Sequencing Risk: Why the Order of Investment Returns Matters in Drawdown

What Is Sequencing Risk?

Sequencing risk is one of the most important concepts in retirement income planning, yet it is frequently overlooked by people managing their own drawdown arrangements. It refers to the risk that the order in which investment returns occur — not just the average return — has a profound and permanent effect on how long your pension pot will last.

The essential insight is this: in retirement drawdown, a period of poor investment returns early in retirement causes far more damage to your pot's longevity than the same period of poor returns occurring later. This is true even if the average return over the entire retirement period is identical in both cases. The timing of losses relative to the period when you are drawing income is what determines the outcome.

This is counterintuitive to many investors, who are accustomed to thinking about investment risk in terms of average returns. In the accumulation phase — when you are saving into a pension — average returns are indeed the primary measure of performance. In the drawdown phase, they are not.

Why Sequencing Risk Does Not Apply in Accumulation

To understand why sequencing risk is specific to drawdown, it helps to contrast drawdown with accumulation.

During accumulation, you are making regular contributions to your pension. If markets fall significantly in year five of your career, the value of your existing pot falls. But you continue to invest, and each new contribution now buys investment units at lower prices. If the market subsequently recovers, you have acquired a greater number of units at cheap prices, which amplifies your gains on the way back up. This effect — called pound-cost averaging — means that market volatility during accumulation can actually enhance long-term returns.

In drawdown, the dynamic is precisely the opposite. Instead of buying units, you are selling them to fund your income. If markets fall in year two of retirement, you must sell units at depressed prices to meet your income needs. Each unit you sell at the low price is a unit that is permanently gone — it cannot benefit from the subsequent market recovery. The more units you sell at the bottom, the fewer you have to recover with when markets rise again.

This asymmetry — accumulation benefits from pound-cost averaging, drawdown is harmed by it in reverse — is why sequencing risk is a retirement-specific phenomenon.

A Worked Example

Consider two retirees, both with a £400,000 pension pot at age 65, both drawing £20,000 per year, and both experiencing an average annual return of 5% over 20 years. The only difference is the order of their returns.

Retiree A: Poor years first. The first five years of retirement produce returns of minus 15%, minus 10%, minus 5%, 0%, and 5%. Years six through twenty produce strong returns that bring the average up to 5% over the full period.

Retiree B: Poor years last. Retiree B experiences the strong returns first, enjoying excellent portfolio growth in years one through fifteen, followed by the same poor returns in years sixteen through twenty.

Despite having the same average return and the same withdrawal rate, Retiree A's pot may be depleted entirely by year 17 or 18. Retiree B's pot at age 85 may still have £200,000 or more remaining. The difference in outcome is not due to different investment performance over the period — it is entirely due to the order in which the same returns occurred.

The reason is that Retiree A was forced to sell large numbers of units at low prices in years one to five, just when the portfolio was at its weakest. Each unit sold to fund the £20,000 annual income in a year of minus 15% returns was sold at a far lower price than it would have been worth in the recovery years. The permanent loss of those units, compounded over subsequent years, ultimately exhausted the fund.

Why Early Losses Are Most Damaging

The damage caused by poor returns is proportional to the size of the pot at the time, and is magnified by withdrawals. In year one, your pot is at its largest. A 20% fall on £400,000 represents a loss of £80,000. You then withdraw £20,000 on top of that. Your pot is now £300,000. To recover to £380,000 (the pre-fall value minus one year's withdrawals), you need a gain of approximately 27% — and you have fewer units to generate that gain.

By contrast, a 20% fall occurring in year fifteen — when the pot, after 14 years of withdrawals, might be much smaller — represents a smaller absolute loss and affects a smaller number of remaining units. It is still painful, but it is materially less damaging to the long-term sustainability of the drawdown.

Strategies to Manage Sequencing Risk

There is no way to eliminate sequencing risk in drawdown entirely — short of purchasing an annuity, which removes the investment component. However, several strategies can materially reduce its impact.

Cash Buffer

Holding one to two years of planned withdrawals in cash or cash-like assets (money market funds, short-term bonds) within or alongside the drawdown plan provides a buffer against needing to sell growth assets during market downturns. When markets fall, income is drawn from the cash buffer. When markets recover, the buffer is replenished from the portfolio.

This strategy does not prevent the portfolio from falling in value — the unrealised loss is still there. But it prevents the catastrophic element of sequencing risk: selling units at the bottom. The portfolio has time to recover before withdrawals resume from it.

