You’ve probably heard that super grows at around 7% per year on average over the long term. That figure is real and useful when you’re accumulating. But in retirement, it can give you a false sense of security.
Here’s the problem: averages mask timing. Two retirees can experience the exact same average return over 20 years and end up with dramatically different outcomes simply because of when the negative years occurred.
That’s sequencing risk, and it’s one of the most important concepts in retirement planning that most Australians have never heard of.
Please note: All figures, projections and scenarios in this article are approximate and for illustrative purposes only. They use simplified return patterns to demonstrate the concept. Individual outcomes will vary based on personal circumstances, investment returns, fees and current government policy. This is general information, not personal advice.
What is sequencing risk?
Sequencing risk (also called sequence of returns risk) is the danger that a significant market downturn in the early years of retirement will permanently damage your portfolio even if returns recover strongly later.
The reason it matters in retirement when it doesn’t matter as much during accumulation comes down to one thing: you’re drawing income at the same time as the market is falling.
When you’re still working and contributing, a market fall is actually an opportunity. You’re buying more units at lower prices. When the market recovers, your gains are amplified.
When you’re retired and drawing income, a market fall is a very different situation. You’re selling units at lower prices to fund your living expenses. Those units are gone permanently. They can’t recover. Even when the market bounces back, you now have a smaller base generating the recovery so the same percentage gain produces fewer dollars than it would have on the original balance.
Scott covered this directly in Episode 1 of the Wealthlab Podcast: “Why Playing It Safe in Retirement Can Cost You More”. The key point: the same 6% average return over retirement can mean very different outcomes depending purely on whether the bad years come at the start or the end.
Why the order of returns matters: a worked example
Here’s the clearest way to understand sequencing risk in practice.
Two retirees, Alex and Sam, both retire at 65 with $500,000. Both earn an average return of 6% per annum over 20 years. Both draw $35,000 per year. The only difference: the timing of their good and bad years.
| Period | Alex’s returns (good years first) | Sam’s returns (bad years first) |
|---|---|---|
| Years 1 to 5 | +12% per year | -4% per year |
| Years 6 to 10 | +6% per year | +6% per year |
| Years 11 to 15 | -4% per year | +12% per year |
| Years 16 to 20 | +8% per year | +8% per year |
| 20-year average | 6% p.a. | 6% p.a. |
| Starting balance | $500,000 | $500,000 |
| Annual drawdown | $35,000 | $35,000 |
| Balance at year 20 | ~$480,000 remaining | Depleted before year 16 |
Same average return. Same starting balance. Same drawdown. Twenty years later, Alex has approximately $480,000 remaining. Sam has run out of money before year 16.
The difference is entirely due to sequencing. Sam was selling units at depressed prices in the early years to fund living expenses. Those early withdrawals permanently reduced the base from which the later strong returns could compound.
This is why saying “my super averages 7% over the long run” is insufficient for retirement planning. What matters is the sequence, not just the average.
Phil lived through a real-world version of this during the GFC. He told the story in Episode 3 of the podcast: a couple who had used debt recycling to invest in ETFs saw their portfolio crash to $120,000 while owing $250,000. Phil urged them to hold on and ride it out, but the experience was, in his own words, an “absolutely terrible outcome.” That’s sequencing risk hitting in real time, not in a spreadsheet.
Why retirees are especially vulnerable
During the accumulation phase, most people are net buyers of super, contributing regularly, so a market fall means they buy more units cheaply. Sequencing risk is low.
In retirement, that reverses completely. You become a net seller, drawing down units each period to fund living expenses. A market fall forces you to sell more units than you would at a higher price. Those extra units sold are permanently gone from your portfolio, and they can’t recover.
The first five years of retirement are the most critical window. Research consistently shows that a significant market downturn in years one to five of retirement causes permanent portfolio damage that a later recovery cannot fully repair even if the total return over the full period is identical.
The 60-to-67 gap that most Australians face (the period between super access and Age Pension eligibility) is particularly exposed. During this window, you are typically drawing down your full living expenses from super with no other income buffer. Scott and Phil covered the real cost of this gap in Episode 19 of the podcast, showing how retiring even one year earlier can shift funding from lasting to age 105 to running out at 79.
The connection to investment allocation in retirement
Sequencing risk is one of the main reasons why investment allocation in retirement is more complex than simply “switch to conservative as you get older.”
