Two people retire with the exact same amount of money, invested in the exact same way, drawing the same income. One runs out of money in their early eighties. The other dies with more than they started with. The only difference between them is when the market crashes happened relative to their retirement date.
That’s sequencing risk — one of the most important and least understood dangers in retirement. It’s the reason the first few years after you stop working matter far more than any other period, and why the strategy that built your wealth is not the strategy that should protect it.
This guide explains what sequencing risk is, why it’s so dangerous at the point of retirement, and what you can do to manage it.
What Is Sequence of Returns Risk?
Sequencing risk (sometimes called “sequence of returns risk”) is the risk that the order in which your investment returns arrive — not just the average — determines whether your money lasts.
While you’re still working and adding to your super, the order of returns barely matters. A market crash early on is actually helpful: with regular contributions, you’re buying assets cheaply, and you have decades for them to recover. Over a long accumulation phase, what counts is the average return across the whole period.
Retirement flips this on its head. Once you stop contributing and start withdrawing, the order of returns becomes critical. A bad run of returns in the early years — while your balance is at its largest and you’re selling assets to fund your income — can permanently impair a retirement portfolio’s ability to support ongoing withdrawals, damage that even a strong recovery later can’t fully repair.
Why the Order of Returns Matters So Much
The mechanism is simple but brutal: when you’re drawing an income through regular withdrawals, you’re forced to sell assets to fund it. If markets have fallen, a significant downturn early in retirement can force you to sell investments at lower prices to raise the same dollars — and those units are gone, so they can’t participate in the eventual recovery.
In the accumulation phase, a downturn means you’re buying more units cheaply. In the drawdown phase, a downturn means you’re selling more units cheaply. The same market movement helps you before retirement and hurts you after it.
Consider two retirees who both average, say, 6% a year over 25 years and draw the same income:
Retiree A hits a couple of bad market years right at the start of retirement. They’re forced to sell a large number of units at low prices to fund their income, permanently shrinking the capital base. Those early losses can permanently deplete the portfolio and hinder future recovery. When markets recover, there’s simply less money left to grow, especially if withdrawals stay high because that leaves less capital available to recover when markets rebound.
Retiree B enjoys good early years and hits the same bad years late in retirement. By then their balance has already grown, they’ve drawn years of income from a rising base, and the late downturn does far less damage.
Same average return. Same withdrawals. Wildly different outcomes — purely because of timing. This is why two people with identical plans can end up in completely different places.
The Danger Zone: The Years Around Retirement
Sequencing risk is most acute in a window often called the “retirement risk zone,” also commonly described as the retirement danger zone — roughly the five years before and five to ten years after you retire.
There are two reasons this period is so dangerous:
Roughly three-quarters of retirement portfolio outcomes are determined in the first decade of retirement, with approximately 77% of a portfolio’s outcome set in those early years.
Your portfolio balance is at its peak. A given percentage fall hurts most when the dollar amount it applies to is largest. A 20% fall on a $1 million balance is a $200,000 loss; the same fall on a $400,000 balance later in retirement is only $80,000. Your exposure to loss is at its maximum right when you retire.
You’ve started withdrawing. The moment you switch from adding money to taking it out, downturns stop being opportunities and start being permanent damage. The combination of peak balance plus active withdrawals is what makes the early retirement years uniquely fragile.
Get through this zone without a significant market decline early in the first decade, and your plan has enormous resilience. Hit a bad crash then, and even a mathematically “average” retirement can fail.
How to Manage Sequencing Risk
You can’t control when markets fall, but you can structure your retirement so that an early downturn doesn’t force you to sell growth assets at the worst possible time. The common strategies include:
Hold a cash and defensive buffer. Keeping two to three years of living expenses in a cash buffer or cash reserves means that after market downturns, you can draw income without having to sell equities at a loss. This gives your investments more portfolio time to recover in better years before you refill the buffer. A bucket strategy can help reduce sequencing risk by dividing your retirement portfolio into time-based segments, including a short term bucket of liquid assets for near-term spending needs.
Adjust your asset allocation as you approach retirement. The aggressive, growth-heavy portfolio that served you well in accumulation carries more sequencing risk at the point of retirement. A balanced investment mix and broad diversification across assets can lessen vulnerability to market volatility, because spreading risk across different holdings limits the damage from a severe fall in any one area over your time horizon.
Build flexibility into your spending. Being able to trim discretionary spending in a bad market year helps preserve capital during poor market performance, rather than relying on a fixed percentage withdrawal approach. Flexible withdrawals can also support steadier cash flow, so you’re not forced to lock in losses when returns are weak.
Use the Age Pension and guaranteed income as a floor. Because the Age Pension isn’t tied to markets, it provides income that keeps flowing regardless of what shares are doing. The more your essential expenses are covered by pension, annuities, and other stable income sources, the less pressure there is on your portfolio in a downturn.