Bucket Strategy

The bucket strategy extends the cash buffer concept into a structured multi-layer portfolio. The first bucket holds one to two years of income in cash. The second bucket holds three to seven years of income in lower-volatility assets such as bonds and multi-asset funds. The third bucket holds longer-term growth assets — equities, property funds — intended to be accessed only after seven or more years.

Income is drawn from the nearest bucket. Replenishment flows from the longer-term buckets to the shorter-term ones during positive market periods. This means the equity exposure is never touched until it has had several years to grow, substantially reducing the probability of selling equities at a loss to meet income needs.

Flexible Withdrawals

If your drawdown arrangement and budget allow, reducing withdrawals in years when markets have fallen is one of the most effective sequencing risk management tools. Rather than taking £20,000 every year regardless of market conditions, scaling back to £15,000 or less in a poor year — if your spending can accommodate it — significantly reduces the number of units sold at depressed prices.

This strategy requires income flexibility that not everyone has. It works best when a guaranteed income floor (State Pension, DB pension, or annuity) covers essential expenses, and drawdown is used for discretionary spending that can be reduced in bad years.

Annuity for Base Income

Annuitising enough of the pension pot to cover essential expenses removes sequencing risk from the income that matters most. If your essential bills are met by a guaranteed income floor, the drawdown portfolio can be managed with greater patience and flexibility. You do not need to sell assets at depressed prices to meet non-discretionary spending because that spending is already guaranteed.

This is the rationale behind our blended approach — combining a guaranteed income foundation with drawdown for discretionary needs and estate planning.

Lower Initial Withdrawal Rate

Starting with a more conservative withdrawal rate — 3.0% to 3.5% rather than 4% — provides a larger portfolio buffer against early losses. The portfolio can absorb a significant early fall and still sustain income at the planned rate, because there are more assets available to recover with. This comes at the cost of a lower initial income but significantly improves long-term sustainability.

The 4% Rule and Sequencing Risk

The 4% rule — developed by financial planner William Bengen in 1994 — is based on historical US market data going back to 1926 and identifies 4% as the withdrawal rate that would have survived the worst historical market sequences, including the Great Depression and other severe downturns.

The rule provides a useful reference point, but it has important limitations in the context of sequencing risk. It is based on US market history, which may not replicate for UK or international investors. It assumes a 30-year retirement — many of our clients need their pot to last 35 or 40 years. It does not account for fees. And critically, there are historical start dates even in the US data that produced fund exhaustion — the rule provides a high probability of success, not a guarantee.

For our clients, we do not treat 4% as a universal rule. We model client-specific scenarios based on their pot size, income needs, guaranteed income sources, risk tolerance, and retirement horizon, and we assess sustainable withdrawal rates within that context.

Our Sequencing Risk Management Framework

At Global Investments, our approach to sequencing risk combines several of the strategies described above, calibrated to each client's individual circumstances.

For clients in the early years of drawdown — where sequencing risk is at its greatest — we typically recommend maintaining a meaningful cash or near-cash buffer, with the portfolio's equity exposure structured to match the client's medium-term risk tolerance rather than their long-term capital growth aspiration. As retirement progresses and the sequencing risk window closes — broadly, after the first seven to ten years — the strategy can shift to reflect the changing balance of objectives.

We review drawdown strategies at least annually, and more frequently if market conditions warrant. We will also discuss with clients whether their withdrawal rate remains appropriate in the context of current portfolio performance and the remaining retirement horizon.

How Global Investments Can Help

Sequencing risk is one of the key risks we focus on when building and reviewing drawdown plans for our clients. Our structured approach — combining cashflow modelling, portfolio construction, withdrawal rate analysis, and stress-testing against adverse market scenarios — is designed to give clients confidence that their drawdown plan is resilient to the kind of early market falls that history shows can occur at any point.

We also work with clients to establish a guaranteed income floor — through State Pension optimisation, DB pension strategy, or selective annuitisation — that removes sequencing risk from their essential spending. If you are in drawdown or approaching retirement and would like your sequencing risk exposure assessed, please contact our pensions team.

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Pension rules and investment outcomes are uncertain. Past market performance does not guarantee future results. Investments can fall as well as rise and you may get back less than you invest. The information in this guide reflects the position as of June 2026. This guide is for information purposes only and does not constitute regulated financial advice. Please seek advice from a qualified pension adviser.