Sequence of returns risk
Why two identical plans can end decades apart.
Two Canadians save the same $750,000 and retire on the same $55,000 a year. One retires in 1973 and runs out of money at 84. The other waits two years, retires in 1975, and finishes retirement with around $1.27M still invested. Neither did anything different from the other. The order the market delivered its returns did the rest, and it weighs most heavily in the first decade you spend a portfolio down.
What sequence of returns risk is
Over a long enough stretch, markets average out. While you are saving, the order those returns arrive in barely matters: you are adding money, and a down year early means cheaper shares. Once you retire and start drawing an income, the order starts to matter a great deal.
The reason is that you have switched from buying to selling. A poor run in the first years of retirement forces you to sell more of a shrinking portfolio to fund the same spending, which locks in the loss and leaves less behind to recover when markets turn. The same returns arriving in a kinder order, later, would do far less harm. That asymmetry is sequence of returns risk.
The asymmetry
While you are saving
A market drop lets you buy in at lower prices. Timing barely changes the outcome.
Once you are drawing income
A market drop forces you to sell low for income. Timing now drives the outcome.
Same plan, opposite endings
The same $750,000 portfolio and $55,000-a-year plan, started two years apart. Real Canadian market history, computed by the simulator.
The 1973 retiree walked straight into the 1973-74 crash and the inflation spike that followed. Selling into those first years emptied the portfolio by 84.
The 1975 retiree, two years later, started after the worst of it. The same spending, the same investments, and the portfolio grew to around $1.27M by 100.
The pattern holds across the record. Of the 69 start years since 1956, the retirements that failed at this plan cluster in the late 1950s through the 1970s, the start years that ran into a weak opening decade.
See the full spread, and how spending changes it, in how long your money lasts.
The first decade carries the most weight
A retirement has to survive its worst years whenever they fall, but a bad run hurts far more at the beginning. Early losses come off a portfolio that is still close to its largest, and every dollar withdrawn during the slump is a dollar that never recovers. By the time the same slump arrives twenty years in, the plan has usually banked enough good years to absorb it.
It is why an average return assumption can mislead. Two retirements can earn the identical average over thirty years and end in completely different places, decided by the order the good and bad years came in.
The same loss, early or late
A market drop in year one
Comes off your biggest balance, and the shares you sell for income never recover.
The same drop in year twenty
Comes off a plan that has already banked good years, with fewer left to fund.
Three levers you can pull
Spend flexibly
The strongest defence is spending that can flex: trimming withdrawals after a bad year. Replay's guardrails policy models exactly this, and you can watch how much it helps.
Keep a stable cushion
Holding a few years of spending in GICs, bonds, or cash means you are not forced to sell equities while they are down. Adjust the asset mix in the tool to see the effect on the worst starts.
Start with room to spare
A lower opening withdrawal rate leaves slack for a rough first decade. The safe-max figure in the simulator is the highest steady spending that survived every start year on record.
Equity exposure is a real tradeoff, though. A bigger allocation to stocks swings harder in the early years, the same exposure that creates sequence risk, yet it also earns more over a full retirement and recovers faster after a drop, and the research on holding more equities through retirement finds that added growth can outweigh the added volatility for many households. Portfolio size works the same way: the further your savings run ahead of your spending, the less any single bad sequence hurts. A steadier mix lowers the swings and a more aggressive one trades them for higher growth; neither is the one right answer.
Run your plan through every start year
Retirement Replay runs your exact plan through every Canadian market on record, including the worst sequences, and lets you replay a single bad start month by month. The count it shows already has the crashes in it.
Questions people ask
What is sequence of returns risk?
It is the risk that the order of investment returns decides whether a retirement lasts, even when the long-run average is identical. A run of poor years early in retirement, while you are withdrawing, does lasting damage that the same years arriving later would not.
Why does it matter more near retirement?
Because you switch from buying to selling. Early in retirement a market drop forces you to sell more of a large portfolio to fund spending, and those sold-low dollars never recover. The same drop twenty years later does far less harm, because the plan has had time to grow first.
How do I protect against it?
You cannot control the market, but you can control three things the simulator lets you test: how flexibly you spend (guardrails), how much stable money you hold for the early years, and how high you set your starting withdrawal. Each softens a bad opening decade.
Is it only bad luck?
The timing is luck, but how exposed you are to it is partly a choice. Two retirees who hit the same bad sequence can end up far apart depending on whether they trimmed spending and kept a cushion, which is the part you set in advance.
More retirement guides in the Guides hub.