Sequence Risk in Retirement
Someone who has spent decades saving, investing through market cycles, and building toward a retirement date may reasonably expect the same portfolio discipline to carry them forward. But once the paycheque stops and withdrawals begin, the portfolio is no longer only a long-term investment account. It becomes part of the household income system.
That change creates sequence-of-returns risk: the possibility that poor market returns early in retirement will have a disproportionate effect on the years that follow. A diversified portfolio and a sound long-term return assumption still matter, but the order in which returns arrive can matter just as much when money is being withdrawn.
Why Retirement Changes the Math
During working years, market volatility occurs while new money is still going into the portfolio. Regular contributions continue, lower prices can mean buying more investments, and there may be many years before the money is needed. A difficult market is unpleasant, but it does not usually affect this month’s household cash flow.
In retirement, the direction of cash flow reverses. The portfolio may need to provide income alongside a defined benefit pension, CPP, OAS, RRSP or RRIF withdrawals, a TFSA, and non-registered investments. If markets decline while the household is also drawing income, investments may need to be sold at reduced values to meet spending needs.
The instinct to remain invested and trust the long term is understandable. It is often the discipline that built the portfolio in the first place. The additional planning question is whether the first five years can withstand an unfavourable market path without forcing withdrawals that weaken the portfolio’s ability to recover.
Average Returns Can Mislead
Many retirement projections begin with an average annual return. That is a useful starting point, but it can conceal an important practical difference: the path of returns matters once withdrawals start.
Consider two retirees with the same starting portfolio and the same annual withdrawal. Over 10 years, each receives the identical set of annual market returns, so their average return is the same. In one case, however, the weaker years occur first. In the other, the stronger years arrive first and the weaker years come later.
If neither retiree made withdrawals, the order of those returns would not change the ending value. With withdrawals, it does. The retiree who experiences losses first must take income from an account that has already declined. When markets later recover, the recovery applies to a smaller remaining balance.
The retiree with stronger early returns has a larger base before the weak years arrive. They still experience volatility, but earlier withdrawals were made from a stronger portfolio. This is why two retirement plans with the same long-term average return can produce materially different outcomes.
When Withdrawals Amplify Losses
Sequence risk is not caused by a market decline alone. It is caused by the combination of a decline and ongoing withdrawals. The same dollar withdrawal represents a larger percentage of a portfolio after its value has fallen, which can require selling more units or shares at lower prices.
Consider Maya and Daniel, a hypothetical Ontario couple, both age 65 and recently retired. Their defined benefit pensions cover about 40% of their target annual spending. They also hold approximately $1.5 million in RRSP assets, fully funded TFSAs, and $300,000 in a non-registered account. They have no debt and plan to begin CPP and OAS at 65.
They have saved well and have meaningful guaranteed income. Yet their pensions do not cover all of their planned spending. If markets fall during their first retirement year, they may still need withdrawals from their RRSPs or non-registered account to fund the remaining lifestyle costs.
If those withdrawals remain fixed, Maya and Daniel would be taking more from a portfolio that is already down. Their pensions reduce the pressure, but they do not eliminate it. A household without pension income, relying more heavily on portfolio withdrawals for essential spending, would face greater exposure.
For this reason, the useful question is not whether markets will decline at some point. They will. The question is whether the household’s withdrawal plan requires too much selling if the decline arrives near the beginning of retirement.
Build Defences Before Retirement
The answer is usually not to eliminate market exposure just before retirement. A retirement that may last 25 or 30 years still needs growth. The objective is to protect the portion of the plan most exposed to poor timing while preserving enough long-term return potential.
Maintain a near-term reserve
A cash or short-term bond reserve can cover some near-term portfolio-funded spending needs. This does not mean moving the entire portfolio to cash. It means determining how much of the next few years of withdrawals should be insulated from market volatility.
Cash may appear inefficient when assessed only by expected return. Its role in a retirement plan is different. If a reserve avoids forced sales of growth assets during a market decline, it can support the broader plan even if the reserve itself earns less.
