Sequence-of-Returns Risk: Why the First Five Years of Retirement Matter Most |
Every so often, the S&P/TSX Composite closes at a record high. It happens in clusters, it makes the evening business news, and then — after a pullback and a recovery — it happens again. That's simply what a long-term uptrend looks like from the inside. If you're 45 and still contributing to your RRSP every payday, that headline is straightforwardly good news.
If you're 64 and planning to start drawing an income from that portfolio next spring, it's a genuinely different question. Not a worse one — just different. Because the moment you stop adding money and start taking it out, a risk shows up that was never really on your radar during your working years. It has an unglamorous name: sequence-of-returns risk. And it's one of the few risks in financial planning that can meaningfully change the outcome of an otherwise well-built plan.
If you're 64 and planning to start drawing an income from that portfolio next spring, it's a genuinely different question. Not a worse one — just different. Because the moment you stop adding money and start taking it out, a risk shows up that was never really on your radar during your working years. It has an unglamorous name: sequence-of-returns risk. And it's one of the few risks in financial planning that can meaningfully change the outcome of an otherwise well-built plan.
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Two retirees, the same average return, two very different retirements.
Meet two hypothetical retirees. Both retire with $600,000. Both plan to withdraw $36,000 in year one, indexed to inflation at 2.5% each year after. Both earn an average of 6% per year over 25 years. Here's the only difference. Margaret hits a rough patch immediately — down 15%, then 10%, then 3% in her first three years, followed by 22 solid years averaging about 8%. Dave gets exactly the same returns in exactly the same amounts, just in the opposite order: 22 good years first, and the rough patch at the very end. Same math. Same average. Same withdrawals.
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One of them funded a 25-year retirement with change left over. The other ran dry with a decade still to go. Nothing separates them but the order of the returns.
A fair objection: $36,000 on $600,000 is a 6% withdrawal rate, which is aggressive by design — it makes the effect easy to see. So we ran it again at a more conservative $24,000. At that rate, neither retiree runs out. But Margaret ends with about $206,000 and Dave ends with over $1 million. The gap narrows. It never disappears.
What's actually happening here.
While you're saving, a bad market is a discount. Your contribution buys more units when prices are down, and those cheap units are the ones that do the heavy lifting when things recover. The order of returns genuinely doesn't matter — only the destination does.
Once you're withdrawing, the machinery runs in reverse. To fund a withdrawal in a down year, you have to sell units at depressed prices, which means selling more of them to raise the same $3,000 a month. Those units are gone. When the rebound arrives — and historically it does — there's simply less capital left to participate in it. You didn't just lose money. You lost the ability to earn it back.
That's the whole concept: in accumulation, volatility is a discount; in de-cumulation, it's a permanent withdrawal from your future.
This is not the opposite of "stay invested."
We've written before about the importance of not panicking in a downturn, and we stand behind every word. Selling in fear and sitting in cash is still one of the most expensive mistakes a Canadian investor can make.
But "stay invested" and "sequence risk" aren't in conflict — one refines the other. The accumulator's job is to ignore the noise. The retiree's job is to not be forced to sell into it. The behaviour is the same; the structure underneath it has to change. You need a plan that lets you stay invested, even in a year when the market is down 12% and the bills still arrive.
The Huron County version of this.
We see a specific pattern in our office. Someone sells the family farm outside Clinton or Dungannon, or takes a commuted value from a local pension, and suddenly there's a large, one-time number in an account. Markets are at a record. The temptation is to look at that number, do the arithmetic, and lock in a lifestyle around it.
The number on the statement is real. The assumption that it will keep growing on schedule while you withdraw from it is the part worth stress-testing — especially if the whole retirement started at a market peak.
Three practical defences.
None of these require predicting the market, which is fortunate, because nobody can.
Here's the honest result when we ran Margaret's terrible sequence again with a two-year cash wedge, a temporary 10% spending trim, and three skipped inflation adjustments: her money lasts the full 25 years instead of running out in year 15. It also finishes thin. These tactics buy durability, not returns.
Bottom line - A record-high market is a good thing. It is not, by itself, a retirement plan. If you're within five years of drawing an income from your portfolio, the question that matters most isn't "what did the market do this week?" — it's "what happens to my income if the first three years go badly?"
