Sequencing Risk in Drawdown Explained Updated for 2026/27

Sequencing risk, sometimes called sequence-of-returns risk, is one of the least understood but most important concepts in retirement income planning, precisely because it behaves so counterintuitively. Most people naturally think about investment returns as an average: if your investments return 5% a year on average over 20 years, surely it shouldn't matter which specific years were good and which were bad? For someone still saving into a pension, that's broadly true. But for someone simultaneously withdrawing money from a pension, the order in which good and bad years happen to occur can make an enormous difference to how long the money lasts, even when the average return over the whole period is identical. This page explains what sequencing risk means in plain English, walks through a clear illustrative example, and looks at practical strategies for managing it.

What sequencing risk means in plain English

In plain English, sequencing risk means that a market downturn happening early in your drawdown years can do lasting damage to your pension pot in a way the exact same downturn happening later, or not withdrawing at all, simply wouldn't. The reason comes down to a simple mechanical fact: when you withdraw a fixed amount of money from an investment pot during a downturn, you're forced to sell more shares or units to raise that same amount of cash, because each unit is worth less. Selling more units at depressed prices permanently reduces the number of units you have left to benefit from the eventual recovery, in a way that never happens if you're not withdrawing money during the fall, or if the fall happens after you've already built up a larger buffer through years of earlier growth.

A clear illustrative example

To make this concrete, imagine two savers, both starting drawdown with an identical pot of £250,000, both withdrawing £12,500 a year, adjusted for inflation, and both experiencing exactly the same set of annual investment returns over 20 years, just in a different order. The first saver, call her Alice, experiences a run of poor returns in her first five years of drawdown, including a couple of years with sharp falls, followed by 15 years of steadier, more positive growth. The second saver, call him Ben, experiences the exact same 20 years of returns as Alice but in reverse order — 15 years of steady growth first, followed by the poor run and sharp falls in his final five years. Even though both savers experienced literally the same sequence of returns, just running in opposite directions, and therefore the same average annual return over the full 20 years, Alice's pot is very likely to run out considerably earlier than Ben's, or leave her needing to make much larger cuts to her withdrawals along the way, purely because her poor years happened while her pot was smaller and she was actively withdrawing from it.

This example illustrates why sequencing risk is sometimes described as one of the cruellest quirks of retirement investing — it means that two people who did everything else identically, saved the same amount, retired at the same age, invested in the same funds, and withdrew the same percentage, can end up with dramatically different outcomes purely due to the accident of when a market downturn happened to occur relative to their own retirement date. There's no way to control or predict when a downturn will occur, which is precisely why sequencing risk needs to be actively managed through strategy, rather than simply hoped away.

Why it matters far more in decumulation than accumulation

Sequencing risk matters far more to someone in the "decumulation" phase, withdrawing money regularly from a pot, than to someone still in the "accumulation" phase, paying money in regularly. Someone still contributing to a pension actually benefits, in a sense, from a market downturn early in their working life, because they're buying more units at lower prices with each regular contribution, a phenomenon often called pound-cost averaging, and they have decades ahead for the market to recover before they need the money. Someone withdrawing money regularly experiences the mirror image of that effect: a downturn means they're selling units at lower prices, locking in losses in a way that pound-cost averaging in reverse makes considerably worse than if they'd simply left the pot untouched. This is a core reason why investment risk needs to be thought about differently as you move from saving for retirement into actually living off your pension pot.

Practical strategies to manage sequencing risk

A range of practical strategies exist to help manage sequencing risk, without needing to accurately predict when the next market downturn will happen, which nobody can reliably do. One widely used approach is holding a cash or lower-risk buffer, sometimes covering one to three years of essential spending, specifically so that a market downturn doesn't force you to sell growth investments at depressed prices to fund your immediate income needs — instead, you can draw from the buffer during a downturn and let the growth assets recover before you need to touch them again. A second approach is adopting a flexible withdrawal rate, reducing withdrawals, even temporarily, during a period of poor investment performance, rather than mechanically maintaining a fixed, inflation-adjusted withdrawal regardless of how the underlying pot is performing, which reduces how many units need to be sold at depressed prices during a downturn. A third, related approach is the "bucket strategy", splitting a pension pot into several portions with different time horizons and risk levels, a near-term cash-like bucket, a medium-term bucket, and a longer-term growth bucket, structured so that near-term spending needs are always covered by the lowest-risk bucket, insulating the growth portion of the pot from being sold during a downturn purely to fund current spending.

