Sequence of Returns Risk in Retirement Explained

Sequence of returns risk (sometimes called "sequencing risk") describes how the order of investment returns can affect a portfolio you are drawing income from. Two retirees can experience exactly the same set of annual returns over 20 years, in different orders, and end up with very different pots. The one who experienced the bad years first can run out of money decades earlier than the one who experienced them last, even though their average return was the same.

The reason is straightforward. When markets fall, the units in your pension are worth less. If you have to sell units to pay yourself an income at that point, you are crystallising losses. The pot that remains is smaller, so when markets recover, there is less capital invested to benefit from the rebound.

During your working years, you contribute money on a regular basis. A market crash in your 30s or 40s is, in many ways, helpful. Your contributions buy more units while prices are low, and provided you keep going, the eventual recovery rewards you. This is the principle behind regular monthly investing.

In retirement, that dynamic flips. You are no longer adding money; you are taking it out. A 20% market fall in year one of retirement is fundamentally different from a 20% fall in year one of your career, even though the headline figure is the same. In retirement, you cannot wait for the market to recover before you eat or pay your energy bill, so you may be forced to sell at depressed prices.

Our article on Pension Drawdown Explained covers how flexi-access drawdown works in more detail, including the risks involved.

Research consistently shows that the first decade of retirement carries the most sequence risk. If markets do well during those early years, your pot has a chance to grow even while you are drawing from it, and your portfolio becomes much more resilient to later downturns. If markets do badly, the pot can shrink to a level from which it never fully recovers.

This is why many advisers pay particular attention to retirees in the first few years after they have stopped working. Sustainable income strategies that work well across most periods can still fail if the timing of early returns is unfavourable.

There are several well-known approaches to managing sequence risk, and they are often combined.

Our article on Annuity vs Drawdown Explained covers how a hybrid approach can work in practice.

The well-known "4 per cent rule" began as a rough guide to how much someone could withdraw from a balanced portfolio without running out of money over a 30-year retirement. It was always meant as a starting point rather than a precise figure, and many UK-based studies suggest a lower starting rate may be more prudent in current conditions.

The point is not the exact percentage. The point is that any sustainable withdrawal rate is built around the assumption that you will not panic-sell during a downturn. Sequence risk is what makes the rule break.

Sequence risk is one of the areas where personalised, regulated financial advice can be especially valuable. The right approach depends on your specific pot size, your other income sources, your spending needs, your tax position and your appetite for risk.

In some situations, particularly for those with larger pots or more complex circumstances, working with a regulated financial adviser may be appropriate. An adviser can help you design a drawdown strategy that accounts for sequencing risk from the outset — including the right level of cash buffer, a sustainable withdrawal rate, and a plan for adjusting income if conditions change.

Our article on How To Take Pension Income In Retirement provides a broader overview of the different ways pension income can be accessed.