What is sequence-of-returns risk?

It's the risk that poor investment returns in the early years of retirement — while you're also withdrawing — permanently shrink your portfolio, even if average returns over the full retirement are fine. The order of returns matters, not just the average.

How do you protect against sequence risk?

Common defences include holding one to three years of spending in cash or short bonds, being flexible with spending in down years, delaying CPP for guaranteed income, and not retiring into an over-concentrated portfolio.

Sequence-of-returns risk: why the first five years matter most

Here's a fact that surprises most new retirees: two people can earn the exact same average return over 30 years and end up with wildly different results — one comfortable, one nearly broke. The difference is the order the returns arrive in.

The same average, different outcomes

Imagine two retirees who both average 6% a year. One gets great returns early and poor returns late; the other gets the poor returns first. While you're accumulating, the order doesn't matter. But once you're withdrawing, a bad early stretch means you're selling investments while they're down — locking in losses you never recover from.

That's sequence-of-returns risk, and it's why the first five to ten years of retirement carry outsized weight.

Why averages lie

A retirement plan built on "my portfolio returns 6% every year" is dangerously smooth. Real markets are lumpy. A single Monte Carlo average hides the unlucky paths that actually sink plans — you need to see the range of outcomes, especially the bad ones.

Four practical defences

A cash buffer. One to three years of spending in cash or short-term bonds means you don't have to sell equities in a crash.
Flexible spending. Trimming discretionary spending in down years dramatically improves survival.
Guaranteed income. Delaying CPP to 70 raises your inflation-indexed base, so less of your spending depends on the market.
Don't over-concentrate. Retiring with everything in one stock or sector amplifies the risk.

See your own range

The way to make this real is to run your plan through many market scenarios, not one, and look at the unlucky tail — then check whether your buffer and flexibility keep you safe.