How to Plan for Sequence-of-Returns Risk Near Retirement
Sequence-of-returns risk is one of the biggest threats to a comfortable retirement — and timing matters more than most Canadians realize. This guide explains what it is and how retirees in London, Ontario and across Canada can plan around it.
By Marc Pineault, licensed retirement planner in London, Ontario
Published
How to Plan for Sequence-of-Returns Risk Near Retirement
You can do everything right for decades — save consistently, invest sensibly, live within your means — and still run into serious trouble in retirement because of when the market decides to dip. That timing issue has a name: sequence-of-returns risk. It's one of the most important retirement planning concepts that many Canadians have never heard of, and understanding it before you stop working can make a significant difference to how long your savings last.
What Sequence-of-Returns Risk Actually Means
Imagine two retirees who both earn the same average investment return over 20 years. One experiences strong gains early in retirement and weak years later. The other faces the opposite — a rough patch right out of the gate. Despite identical averages, the second retiree ends up with far less money, or may even run out entirely.
The reason is withdrawals. When you're still working and contributing to your savings, a market drop is just a paper loss — you're buying more at lower prices. But once you're drawing income from your portfolio, a bad year means selling investments at a low point to cover your living expenses. That permanently removes units from your account, leaving less invested to recover when markets bounce back. It's a mathematical problem that has nothing to do with your patience or your long-term outlook.
The years immediately before and after your retirement date — often called the "fragile decade" — are when your portfolio is most exposed to this risk.
Strategies for Managing the Risk Before You Retire
The good news is that this is a plannable problem. Several practical approaches can help reduce the damage a bad market sequence could do.
Build a cash or short-term buffer. Having one to two years of living expenses in cash or near-cash means you can cover your bills without selling investments during a downturn. This gives your portfolio time to recover before you need to draw from it.
Shift your asset mix gradually. As you approach retirement, slowly reducing the portion of your savings in higher-volatility assets gives your near-term income needs a smoother foundation. This doesn't mean avoiding growth entirely — it means being more deliberate about which money is exposed to short-term swings.
Delay or maximize guaranteed income. Canada Pension Plan (CPP) and Old Age Security (OAS) are not subject to market risk — they pay the same whether the TSX is up or down. Delaying CPP to age 70, for example, increases your monthly payment by 42% compared to taking it at 65. A higher guaranteed income floor means you need to pull less from your investments in any given year, which directly reduces sequence risk.
Consider a "bucket" approach. Dividing your retirement savings into buckets — short-term spending, medium-term stability, and long-term growth — is a popular framework because it separates money you'll need soon from money that can ride out a downturn. Each bucket serves a different time horizon and carries a different level of risk accordingly.
The Role of Flexibility in a Retirement Plan
One underappreciated defence against sequence-of-returns risk is simply having some flexibility in your spending. Retirees who can reduce withdrawals modestly during a market downturn — even temporarily — give their portfolio a much better chance of recovering. This doesn't mean suffering through retirement; it means building a plan that isn't perfectly rigid, with room to adjust if needed.
Flexibility might also mean planning to work part-time in the early years of retirement, or being open to drawing from different account types (RRSP, TFSA, non-registered) depending on market conditions and tax efficiency in any given year. This kind of adaptive strategy is much easier to execute when it's been thought through in advance rather than improvised under pressure.
Why a Plan Built Around This Risk Looks Different
A retirement plan that accounts for sequence risk looks meaningfully different from one that simply projects a steady average return each year. It stress-tests what happens if your first five years of retirement include a significant market drop. It builds in a buffer, assigns a role to your guaranteed income sources, and creates a withdrawal strategy flexible enough to adapt.
Marc Pineault, a retirement planner in London, Ontario, works with clients to build exactly this kind of resilient plan — one that doesn't assume markets will cooperate on your timeline. The goal isn't to predict what markets will do; it's to structure your retirement income so that a bad year early on doesn't define the next 25.
If you're within five to ten years of retirement and haven't thought through sequence-of-returns risk yet, now is a good time to start. Reach out to Marc Pineault to book a consultation and build a plan designed to hold up — whatever order the returns arrive in.
This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.
Frequently asked questions
Sequence-of-returns risk is the danger that a string of bad investment years early in your retirement — when you're withdrawing money — can permanently damage your portfolio, even if long-term average returns look fine on paper. It hits hardest in the first decade after you stop working.
Most retirement planners suggest starting to manage this risk five to ten years before your planned retirement date, since that window — along with the first five years of drawing income — is when your savings are most vulnerable to a market downturn.
No — CPP and OAS are guaranteed government pensions that pay out regardless of market conditions, which is exactly why maximizing or delaying those benefits can help reduce how much you need to pull from investments during a downturn.
A bucket strategy divides your savings into short-term cash (one to two years of expenses), medium-term lower-risk investments, and long-term growth assets — so you never have to sell stocks at a loss just to cover your monthly bills.
Recovery is possible but difficult, because withdrawing money while your portfolio is down locks in losses and leaves less invested to benefit from the eventual rebound — which is why having a plan before retirement, not after a crash, makes such a big difference.
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Marc Pineault
Retirement Planner in London, Ontario
I help families and business owners in London, Ontario build clear financial plans for retirement, taxes, and investments — then I manage it all so they can stop worrying and start living.
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