Consider Tom, 65, who retires with a £280,000 pension pot and sets up a simple three-bucket structure to manage sequencing risk. He keeps around £25,000 in cash or near-cash, covering roughly two years of his planned essential drawdown withdrawals, £75,000 in a medium-risk, income-generating portfolio intended to refill the cash bucket over time, and the remaining £180,000 in a longer-term growth portfolio he doesn't expect to need for at least ten years. When markets fall sharply in his second year of retirement, Tom simply draws his planned income from the cash bucket rather than selling any growth investments at depressed prices, giving the growth portfolio time to recover before he needs to draw on it. This structure doesn't eliminate the underlying investment risk in his portfolio, but it substantially reduces the specific danger that a poorly timed market fall forces him to lock in losses at exactly the wrong moment.

It's worth being clear about what these strategies can and can't achieve. Holding a cash buffer or using a bucket strategy doesn't increase your expected long-term return, and in fact tends to reduce it slightly, since cash and lower-risk assets typically grow more slowly than equities over the long run. What these strategies do instead is reduce the variability and specific timing risk around when you're forced to realise losses, smoothing out the impact of a badly timed downturn at the cost of a small amount of long-term growth potential. For many retirees, that trade-off, giving up a small amount of expected long-term return in exchange for meaningfully reduced sequencing risk, particularly in the vulnerable early years of retirement, is a sensible one, though the right balance depends on your own risk tolerance, other income sources, and how much flexibility you have to adjust spending if needed.

Sequencing risk and your withdrawal rate

It's also worth understanding how sequencing risk interacts with the sustainable withdrawal rate you choose in the first place, since the two concepts are closely linked. A withdrawal rate that looks perfectly sustainable using long-term average return assumptions can still leave you exposed to sequencing risk if the specific sequence of returns you actually experience happens to be unfavourable in the early years, even though the same rate might have worked comfortably under a different, equally plausible sequence of the same average returns. This is exactly why many financial planners now stress-test a proposed withdrawal rate against a range of different historical or simulated sequences, rather than a single average projection, specifically to understand how the plan would hold up if the early years turned out to be among the worst in the range considered, rather than simply the average case.

Diversification across different types of investments can also help soften the impact of sequencing risk, though it doesn't eliminate it entirely. A portfolio spread across different asset classes, geographies, and investment styles is less likely to experience the same severity of fall at the same time as a portfolio concentrated in a single market or sector, which can reduce, though not remove, the chance of a particularly damaging early downturn. This is a separate consideration from the bucket or cash-buffer approaches discussed above, but the two work well together: diversifying the underlying investments to reduce the chance and severity of a sharp fall, while also holding a buffer specifically to avoid having to sell into any fall that does occur.

It's also worth recognising the psychological dimension of sequencing risk, not just the mechanical one. A sharp market fall in the first year or two of retirement can be genuinely alarming, particularly for someone newly reliant on their pension pot for income, and the natural instinct for some people is to panic and move everything into cash at exactly the worst moment, crystallising losses that a calmer, planned response, such as drawing from an existing cash buffer instead, would have avoided entirely. Having a clear, pre-agreed strategy in place before a downturn happens, rather than trying to work out a sensible response in the middle of a market panic, tends to produce much better decision-making and considerably better long-term outcomes.

Finally, it's worth remembering that sequencing risk cuts both ways, even though most discussions understandably focus on the downside. Someone who experiences unusually strong investment returns in the first few years of drawdown benefits from the mirror-image effect: their pot grows faster than average early on, giving them a larger buffer against any subsequent downturn later in retirement. This is part of why some retirees who happened to retire into a strong market find their pension pot far more resilient than the historical averages alone would suggest, just as others who retired into a weak market find themselves considerably more exposed. Understanding that this variability is largely a matter of timing luck, rather than anything within an individual's control, can help make sense of why identical withdrawal strategies can produce such different real-world outcomes for people who retired only a few years apart.

Given how much a small amount of bad timing can affect an otherwise sound retirement plan, sequencing risk is a strong argument for building some flexibility into your plans from day one, rather than committing rigidly to a single fixed withdrawal figure the moment you retire. A plan that can flex, whether through a cash buffer, a willingness to reduce discretionary spending in a poor year, or a formally reviewed withdrawal strategy, is far better placed to absorb whatever sequence of returns actually unfolds over your own retirement than a plan built purely around a single average projection alone, however carefully that projection was originally calculated.