What Is Sequence-of-Returns Risk in Retirement Planning?

You've probably heard that past performance doesn't guarantee future results. But there's a deeper version of that idea — one that becomes personal the moment you retire: it's not just what returns you earn, it's when you earn them. This timing risk has a name: sequence-of-returns risk. For Canadians approaching or entering retirement, understanding it could be the difference between a retirement income plan that holds together for 30 years and one that quietly falls apart in the first five.

What Sequence-of-Returns Risk Actually Means

During your working years, the order of investment returns barely matters. If your portfolio drops 20% one year and climbs 25% the next, you're still building wealth — and regular contributions during the dip actually work in your favour.

Retirement flips this completely. The moment you start drawing money from your savings to pay for everyday life, poor returns early on can cause lasting damage — even if your long-run average return ends up looking perfectly fine on paper.

Here's the problem in plain terms: when markets fall and you're still pulling money out to pay for groceries, utilities, and travel, you're forced to sell more units of your investments at lower prices. That leaves fewer units invested to benefit from the eventual recovery. Early losses dig a hole that later gains struggle to fill.

A Simple Example That Makes It Concrete

Picture two retirees — both starting with $500,000, both withdrawing $30,000 per year, and both earning the same average annual return of 5% over 20 years. The only difference is the order those returns arrive.

Retiree A sees strong positive years early in retirement, with the weak years arriving later. Retiree B experiences the identical returns in reverse — the worst years come first.

Retiree A finishes with a healthy portfolio balance. Retiree B may run out of money a decade early.

Same savings. Same average return. Same withdrawal amount. Completely different outcomes — because of sequence.

Why Retirees Are So Much More Vulnerable Than Accumulators

When you're still working and investing, a market downturn can actually be an opportunity. Your contributions buy more units at lower prices, and you have time for recovery. The math works in your favour.

In retirement, the math reverses. You're no longer buying — you're selling. Every withdrawal you make during a down market locks in a real loss. The portfolio that was built to last three decades can be structurally compromised in the first three years.

This is why retirement planning isn't simply a question of picking the right investments or targeting a certain return. The structure of your income — which accounts you draw from, in what order, and how guaranteed sources like CPP and OAS fit into the picture — matters just as much as the portfolio itself.

Practical Ways to Manage This Risk

No plan can eliminate sequence-of-returns risk entirely, but there are well-established approaches to reduce its impact:

Build a short-term cash buffer. Holding one to two years of living expenses in cash or short-term fixed income means you don't have to sell equities during a downturn. You draw from the buffer first and give your invested portfolio time to recover.

Coordinate your guaranteed income sources. CPP, OAS, and any workplace pension provide income that doesn't depend on what markets are doing. The more of your essential expenses covered by guaranteed income, the less you need to pull from your portfolio in any given year — good or bad.

Stay flexible with discretionary spending. Retirees who can temporarily reduce withdrawals during a market downturn — cutting a travel year, for example — give their portfolios meaningful breathing room to recover without permanent damage.

Think carefully about your withdrawal sequence. Which account you draw from first — registered, TFSA, or non-registered — carries real tax and longevity implications. A deliberate withdrawal sequence reduces drag from both taxes and poor market timing.

Plan your RRIF conversion thoughtfully. RRIF minimum withdrawals are mandatory and they don't pause during a market downturn. A plan that addresses this — including strategies to reduce your registered balance before conversion — can lower your forced-withdrawal exposure in volatile years.

This Is a Planning Problem, Not a Market-Prediction Problem

Sequence-of-returns risk doesn't get solved by predicting when the next downturn will arrive — nobody does that reliably. It gets managed by building a retirement income structure that is resilient regardless of when that downturn comes.

Marc Pineault, a retirement planner in London, Ontario, works with pre-retirees and retirees to build exactly that kind of plan: coordinated income from multiple sources, a thoughtful account withdrawal sequence, and portfolio buffers designed so that bad timing doesn't derail decades of saving. If you're within five to ten years of retirement — or already there — book a free consultation with Marc Pineault at calmmoney.ca to see how your current plan holds up when the market doesn't cooperate on your schedule.

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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.