The intuitive response to sequencing risk is to move to a conservative or cash-heavy portfolio at retirement to avoid a market fall. But as Scott explained in Episode 1, this introduces a different and often worse problem: a conservative or cash portfolio at 3 to 4% return doesn’t keep pace with a 25 to 30-year retirement. You run out of money slowly through inflation erosion rather than quickly through a market crash, but you still run out.
The data is striking. In Episode 1, Scott walked through a real comparison: a couple with $500,000 in super spending $75,000 per year in retirement. The growth portfolio (averaging 6 to 7% per annum) funds their retirement into their late 90s. The conservative portfolio (averaging 3 to 4% per annum) runs out approximately 15 years earlier despite both having the same average return structure.
Phil also pointed out in Episode 22 of the podcast that what most super funds call “balanced” is actually a growth portfolio with 70% or more in growth assets. So if you’re in a “balanced” option thinking you’re protected from sequencing risk, you may be more exposed than you realise. It’s worth checking what you’re actually invested in.
The solution isn’t to go fully conservative. It’s to manage sequencing risk specifically, while maintaining enough growth in the portfolio for longevity.
How to manage sequencing risk in retirement
There are several practical strategies that reduce sequencing risk without sacrificing the long-term growth your retirement needs.
1. The cash buffer (bucket strategy)
The most widely used sequencing risk mitigation is the bucket strategy. You hold one to three years of living expenses in cash or short-term term deposits (the “defensive bucket”), and keep the remainder of your portfolio in growth assets.
When markets fall, you draw from the cash bucket for living expenses rather than selling growth assets at depressed prices. This gives your growth assets time to recover without forcing distressed sales.
The cash bucket is replenished periodically when markets are strong, selling some growth assets at higher prices to refill the defensive reserve.
On a $500,000 portfolio drawing $35,000 per year, a two-year cash buffer of $70,000 in term deposits leaves $430,000 invested in growth assets. If markets fall 25% in year one, you draw from cash, not from the growth portfolio. When markets recover in year two or three, the growth portfolio recovers on a larger base than if you had been drawing from it throughout the downturn.
2. Flexible drawdown
Rather than drawing a fixed dollar amount each year regardless of market conditions, some retirees use a flexible drawdown approach, drawing less in years when markets have fallen and slightly more when markets have performed well.
This requires lifestyle flexibility that not all retirees have, particularly if you have fixed essential expenses. But even modest flexibility, reducing discretionary spending by $5,000 to $10,000 in a poor market year, materially reduces the sequencing risk impact.
The minimum drawdown rules for account-based pensions give you a floor (4% for under 65, 5% from 65 to 74), not a ceiling. Drawing at the minimum in poor market years is a simple and effective form of flexible drawdown.
3. Investment diversification across asset classes
Diversification doesn’t eliminate sequencing risk, but it reduces the severity of drawdowns. A portfolio that holds Australian shares, international shares, property, bonds, and cash will typically not fall as steeply in any single market event as one concentrated in a single asset class.
The 2020 COVID crash saw Australian equities fall approximately 35%, but a balanced diversified portfolio (60% growth, 40% defensive) fell approximately 15 to 20%. The difference in sequencing impact between a 35% fall and a 15% fall on a portfolio from which you’re drawing income is significant.
Scott and Phil discussed market unpredictability and why smart investors don’t panic in Episode 11 of the podcast, including how conservative portfolios can actually be hurt by rising interest rates with a 4 to 6 month lag, meaning “safe” isn’t always safe.
4. Timing of retirement
Timing retirement to avoid the first few years coinciding with a major market peak can reduce sequencing risk, though this is difficult to control and no one consistently times markets successfully.
What is controllable is building a larger buffer before retirement, having 12 to 24 months of living expenses accessible outside super so that you are not immediately dependent on portfolio drawdowns from day one of retirement.
5. Partial annuity
A small portion of the portfolio converted to a guaranteed income product (annuity) can provide a fixed income floor that doesn’t depend on market performance. This won’t solve sequencing risk entirely, but it reduces the minimum income you need to draw from the market-exposed portion of the portfolio during a downturn.
Sequencing risk and the Age Pension
The Age Pension provides a natural partial hedge against sequencing risk for Australians who reach 67. As your account-based pension balance falls due to drawdowns (including during a market downturn), your assessable assets eventually drop below the Age Pension thresholds, and Centrelink begins supplementing your income.
