When markets fall just after you retire, the damage can be greater than you expect.
You might still have the same long-term average return, but the order in which returns happen, the sequence of returns, can make or break your retirement plan.
It is one of the least understood risks in retirement, yet it can have the biggest impact on whether your pension lasts.
Imagine two retirees, both with £500,000 invested and both taking £20,000 a year.
They achieve the same average annual return of 5% over 20 years, but one starts with two bad years in the market, while the other starts with two good years.
The result is that the one who suffered early losses can run out of money nearly a decade sooner.
That is sequence risk, the danger that poor returns early in retirement, combined with withdrawals, permanently shrink your portfolio.
When you are saving for retirement, market dips do not hurt as much because you are still adding money. But when you are withdrawing, the maths reverses.
If your investments fall and you take income at the same time, you are selling more units when prices are low, locking in losses that are hard to recover.
It is not volatility itself that is the problem, it is volatility combined with withdrawals.
1. Keep a cash buffer
Holding one to three years of income in cash gives you breathing room when markets fall.
You can spend from the buffer instead of selling investments at a loss, then refill it once markets recover.
2. Use guardrails
Guardrails are pre-agreed limits on withdrawals.
If your portfolio falls below a set level, you reduce withdrawals slightly. If it grows, you can take a little more.
This stops emotions driving decisions and helps preserve capital through market cycles.
3. Diversify across assets
A sensible mix of shares, bonds, and cash can smooth returns.
You do not need to eliminate volatility entirely, but spreading risk reduces the chance that everything falls at once.
4. Avoid chasing performance
Switching strategies after every market swing is one of the fastest ways to destroy value.
A well-designed plan should anticipate volatility and make room for it.
5. Rebalance once a year
Rebalancing means trimming what has done well and topping up what has fallen.
It is a simple, disciplined way to buy low and sell high without guessing market moves.
Suppose you retire with £400,000 and need £20,000 a year.
You keep £60,000 in cash, three years of income, and invest £340,000 across shares and bonds.
When markets fall by 10%, you draw from the cash rather than selling investments. When they recover, you top the cash back up.
That simple step can extend portfolio life by several years.
Sequence risk is not just mathematical, it is emotional. Watching your pension fall in the early years can trigger panic and poor decisions.
A cash buffer, a clear withdrawal plan, and an adviser who explains what is happening can help you stay calm.
Good withdrawal planning can reduce the need to sell investments unnecessarily.
For example,
It is not just about investment structure, it is also about when and where you draw from.
Sequence risk reminds us that investment returns are not just about averages, they are about timing.
By holding a cash buffer, diversifying sensibly, setting guardrails, and avoiding emotional reactions, you can give your retirement income a far smoother ride.
You cannot control markets, but you can control your approach.
If you would like help building a withdrawal plan that protects your income through market ups and downs, book a 20-minute review today.
Nic Round is a Chartered Financial Planner and Chartered Wealth Manager, authorised and regulated by the Financial Conduct Authority.