Sequence of Returns Risk: Why Order of Investment Returns Matters
When people think about investing for retirement, they usually focus on one big number: average return. That’s’ the rate at which your assets are growing. But there’s another factor that can be just as important — especially once you begin drawing income from your portfolio.
It’s called ‘sequencing of returns risk,’ and understanding it can help retirees and near-retirees make smarter, calmer financial decisions. JCIC is here to help you through this process.
At its core, sequencing risk refers to the danger of experiencing poor market returns early in retirement, while simultaneously withdrawing money from your investments. Even if your long-term average return ends up being perfectly reasonable, the timing of those returns can significantly affect how long your savings last.
An example…
Imagine two retirees each start with $1 million, withdraw the same amount annually, and earn the exact same average return over 20 years. Surprisingly, one portfolio may remain healthy while the other runs dangerously low. The difference is not the average return — it’s the sequence in which those returns occurred.
If major market declines happen in the early years of retirement, withdrawals can compound the damage. Selling investments during downturns locks in losses and leaves fewer assets available to recover when markets rebound. On the other hand, if stronger returns occur early and weaker returns later, the portfolio often has a much better chance of sustaining income over time.
What it means for you
This sounds intimidating, but sequencing risk is manageable — and importantly, it does not mean investors should abandon growth investing or live in fear of market volatility. In fact, one of the best ways to address sequencing risk is through thoughtful planning rather than dramatic investment changes.
A few common mitigation strategies that we utilize are:
Maintaining a Cash Reserve - Keeping one to three years of anticipated withdrawals in cash or very conservative investments can provide flexibility during market downturns. Instead of selling equities after a bad year, retirees may be able to draw from safer reserves while waiting for markets to recover.
Diversification - A properly diversified portfolio can help smooth volatility. While diversification cannot eliminate losses, combining equities, fixed income, and other asset classes may reduce the severity of declines and improve portfolio resilience.
Flexible Withdrawals - Retirees who can modestly reduce discretionary spending during weak market periods often improve the longevity of their portfolios substantially. Even temporary adjustments can make a meaningful difference.
Delaying Retirement or CPP/OAS - Working even one or two additional years, or strategically delaying government benefits, can strengthen retirement income plans considerably. These decisions may reduce portfolio withdrawal pressure during vulnerable early retirement years.
Having a Long-Term Perspective - Perhaps most importantly, sequencing risk should not be confused with a reason to avoid investing altogether. Inflation remains a major long-term risk, and retirees still typically need growth assets to preserve purchasing power over multi-decade retirements. Markets are inherently uneven. Historically, periods of volatility and decline have eventually been followed by recovery and growth. The goal is not to predict every downturn, but to build a financial plan capable of withstanding them.
Understand the real purpose of investing
For many investors, sequencing risk becomes less about “beating the market” and more about creating reliable income, maintaining flexibility, and avoiding emotionally driven decisions during turbulent periods.
The good news is that we thoroughly understand this risk and we’ve proven that with appropriate withdrawal strategies, diversified portfolios, and realistic spending assumptions, sequencing risk can often be significantly reduced without sacrificing long-term opportunity.
Retirement planning is not just about how much you earn on average — it’s about how your investments support your life when you need them most.
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