This means the effective “running out of money” risk is lower for most Australians than pure portfolio modelling suggests, because a rising Age Pension entitlement acts as a floor as the portfolio depletes.
However, the Age Pension does not fully compensate for severe sequencing damage in the early years, particularly in the 60-to-67 gap before the pension is even available.
Planning the transition from super-only income (age 60 to 67) to super-plus-pension income (age 67 onwards) is one of the most valuable things a financial adviser can do for someone approaching retirement. Episode 10 of the Wealthlab Podcast, “How the Age Pension Really Works”, covers how the assets test and income test interact with super drawdowns in real worked examples. Phil and Dan also covered commonly missed pension and Centrelink opportunities in Episode 20.
Want to see how your balance tracks against different drawdown scenarios? Try the free Wealthlab super calculator for a quick snapshot, or take the retirement quiz for a broader readiness assessment.
Frequently asked questions
What is sequencing risk in retirement?
Sequencing risk is the risk that poor investment returns early in retirement will permanently damage your portfolio, even if long-term average returns are healthy. Because you’re drawing down income while the market is falling, you’re forced to sell units at lower prices. Those units can’t recover, reducing the base for future growth. The same average return over 20 years produces very different outcomes depending on when the bad years occurred.
Why does sequencing risk matter more in retirement than during accumulation?
During accumulation you’re a net buyer of super, so market falls let you buy more units cheaply. In retirement you’re a net seller, drawing income regardless of market conditions. Selling during a fall is permanent, as those units don’t recover. This asymmetry makes the timing of returns critical in retirement in a way it isn’t when you’re still contributing.
When is sequencing risk highest?
The first five years of retirement are the highest-risk window. A significant market downturn in years one to five causes permanent damage that a subsequent recovery cannot fully repair. This is why the period immediately after retirement is the most critical for investment allocation decisions.
How can I reduce sequencing risk?
The most practical strategies are holding a cash buffer of one to three years of living expenses to avoid selling growth assets during a market fall, using flexible drawdown (drawing less when markets are down), maintaining a diversified portfolio that doesn’t fall as steeply in any single event, and planning the transition to Age Pension income at 67 as a natural income floor.
Should I switch to a conservative portfolio at retirement to avoid sequencing risk?
Not entirely. A fully conservative or cash portfolio introduces longevity risk, as it doesn’t generate enough return to sustain a 25 to 30-year retirement. The goal is to manage sequencing risk specifically through a buffer strategy and flexible drawdown, while keeping most of the portfolio in growth assets for the long term. Episode 1 of the Wealthlab Podcast covers this in detail with real numbers.
Does the Age Pension protect against sequencing risk?
Partially. As your super balance falls due to drawdowns, your Age Pension entitlement typically increases, providing a natural income floor. But this only applies from age 67 and doesn’t compensate for severe sequencing damage in the early retirement years, particularly in the 60-to-67 gap when there is no government support.
What is the bucket strategy for retirement?
The bucket strategy holds living expenses for one to three years in a defensive “bucket” (cash or term deposits) and keeps the remainder in a growth portfolio. During a market downturn, you draw from the cash bucket rather than selling growth assets. This gives your growth portfolio time to recover without forced distressed sales. The cash bucket is replenished when markets are strong.
How does sequencing risk affect the decision to retire at 60 vs 67?
Retiring at 60 means seven years of fully self-funded drawdown before the Age Pension starts. This is the highest-exposure window for sequencing risk because there’s no government income to fall back on. Retiring at 67 means the Age Pension is available immediately, which provides a partial buffer from day one. If you’re considering retiring at 60, a cash buffer and flexible drawdown strategy are particularly important. For a deeper look at the 60-to-67 gap, see our guides on retiring at 60 with different super balances.
The bottom line
Sequencing risk is not something you can eliminate, but it is something you can plan around. The retirees who weather market volatility best are typically those who have a cash buffer that doesn’t require them to sell growth assets during a downturn, a flexible drawdown approach, and a clear understanding of how the Age Pension will supplement their income from 67.
Getting the investment structure right at retirement is as important as getting the balance right before retirement. If any of this has raised questions about your own situation, book a free chat with the Wealthlab team. No pressure, no jargon.