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Sequence of returns risk: why retirement timing matters

7 Jul 26 Emily Malone

A lot of retirement planning focuses on the size of the pot.

How much you’ve built. What return you might get. Whether the numbers look broadly on track.

All of that matters. Once you start drawing an income, though, the timing of returns can have a lasting effect on how well the plan holds up. That’s where sequence of returns risk comes in.

A difficult market at the start of retirement can put added strain on an income plan, especially if withdrawals have already started. As The Pensions Regulator notes, retirement income can fall sharply or even run out if too much is taken too quickly and markets fall at the wrong time.

That’s why early losses tend to matter more once withdrawals have begun.

Here’s a little guide to help clarify things.

What is sequence of returns risk?

In plain terms, it means the order of investment returns matters once you’re drawing income.

Poor returns early on can do more damage than poor returns later, even if the average return over the full period ends up looking similar on paper.

That’s because retirement changes the job your portfolio is doing.

Before retirement, market falls can be uncomfortable, but you’re often still contributing, still earning, and not relying on the portfolio to cover spending. Once you retire, that changes. If you’re taking withdrawals while markets are down, you may have to sell more of your investments at lower prices to generate the same level of income.

So the risk sits in the timing; poor returns early on can have more impact once withdrawals have started.

Why the order of returns matters

Two people can have the same pension pot, take the same level of income, and experience the same average return over time, but still end up in very different positions.

The difference can simply be the order those returns arrive in.

If one person gets stronger returns in the early years of retirement and weaker ones later, their portfolio may have more chance to absorb those later falls. If the other person is hit by market falls right at the start, while they’re already taking money out, the portfolio can come under pressure much earlier. By the time markets recover, there may be less left invested to benefit.

This is why averages don’t tell the whole story. A falling market matters more when income is being taken from the same portfolio.

A simple example

Imagine two retirees each start with £500,000 and each take £25,000 a year.

Over six years, they experience the same annual returns. The only difference is the order.

One gets the stronger years first and the weaker years later.

The other gets the weaker years first and the stronger years later.

Even though the average return is the same, the second person can end up with less left, simply because they were taking income while the portfolio was already falling.

That’s sequence of returns risk in practice.

Once withdrawals are happening at the same time as market falls, the portfolio has less room to recover.

Why this matters so much in retirement

This risk matters most when you move from building wealth to living off it, because retirement changes the job the portfolio is doing. Instead of focusing mainly on growth, the portfolio now needs to support your lifestyle, often over a long period of time, while markets continue to rise and fall along the way.

That creates a different kind of pressure.

It’s one reason retirement income planning needs to go beyond broad assumptions like “markets average X% over the long term”. In real life, the path matters. The FCA has made the wider point that retirement income decisions involve managing investment risk and longevity risk together, especially in drawdown.

If you’re approaching that transition, we touch on the wider planning window in Making the most of your final working years and New tax year, new opportunities: what you should know about your pension in 2025/26.

Who is most exposed to sequence risk?

Sequence of returns risk tends to matter most for people who are:

using drawdown for regular income
taking ad hoc lump sums from invested pensions
retiring just before or during a market downturn
withdrawing too much too soon
relying heavily on invested assets rather than secure income sources

These approaches can work well, but they usually need closer planning and more flexibility because the timing of weak markets can have more impact when there isn’t much room for error. Once funds remain invested in retirement, you need to be aware of both the flexibility and the risks.

What can make it worse?

A few things tend to increase the risk.

Taking too much too early

If withdrawals are high relative to the size of the portfolio, a market fall can do more lasting damage.

That’s because there’s less left invested to recover. Taking more now means less available later.

Relying on investments alone for income

If all of your retirement income depends on invested assets, market falls can have a more immediate effect on spending decisions.

That’s one reason a mix of income sources can be helpful.

The State Pension can provide part of that foundation, and the FCA has also discussed the role of blended retirement income solutions that combine flexible access with some guaranteed income.

Retiring into a weak market

This is the classic sequence-risk scenario.

A difficult market at the start of retirement can have an outsized effect compared with similar market falls much later on.

Not because the fall itself is necessarily worse, but because the portfolio is more exposed to withdrawals in those early years. Morningstar and FCA material both support that framing.

How can you reduce sequence of returns risk?

You can’t remove it completely.

But you can make it more manageable.