Don’t be too conservative, either. The opposite mistake — going entirely to cash — trades sequencing risk for longevity risk: the danger that inflation erodes your money and you outlive it over a 25–30 year retirement. The goal isn’t to avoid all risk; it’s to structure risk so a bad early run doesn’t sink the plan.
Why the Old Strategy Doesn't Work Anymore
The most important mental shift at retirement is recognising that wealth accumulation and wealth drawdown are two different games with two different rulebooks.
For decades, the winning strategy was simple: stay invested, ride out the downturns, keep contributing, and let compounding and averaging do the work. Time was on your side, and volatility was your friend. That is the nature of general market risk and market risk more broadly during the accumulation years.
At retirement, time compresses and volatility becomes your enemy — at least in that critical early window. Unlike general market risk, sequence risk becomes especially dangerous once withdrawals start, because losses and spending can compound the damage at the same time. The person who simply carries their accumulation-phase portfolio and mindset into retirement, without adjusting for sequencing risk, is taking a gamble they may not even realise they’re making. The transition from building wealth to drawing it is precisely where good advice earns its keep.
How Money Path Can Help
Sequencing risk is invisible until it isn’t. It doesn’t show up in a simple “how much do I need to retire” calculation, and it’s not something most people can see coming — which is exactly why so many retirement plans that look fine on paper come unstuck when a downturn lands in the wrong year.
At Money Path, managing sequencing risk is central to how we build retirement income strategies. We structure your portfolio so an early market fall doesn’t force you to sell growth assets at a loss — using cash and defensive buffers, a considered asset allocation for the risk zone, and a drawdown approach that flexes with conditions to protect your retirement portfolio’s ability to fund income needs and support your financial future. We model your plan against poor investment returns early, not just average ones, so you can see how it holds up in a bad start rather than an idealised one as withdrawals continue. And we integrate the Age Pension and any guaranteed income as a stable floor beneath your market-linked investments, with layered reliable income sources helping support stable cash flow and reduce sequence risk exposure.
The years around your retirement date are the ones where the right structure makes the biggest difference — and where mistakes are hardest to recover from. Getting the strategy right before you retire, or in those first crucial years, is one of the highest-value financial decisions you’ll ever make, because these strategies work together to improve portfolio longevity.
If you’re approaching retirement or recently retired, talk to the team at Money Path about building a retirement income strategy designed to survive a bad start, not just an average one.
Frequently Asked Questions
What is sequencing risk in simple terms? It’s the risk that the order of your investment returns — not just the average — decides whether your retirement savings last. Bad returns early in retirement, when your balance is largest and you’re withdrawing income, do far more damage than the same bad returns later. Two people with identical average returns can have completely different outcomes depending on timing.
Why does the order of returns matter after retirement but not before? While you’re contributing, a market fall lets you buy assets cheaply and you have time to recover, so downturns actually help. Once you’re withdrawing income, a fall forces you to sell more units to raise the same dollars, and those units are gone permanently — so early downturns cause lasting damage. That’s why regular withdrawals need careful management, so a downturn doesn’t lock in losses.
When is sequencing risk highest? In the “retirement risk zone” — roughly the five years before and five to ten years after you retire. This is when your balance is at its peak (so losses are largest in dollar terms) and you’ve started drawing income (so downturns become permanent rather than temporary).
How do I protect myself from sequencing risk? Common strategies include holding a cash and defensive buffer so you don’t sell shares in a downturn, adjusting your asset allocation as you approach retirement, building flexibility into your spending, and using stable income like the Age Pension as a floor. Flexible withdrawals can also help in a bear market. The right mix depends on your circumstances and is worth planning with an adviser.
Should I just move everything to cash when I retire? Generally no. Going entirely to cash swaps sequencing risk for longevity risk — the danger that inflation erodes your money and you outlive it over a 25–30 year retirement. The aim is to structure risk sensibly, not eliminate it, keeping enough growth exposure to last the distance while protecting against a bad early run.
Does the Age Pension help with sequencing risk? Yes. Because Age Pension payments aren’t linked to markets, they keep flowing regardless of what shares are doing. The more of your essential expenses covered by pension and other stable income, the less you’re forced to sell growth assets during a downturn and rely on market performance — which directly reduces sequencing risk.
I’m five years from retiring — should I be doing anything now? Potentially yes. The risk zone starts before you actually retire, so the years leading up to your retirement date are a key window to review your asset allocation, build buffers, and structure your drawdown plan. Addressing sequencing risk before you retire is far easier than reacting to a downturn after it hits.
This article is general information only and does not take into account your personal circumstances or objectives. Investment values can fall as well as rise, and past performance is not a reliable indicator of future performance. Always seek personal financial advice before making investment or retirement decisions.