A fair objection: $36,000 on $600,000 is a 6% withdrawal rate, which is aggressive by design — it makes the effect easy to see. So we ran it again at a more conservative $24,000. At that rate, neither retiree runs out. But Margaret ends with about $206,000 and Dave ends with over $1 million. The gap narrows. It never disappears.
What's actually happening here.
While you're saving, a bad market is a discount. Your contribution buys more units when prices are down, and those cheap units are the ones that do the heavy lifting when things recover. The order of returns genuinely doesn't matter — only the destination does.
Once you're withdrawing, the machinery runs in reverse. To fund a withdrawal in a down year, you have to sell units at depressed prices, which means selling more of them to raise the same $3,000 a month. Those units are gone. When the rebound arrives — and historically it does — there's simply less capital left to participate in it. You didn't just lose money. You lost the ability to earn it back.
That's the whole concept: in accumulation, volatility is a discount; in de-cumulation, it's a permanent withdrawal from your future.
This is not the opposite of "stay invested."
We've written before about the importance of not panicking in a downturn, and we stand behind every word. Selling in fear and sitting in cash is still one of the most expensive mistakes a Canadian investor can make.
But "stay invested" and "sequence risk" aren't in conflict — one refines the other. The accumulator's job is to ignore the noise. The retiree's job is to not be forced to sell into it. The behaviour is the same; the structure underneath it has to change. You need a plan that lets you stay invested, even in a year when the market is down 12% and the bills still arrive.
The Huron County version of this.
We see a specific pattern in our office. Someone sells the family farm outside Clinton or Dungannon, or takes a commuted value from a local pension, and suddenly there's a large, one-time number in an account. Markets are at a record. The temptation is to look at that number, do the arithmetic, and lock in a lifestyle around it.
The number on the statement is real. The assumption that it will keep growing on schedule while you withdraw from it is the part worth stress-testing — especially if the whole retirement started at a market peak.
Three practical defences.
None of these require predicting the market, which is fortunate, because nobody can.
- A cash or GIC "wedge." Hold roughly one to two years of planned withdrawals — about $70,000 to $75,000 in our example — in cash or short-term GICs. In a bad year, you spend from the wedge and leave your equities alone to recover. There's an honest cost. What safe money pays you rises and falls with the Bank of Canada's rate cycle — generous in some stretches, thin in others — but over a full retirement it will almost certainly trail your equities. The size of that gap depends on where in the cycle you happen to be sitting. Think of it as an insurance premium.
- Flexible spending. The willingness to skip an inflation adjustment or trim discretionary spending for a year or two in a bad market is worth more than most investment decisions you'll make. And "inflation" for a retiree is rarely the headline number. Reported CPI is an average across a basket of goods that doesn't look much like a retired household's spending. In any given stretch, the categories retirees are most exposed to — groceries, fuel, travel — can run well ahead of the national figure, and a spike in one of them shows up in your budget long before it shows up in the summary statistic. Plan against your own cost of living, not the number in the news.
- Withdrawal-order awareness. Which accounts you draw from first — non-registered, TFSA, RRSP or RRIF — affects both your tax bill and your resilience, particularly around OAS clawback thresholds and minimum RRIF withdrawals. That's a full conversation of its own, but it belongs in the same plan.
Here's the honest result when we ran Margaret's terrible sequence again with a two-year cash wedge, a temporary 10% spending trim, and three skipped inflation adjustments: her money lasts the full 25 years instead of running out in year 15. It also finishes thin. These tactics buy durability, not returns.
Bottom line - A record-high market is a good thing. It is not, by itself, a retirement plan. If you're within five years of drawing an income from your portfolio, the question that matters most isn't "what did the market do this week?" — it's "what happens to my income if the first three years go badly?"
Same Returns, Same Average — Wildly Different Outcomes
Margaret and Dave both retire with $600,000 and both average 6% annual returns over 25 years. The only difference is the order the returns arrive in. That order alone decides whether the money lasts.
Margaret — bad returns first
Dave — bad returns last
Starting balance (both)
$600,000
Margaret runs out
Year 15
Dave, after 25 years
$345,000
Illustrative simulation: $600,000 starting portfolio, $36,000 first-year withdrawal indexed 2.5%/year, 25 identical annual returns averaging 6%, reordered. Not investment advice — actual results depend on your own withdrawal rate, asset mix, and market conditions.
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This article is for general information purposes and does not constitute personalized financial or insurance advice. Speak with your advisor about the coverage that's right for your situation.
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Article written in August 2026
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