Build flexibility into withdrawals

One of the most effective ways to reduce pressure on a portfolio is to avoid treating retirement income as totally fixed if markets are going through a difficult spell.

If withdrawals can be adjusted, even temporarily, that can reduce the need to sell investments after falls. Flexibility is one of the main features of drawdown, but also one of the main responsibilities.

Keep a short-term spending reserve

Some people hold part of their near-term spending needs in cash or lower-volatility assets, so they’re not forced to draw everything from growth investments at the wrong time.

That won’t solve every problem, and holding too much in cash brings its own trade-offs, but it can create breathing room. Some people use cash pots or income-producing funds to help manage withdrawals without selling growth assets after a fall.

Think about secure income as well as invested income

For some people, the answer isn’t only about portfolio structure. It’s also about where income comes from.

The State Pension, defined benefit pensions, and in some cases annuities can all provide a level of security that reduces pressure on invested assets. The FCA notes that blended approaches can help balance flexibility with secure income.

Review the plan regularly

Retirement income planning isn’t something you set once and leave untouched for twenty years.

Spending changes. Markets change. Tax rules change. Your own attitude to risk may change too.

That’s why regular review matters. Not because the plan should always be changing, but because it needs to stay connected to real life. The FCA’s retirement income advice review repeatedly emphasises ongoing suitability and the need to keep strategies under review.

A more useful way to think about it

If your portfolio falls while you’re still saving, you’re mostly dealing with a paper loss.

If your portfolio falls while you’re drawing from it, the effects can be more permanent.

That’s really what sequence of returns risk is about.

Not fear. Not trying to predict the market perfectly. Just understanding that timing matters more once retirement income depends on invested assets.

Thinking about how to turn your pension into a sustainable retirement income?

We can help you look at withdrawals, investment risk and secure income together, so the plan feels resilient as well as workable.

Where we add value

Sequence of returns risk is one of those issues that often gets overlooked until someone is close to retirement, or already taking income from their portfolio.

Our role is to bring that risk into the open early enough for it to be useful.

That may mean stress-testing a drawdown plan, looking at how much flexibility you really have, or thinking more carefully about how secure income and invested income work together. In some cases, it may mean deciding a more cautious structure is the better fit.

Sometimes the most valuable part of retirement planning isn’t chasing a better return.

It’s building a plan that can cope if returns arrive in an unhelpful order.

If you’re thinking about the bigger retirement picture, we’ve also touched on that in The 100-year life: are you prepared? and 5 ways to reduce your retirement age.

The bottom line

Sequence of returns risk is the risk that poor investment returns arrive at the wrong time, especially early in retirement when you’ve already started taking money out. It matters because withdrawals during market falls can reduce the amount left invested for any recovery later on. That’s why retirement income planning needs more than average-return assumptions. It needs a plan for how income will be taken, how risk will be managed, and how the strategy holds up if markets are difficult in the early years.

FAQs

What is sequence of returns risk?

It’s the risk of poor investment returns arriving early in retirement, when you’ve already started taking money out. If that happens, you may end up selling investments at lower values and leaving less behind to recover later. It’s one of the main reasons retirement income planning needs more than a simple average-return assumption.

Why does sequence of returns risk matter in retirement?

Because retirement often involves drawing income from investments rather than leaving them untouched. If markets fall early and withdrawals continue, the portfolio can be harder to rebuild later.

Does sequence risk only apply to pensions?

No. It can affect any invested portfolio being used to fund withdrawals, including ISAs and general investment accounts. The issue is the combination of withdrawals and market falls, not the wrapper itself. This is an inference from the mechanics described in the drawdown and retirement-income sources above.

How can you reduce sequence of returns risk?

You may be able to reduce it by keeping withdrawals flexible, holding some short-term reserves in lower-risk assets or cash, diversifying your sources of retirement income, and reviewing the plan regularly. Those approaches are consistent with MoneyHelper’s retirement investing guidance and the FCA’s retirement income advice review.

Does sequence risk mean drawdown is a bad idea?

Not at all. It just means drawdown needs proper planning. It offers flexibility, but that flexibility comes with responsibility and risk that need to be managed.

Sources

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The Financial Conduct Authority does not regulate estate planning, tax planning or Will writing.

Links within this article will direct to a third-party website and Finura is not responsible for the accuracy of the information or content contained within linked sites.

Date written: 29/06/2026

Approved by Evolution Wealth Network Ltd on 02/07/2026.

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