequencing risk can’t be eliminated entirely (you can’t control market timing), but you can plan to reduce its impact.

  1. Build a “liquidity cushion”.
    Keep several years’ worth of living expenses in safe, low‑volatility assets (cash equivalents or short‑term bonds). That way, if the market is down early in retirement, you don’t have to sell growth assets at a bad time. 
  2. Use a “bucket” approach.
    Divide your savings into (for example):This gives you time for the markets to rebound in the long term, while protecting your short‑term income. 
  1. Consider adjusting the withdrawal strategy.
    If markets are bad, you might delay major withdrawals, reduce spending temporarily, or shift assets to less volatile holdings. The idea is not to lock in losses by selling at the worst time. 
  2. Start thinking about sequencing risk before you retire.
    If you’re a few years from retirement, consider reducing risk, increasing savings, or delaying retirement by a year or two if market conditions look shaky. Every extra year of accumulation helps. 

Why it matters for everyone, not just "big‑money" investors

Some might think “I’ll retire and hope for the best” or “I’ll just rely on average returns”. But sequencing risk shows that average returns alone don’t tell the full story. The order of returns matters. 

Even modest portfolios and conservative withdrawal plans can be derailed if early losses hit, and you start taking money out. Planning for a good sequence is as important as saving enough.

Final thoughts

Retirement is supposed to be your reward for decades of work—but it can also bring new financial vulnerabilities. Sequencing risk reminds us that if you retire when markets are down or enter those early years of withdrawals right as returns falter, you might compromise the sustainability of your nest‑egg more than you expect.

The key takeaway? Timing matters—for withdrawals as much as contributions. By being aware of sequencing risk, building buffers, and adjusting your strategy, you can tilt the odds more in your favour and make those early years of retirement as smooth, secure and enjoyable as possible.