Hidden threats to retirement: Understanding sequencing risk

Retirement planning is often viewed through the lens of long-term averages – average returns, average life expectancy, average withdrawal rates.

Hidden threats to retirement: Understanding sequencing risk

Retirement planning is often viewed through the lens of long-term averages – average returns, average life expectancy, average withdrawal rates. Yet real world outcomes rarely follow neat averages. One of the most critical and misunderstood factors affecting retirement success is sequencing risk: the risk that the order in which investment returns occur – not just the returns themselves – can significantly impact the sustainability of retirement income.

Even for investors with well diversified portfolios and disciplined habits, sequencing risk can determine whether their retirement plan stays on track or falls under pressure.

What is sequencing risk?

Sequencing risk is the danger that a retiree experiences poor investment returns early in retirement, particularly while taking withdrawals. These negative returns, when combined with ongoing withdrawals, can permanently impair the portfolio’s ability to recover – even if long-term averages eventually improve.

Two retirees can earn the same average return over 30 years but end up with drastically different outcomes depending on whether the “bad years” happen early or late.

Why sequencing risk matters more today

Several shifts in the retirement landscape make sequencing risk more relevant than ever, including:

1. The decline of guaranteed income

With fewer individuals relying on defined benefit pensions and more utilising income drawdown, retirees are more exposed to market fluctuations.

2. Greater flexibility – and responsibility

Individuals now have unprecedented control over how and when they draw pension income, making informed decision making essential.

3. Changing tax rules

Future changes to pension tax treatment reinforce the need to preserve capital efficiently and plan withdrawals with precision.

How sequencing risk erodes retirement wealth

When markets fall early in retirement and withdrawals continue at the same rate, the portfolio must grow much faster later to compensate – a mathematical challenge that is often impossible to overcome.

For example:

A 15% loss early on requires ~18% growth just to recover.
If withdrawals continue during that recovery period, even higher returns are needed.

This is why two investors with identical portfolios and withdrawal patterns can see very different long-term outcomes based solely on timing.

Strategies to reduce sequencing risk

A thoughtful retirement strategy doesn’t eliminate sequencing risk, but it can significantly reduce its impact.

1. Use long-term cashflow modelling

Cashflow forecasting – a key feature in our retirement planning approach – allows clients to see how their long-term income needs may be affected by different market environments. It highlights vulnerability to downturns and helps determine sustainable withdrawal levels.

2. Diversify across asset classes

Diversified portfolios smooth volatility across market cycles and can provide more stable returns when retirees need them most.

3. Segment assets into “buckets”

A common and effective approach is asset segmentation:

Short term bucket: Cash and low volatility assets to cover 2–5 years of withdrawals
Medium term bucket: Bonds and mixed assets for stability
Long term bucket: Equities for growth

This shields income needs from equity downturns and supports recovery in riskier assets.

4. Adjust withdrawals dynamically

Using flexible withdrawal strategies – such as reducing withdrawals temporarily during downturns – can dramatically extend portfolio longevity.

5. Build buffers with guaranteed income

Where suitable, annuities can protect clients from market-driven income shocks. Our recent insight shows annuity demand rising partly due to retirees seeking income certainty in uncertain markets. However, annuities may not be suitable for everyone.

6. Review tax efficiency regularly

Even small improvements in the tax treatment of withdrawals, sequencing of income sources, or pension vs non-pension drawdown can offset part of sequencing risk and support sustainability over time.

A manageable but often overlooked risk

Sequencing risk is one of the biggest threats to retirement sustainability – but also one of the most controllable. With clear modelling, diversified strategies, flexible withdrawals and ongoing professional guidance, investors can significantly reduce its impact and maintain confidence in their long-term plans.

For individuals approaching retirement or already drawing income, now is the moment to review planning assumptions and ensure their strategy is resilient in a world where returns arrive in unpredictable order.