Sequence of Returns Risk in Ontario: Why the Order of Market Returns Matters

Most Ontarians spend decades focused on growing their investment portfolio. They track average annual returns, compare fund performance, and calculate projected growth rates. But when retirement arrives, a different and far less discussed risk takes centre stage: sequence of returns risk. Understanding it could be the difference between a retirement that lasts and one that runs out of money far too soon.

What Is Sequence of Returns Risk?

Sequence of returns risk refers to the danger that the timing of market downturns — not just their magnitude — can permanently damage your retirement portfolio. Two retirees could experience identical average returns over 20 years and end up with dramatically different outcomes, simply because one experienced losses early while the other experienced them late.

Here is why this matters: when you are withdrawing money from a portfolio, a major market drop in the early years of retirement forces you to sell more units to meet the same dollar withdrawal. Those units are gone forever — they cannot recover when markets rebound. A retiree who loses 30% in year one and then enjoys strong returns afterward will be in far worse shape than someone who enjoyed gains early and only faced losses near the end.

This is the opposite dynamic from the accumulation phase. When you are saving and not withdrawing, a market crash can actually work in your favour — you are buying more units at lower prices. In decumulation, the math flips completely, and what was an advantage becomes a structural vulnerability.

Why This Risk Is Particularly Acute in Ontario

Ontario retirees often carry significant RRSP and RRIF balances, meaning a large portion of retirement income depends directly on portfolio withdrawals. Unlike retirees who rely almost entirely on defined benefit pensions, many Ontarians are drawing from market-linked accounts — RRIFs, non-registered accounts, and TFSAs — on a monthly basis.

Add to that the mandatory RRIF minimums that kick in at age 72 (or earlier if converted), and you have a situation where the government requires withdrawals whether or not markets are cooperating. If markets drop 25% and you are still required to withdraw $40,000 from your RRIF, you are locking in losses at precisely the wrong time.

CPP and OAS provide a cushion, but few Ontarians rely on those sources alone. The more your retirement income depends on portfolio withdrawals, the more exposed you are to sequence of returns risk.

How Much Can Early Losses Actually Hurt?

The numbers are sobering. Consider a $1,000,000 portfolio with a 5% annual withdrawal ($50,000 per year). In one scenario, the portfolio experiences large losses in years one and two, followed by strong positive returns for the remainder of retirement. In another scenario, the identical returns occur in reverse order — strong years first, losses near the end.

Despite identical average returns over the full period, the first scenario depletes the portfolio significantly earlier. The second scenario leaves a healthy balance. The sequence, not the average, determines the outcome. This is precisely why a financial planner does not simply rely on long-run average returns when stress-testing retirement projections — the average tells you almost nothing about when a bad year hits.

Strategies to Manage Sequence of Returns Risk

Build a cash reserve or income buffer. Holding one to three years of living expenses in cash or short-term fixed income means you do not need to sell equities during a downturn. You draw from the buffer while markets recover. This approach, often called a bucket strategy, creates a meaningful buffer between you and a bad market year.

Maintain flexible withdrawals where possible. Retirees who can reduce discretionary spending temporarily during a market decline give their portfolio time to recover. Even cutting back on travel for one or two years after a major correction can dramatically extend portfolio longevity over a 25-year retirement.

Delay CPP to increase guaranteed income. Each year you delay CPP beyond age 65 (up to age 70) increases your benefit by 8.4% per year. A higher guaranteed CPP payment reduces how much you must withdraw from your portfolio each month, directly lowering your exposure to sequence risk.

Consider partial annuitization. Converting a portion of savings into an annuity creates a guaranteed income floor. It eliminates sequence of returns risk on that portion entirely. While annuities are not right for every situation, they deserve serious consideration for retirees with limited pension income and high withdrawal dependency.

Adjust asset allocation around the retirement date. Some retirees shift to a more conservative portfolio mix in the years just before and after retirement — often called the retirement risk zone. Reducing equity exposure during this window can reduce the impact of a poorly timed crash, even if it means accepting somewhat lower long-run growth expectations.

Working with a Financial Planner in Ontario

Sequence of returns risk is not something most retirees think about until they are already in retirement. By then, options narrow considerably. The time to build a plan is well before you stop working.

At Pineault Wealth Management in London, Ontario, Marc Pineault works with clients approaching and in retirement to build withdrawal strategies that account for sequence risk — stress-testing portfolios against adverse market scenarios and building income plans that do not rely on markets always cooperating.

If you are within ten years of retirement and have not specifically modelled this risk, that conversation is worth having now.

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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.