Let’s start with a simple example.
Two people retire on the same day with the same $1,000,000. They own the same portfolio, they earn the same returns, and they each withdraw $50,000 a year for living expenses. They should end up in the same place, right?
Not necessarily.
Imagine that over their first three years, both portfolios earn exactly the same three returns: one year down 20%, and two years up 15%. The only difference is the order.
The first retiree gets the bad year first: down 20%, then up 15%, then up 15% again. After three years of $50,000 withdrawals, they have about $884,000 left.
The second retiree gets the good years first: up 15%, up 15%, then down 20%. After the same three years and the same withdrawals, they have about $922,000 left.
Same returns. Same average. Same spending. Almost a $38,000 difference in just three years — and that gap tends to grow, not shrink, over a 25- or 30-year retirement.
That difference has a name: Sequence of Return Risk. I would argue it is one of the most underappreciated risks in retirement, because it is almost completely invisible while you are still saving.
Why Time Saving and Time Spending Are Vastly Different
While you are working and contributing, the order of your returns barely matters. In fact, a downturn can actually help you. Every paycheque buys more shares at lower prices, and those shares are still there when the market recovers. If neither of our two retirees above had withdrawn a single dollar, both would have ended those same three years with exactly the same amount: about $1,058,000. The order made no difference at all.
Everything changes the day the paycheque stops and the withdrawals begin.
Now a downturn works against you. You are no longer buying the dip — you are selling into it to pay for groceries, property tax, and everything else. And shares sold in a decline are gone. They do not participate in the recovery, no matter how strong that recovery turns out to be.
This is why research suggests that the returns you experience in roughly the initial years of retirement can drive the majority of your final outcome. Your 30-year average can look perfectly fine on paper while the order those returns arrived in quietly does the damage.
Why Market Declines Are Not Symmetrical
There is a second piece of math that makes this so unforgiving, and most people underestimate it.
A 10% loss needs an 11% gain just to get back to even. That feels manageable. But a 30% loss needs a 43% gain, and a 50% loss needs a 100% gain — the market has to double — just to return to where you started. The deeper the hole, the steeper the climb.
Now add withdrawals to that hole. Say you start the year with $1,000,000, the market falls 10%, and you withdraw $40,000 during the year to live on. Your portfolio did not finish the year down 10%. It finished closer to $860,000 — down almost 14%. To get back to $1,000,000 the following year, while still withdrawing that $40,000, the market would not need to return 14%. It would need to return roughly 21%.
An ordinary decline after accounting for the necessary retirement income became a much larger problem, simply because you were spending while it happened.
Now, don’t forget to add the tax collector — which is the part that most of the “free advice” leaves out.
You may have heard of the 4% rule, which comes from research done in the 1990s on how much a retiree could withdraw each year without running out of money. It is a useful starting point, but it is a pre-tax number. Most Canadians do not get to keep every dollar they withdraw.
If you need $40,000 to live on and you pull it from your RRSP or RRIF, every dollar of that withdrawal is taxable income. At a 20% effective tax rate, you would actually need to withdraw $50,000 to have $40,000 left to spend. That “4% lifestyle” is really a 5% withdrawal from your portfolio — and it is the 5% number, not the 4% number, that your portfolio feels.
A TFSA is the opposite. Withdrawals are tax-free, so what you take out is what you get to spend. A non-registered account sits somewhere in between, because only the capital gains, dividends, and interest are taxed, not the full withdrawal.
This is why the order you draw from your accounts matters almost as much as the order your returns arrive in. The larger the withdrawal your portfolio has to fund, the faster a temporary market decline early in retirement can pull your plan off course.
“Markets always recovered” misses the point for someone in retirement.
Over long periods of time, markets have always recovered. That is true, and for a 35-year-old who is still saving, “stay the course” is close to the right advice. Time is on their side, and every contribution during a downturn is working in their favour.
For a retiree, the math is different. The market took roughly 13 years to get back to its 2000 peak after adjusting for inflation. A saver could wait that out — and benefit from it. A retiree spending through those 13 years could not. Every withdrawal during the wait was capital that never got the chance to recover.
“Ride it out” quietly assumes you are not spending the portfolio while you ride.
What You Can Actually Control
You cannot predict the sequence of returns you will get. No one can. But as Howard Marks puts it, you can’t predict, but you can prepare. Here are some things that you can do:
i) Keep one to two years of spending set aside. Hold that amount in cash or short-term, high-quality bonds. When markets fall, you spend from this reserve instead of selling investments at the bottom, and you refill it once markets recover. Yes, there is a small cost to holding cash in a strong market. There is a price to feeling comfortable during market declines when many people around you are freaking out.
ii) Separate your essentials from the market. If CPP, OAS, and any pension income cover your basic living costs, then your portfolio only has to fund the extras — travel, gifts, the fun stuff — where spending can flex. When your groceries don’t depend on the stock market, a bad sequence becomes an inconvenience, not a crisis.
iii) Be flexible with your spending. A small, temporary reduction in withdrawals after a bad year does an enormous amount of work, because it stops the spiral before it builds momentum. Research on these income “guardrails” — trimming a little after poor returns and allowing a little more after good ones — shows that flexibility alone can make a plan far more durable than a rigid one.
iv) Match your starting withdrawal rate to your starting point. Retiring into an expensive market, where future returns are likely to be lower, calls for a more cautious start than retiring into a cheap one. Starting slightly leaner costs far less than running short later.
v) Don’t take more risk than you need to in the early years. Because the first decade matters so much, some retirees hold a bit more in bonds early in retirement and let their equity exposure rise later, once the most dangerous window has passed. The goal in those early years is not to maximize your return. It is to avoid a hole you can’t climb out of.
vi) Plan your withdrawals with tax in mind. Which account you draw from, and when, changes how much your portfolio actually has to provide. Sometimes that means drawing from different accounts in different years, or using a low-income year — often the years between retirement and starting CPP, OAS, or your required RRIF withdrawals — to your advantage.
Bringing It Back to Your Plan
Sequence of return risk is not a reason to avoid investing in retirement, and it is not a reason to sit in cash for 30 years. Inflation would quietly do its own damage if you did that.
It is a reason to build a retirement plan that can survive a bad first decade, instead of one that only works if the good years show up first.
This is exactly why a financial plan matters more in retirement than it ever did while you were saving. Your plan should already account for corrections, bear markets, and poor early returns — and show you what levers you can pull if they arrive. If it does, then a bad year is something you prepared for, not something you have to react to.
If you’ve done the best you can, then go easy on yourself. You cannot control the order the market hands you. You can control how prepared you are for it.
Want to chat more about how this applies to your retirement? Reach out to me at info@financerx.ca.
Jesse Ogloff, B.Comm, PFP, CFP, CIM, CFDS
Associate Wealth Advisor / Associate Portfolio Manager
CIBC Wood Gundy