Separate essential and discretionary spending
Flexible withdrawals are equally important. Core costs such as housing, food, insurance, and property taxes have to be paid. Travel, a vehicle purchase, a renovation, or additional family gifting may be adjusted if markets are weak.
For Maya and Daniel, reducing discretionary spending for a year or two could lower portfolio withdrawals without changing the essentials of their life. This is not about placing retirement on hold. It is about deciding in advance which expenses can move, rather than making reactive choices after a market decline.
Use a first-phase portfolio structure
The early retirement portfolio may need a more deliberate balance between growth assets and stable assets. Depending on the household, this can include a structure that provides safer holdings for planned withdrawals during weak markets while allowing longer-term assets to remain invested.
These measures work best together. A reserve can be depleted quickly when spending is completely rigid. Spending flexibility is harder to use when there is no stable source of cash. A portfolio that is too conservative may reduce short-term volatility but create a different problem if long-term growth is insufficient.
Income Sources Change the Answer
There is no universal rule for the right cash reserve, withdrawal rate, or portfolio allocation. The appropriate defence depends on how retirement income is built.
Guaranteed income is a starting point. When a defined benefit pension, CPP, and OAS cover most core spending, a household may have greater freedom to reduce portfolio withdrawals in a weak market. When the portfolio must fund a large share of essential costs, the need for reserves, flexibility, and a protective first-phase structure is more pronounced.
CPP timing can also affect sequence risk. Deferring CPP after age 65 increases the monthly benefit by 0.7% for each month of deferral, up to age 70. That can strengthen guaranteed income later and reduce long-term reliance on the portfolio. However, deferral creates a bridge period that must be funded from somewhere.
If the bridge is funded by selling investments after an early market decline, delaying CPP can add pressure during the very period the plan is trying to protect. If it is funded through a cash reserve, planned withdrawals, or deliberate account sequencing, the trade-off may be more favourable. The decision needs to be assessed within the full income plan rather than in isolation.
Account type matters as well. RRSP and RRIF withdrawals are taxable. Selling from a non-registered account may realize capital gains. TFSA withdrawals are tax-free, but using TFSA assets early may reduce tax-sheltered growth that could be valuable later.
Tax interactions can add another layer. In 2026, OAS recovery begins when net world income exceeds $95,323. For a couple with pension income, CPP, OAS, RRSP or RRIF withdrawals, and investment income, a large taxable withdrawal can create OAS recovery even when spending itself is not unusually high. The threshold is based on income, not on how the withdrawal was used.
Test the First Five Years
A retirement plan should be tested for more than its long-term average return. The first five years deserve separate attention because they establish the withdrawal pattern, place new demands on the portfolio, and leave little time for later returns to offset a difficult start.
Before retirement begins, it is useful to map core spending against guaranteed income and identify how much must come from investments. The next step is to determine which accounts would fund those withdrawals, what spending could be adjusted temporarily, and how the plan would respond if weak market years arrive first.
- Compare essential household spending with pension, CPP, and OAS income.
- Identify the portfolio-funded amount needed in each of the first five years.
- Determine whether near-term withdrawals have a stable funding source.
- Separate expenses that must continue from those that can be deferred.
- Test account withdrawals, taxes, and OAS recovery under an early market decline.
The goal is not to predict the next bear market. It is to create enough structure that normal spending does not become forced selling when markets are difficult. That can make the first years of retirement less dependent on the market behaving well at exactly the wrong time.
Coordinate the Plan
Sequence-of-returns risk is a portfolio issue, but the response is broader than investment selection. It involves income sources, CPP and OAS timing, account sequencing, tax consequences, cash reserves, and the household’s ability to adjust spending.
If you are approaching retirement or have recently started withdrawals, Ferguson Financial Planning can model how an early market decline would affect your specific income plan. A coordinated review can show how pensions, registered accounts, non-registered assets, taxes, and spending flexibility fit together before difficult market conditions force the decision.
CI Assante Wealth Management Ltd. is a Member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc.