When clients ask what return they can expect in retirement, it is a fair question — but it is not the one that determines whether the plan holds. What matters more is when those returns arrive, especially in the first few years after you stop earning a salary and your portfolio has to fund your income.
That timing risk is known as sequencing risk. It refers to the damage caused when poor market returns occur early in retirement while you are still withdrawing from the portfolio. Two retirees can start with the same capital, invest similarly, and draw the same income, yet end up with completely different outcomes purely because one hit a weak patch early and the other later — even if their long-term average returns look similar.
While you are still working and saving for retirement, market downturns may be uncomfortable, although generally manageable. Making regular contributions means that you are buying more investments while prices are lower and time is on your side. However, in retirement, this dynamic can work against you as you no longer add money but take it out. If markets fall early on, you are essentially forced to realise more units to generate the same income, thereby permanently reducing the capital that can benefit from any later recovery. This means that, even if markets come back strongly, your portfolio may never fully recover because too much was withdrawn at depressed prices.
In South Africa, sequencing risk is especially relevant because many retirees use living annuities. While living annuities offer flexibility and unique estate planning advantages, it’s important to note that investment risk rests with the retiree – and while drawdowns are regulated within a minimum and maximum range, those limits alone do not guarantee sustainability. If the drawdown is too high relative to the portfolio’s return path — especially in the early years — the damage can be difficult to undo.
Understanding sequence of return risk in real life
In our experience, sequencing risk generally doesn’t appear as a single event – but through a combination of events that happen together at a vulnerable time. Remember, retirement is often accompanied by major once-off decisions that may include settling a bond, upgrading ga vehicle, renovating a home, helping adult children, or taking a lump sum for lifestyle reasons. All of this tends to happen just as your earned income falls away while markets continue to do what markets do.
Generally speaking, the riskiest years tend to span the five years leading up to retirement through the first ten years of retirement. This is because, during this window, there is little opportunity to rebuild capital – not to mention that emotional decision-making can play a role. From experience, we know that the biggest long-term damage is not caused by a market decline itself, but by what happens next. A sudden switch to cash, an abrupt move to ‘play it safe’, or a wholesale portfolio change after a bad year can lock in losses and prevent recovery – resulting in temporary market volatility becoming a permanent setback.
Practical ways to reduce sequencing risk
While there is no way to eliminate sequencing risk, it is possible to reduce its impact by building flexibility and discipline into the early years of retirement. In practice, this is less about creating a separate ‘bucket’ of money and more about designing a withdrawal strategy that can adapt when markets do not cooperate. That means avoiding rigid, fixed drawdowns where possible, having clear rules for when income should be reduced after weaker periods, and maintaining a portfolio that is constructed to support both short-term stability and long-term growth. When the plan is structured this way, you are far less likely to be forced into selling the wrong assets at the wrong time — and, importantly, less likely to make reactive changes that turn a normal market decline into permanent capital damage.
It’s important to note that this is not about trying to predict markets but rather ensuring that you can continue to pay yourself during a difficult period without selling long-term growth assets at the wrong time. It also creates psychological breathing room while reducing the likelihood of panic.
You also need to think carefully about how much income you draw from your investments – keeping in mind that drawdown decisions are not ‘set and forget’. The most resilient plans are those that use drawdown rates as a guardrail with the option to revisit as and when conditions change. Naturally, essential expenses take precedent, while nice-to-have expenses can remain flexible. After a year of strong market returns, you may be in a position to loosen a little, while after a weaker year, you may need to tighten expenditure. In our experience, the retirees who do best are not the ones who refuse to change their income at all costs, but the ones who make small, early, temporary adjustments before a short-term dip becomes a long-term problem.
Naturally, portfolio construction is an important element in retirement, keeping in mind that your portfolio has two jobs, which is (a) remain steady enough to fund income even when markets are unsettled, and (b) grow sufficiently so that inflation doesn’t shrink your purchasing power over your retirement period. This means if you’re invested too conservatively, your lifestyle can be eroded by rising costs; whereas if you’re invested too aggressively, a market downturn early on can force you to sell investments at the wrong time to keep the income going. The right mix depends on how much you are drawing, how long the money needs to last, what other income you have, and whether you can adjust spending when conditions are tougher.
Having said that, sometimes the most effective solution is not to make any investment changes, but to explore alternative options to make your retirement plan more resilient, which could include delaying retirement slightly, working part-time or consulting, or using discretionary savings to fund the early years. Remember, even a short period with lower or no drawdowns can materially improve the resilience of your retirement plan.
Finally, it is important to plan explicitly for irregular, ‘lumpy’ expenses such as cars, home maintenance, medical costs and family support. A dedicated reserve gives you somewhere to draw from without being forced to sell growth assets at the wrong time, which is how a short-term dip becomes lasting damage. Keep in mind that, without the reserve, you may need to fund such expenses from whatever is easiest to sell – which, in turn, can lock in losses and shrink your capital base.
Sequencing risk often happens quietly through a combination of withdrawals, market cycles, and human behaviour – and the solution lies in the robustness of your plan. It’s important your retirement plan includes appropriate liquidity planning, a flexible income strategy, and a portfolio that is designed for both stability and growth – and optionality if markets are not favourable during the first few years of retirement.
Have a great day.
Sue
