Sequence of returns risk is the danger that poor investment returns early in retirement can permanently damage a portfolio even if the long-term average return is as expected. Two retirees with identical average returns over 30 years can have very different outcomes depending on whether the bad years came early or late.
How It Works
Early losses force you to sell more units to generate the same income — leaving fewer units to recover when markets rebound. A 30 percent drop in year one while withdrawing is far more damaging than the same drop in year 20. This asymmetry makes retirement investing fundamentally different from accumulation.
Why It Matters in Retirement
Managing it involves a cash buffer for 1 to 2 years of withdrawals, deferring CPP to increase guaranteed income, using TFSA as a reserve to avoid selling equities in downturns, and avoiding high withdrawal rates in the first decade of retirement.
Related Resources
This article provides general financial education for Canadians. It is not personalized financial advice. For guidance specific to your situation, consider speaking with a CFP professional.