---
layout: post
date: 2026-08-09 10:00
type: blog
title: What is Sequencing Risk in Early Retirement - with Practical Examples
tags: [finance]
syndicate:
  - mastodon
  - bluesky
---

> Sequencing risk defines that the order of returns being more significant when you are withdrawing rather than accumulating. A market downturn early in retirement can cause a portfolio to run out, even if average long-term returns are the same.

## Definitions

Sequencing risk is the term that covers the order or sequence of returns impacting the success rate of your withdrawals in retirement.

## Why this matters

After [investing for the long term](/cash-is-risky-stocks-are-volatile) and building up a nice retirement pot, you've decided to pull the trigger and quit your job.

You've banked your last payday and it's now time to withdraw from your ISA or pension however there as been a world event, or a bad earnings call, and the market has seen a big sell off and has dropped in value. Your retirement pot may have lost a huge a chunk putting at risk your plans.

## Practical Example

Lets dive in to a practical example. Lets assume you are 52, have £300k invested a global index fund within an ISA and you plan to withdraw, tax free of course, £50k per year. This is your bridge until your pensions become available at 58, £300k divided by £50k is 6, so 6 years between 58 and 52 sound perfect.

But a new global pandemic has emerged and the world is reacting by selling off stocks and your investment have dropped 25% - leaving you with a pot worth £225k.

Following your existing plan your withdrawals would mean you run out of money in year 6 just in time for your pension to kick in, in this pandemic scenario you run out of money in year 4 and have a shortfall of £15k.

| Scenario | Start | Y1    | Y2    | Y3    | Y4    | Y5   | Y6  |
| -------- | ----- | ----- | ----- | ----- | ----- | ---- | --- |
| Original | £300k | £250k | £200k | £150k | £100k | £50k | £0k |
| Pandemic | £225k | £185k | £135k | £85k  | -£15k | 0    | 0   |

Note: this example uses illustrative figures and doesn't take account of any growth that might occur during this period for simplicity. Reducing capital by £50k per year until no funds remain.

## Mitigations

To avoid this trap there are a number of mitigations.

### Cash

By building up a cash buffer when approaching retirement it allows you to use cash instead of selling your investments when they are down. This could be used to supplement income from investments or replace it entirely in those early years.

This could mean withdrawing from Cash ISAs, selling premium bonds, or using cash from savings accounts.

Like in March 2020 the pandemic saw a huge drop in the stock market losing 20% of it's value compared to it's January high[^3], however, it had returned to a new all time high by July 2020[^3].

In our above example, had you retired in the December and withdrew a £12.5k from your investments at the beginning of January to cover the next three months, Come April another £12.5k would be needed for the next three months, but as markets were down, to avoid being impacted by this, one could rely on the cash buffer to not sell out of the market, Using up £12.5 of cash reserves. Allowing the stock market to recover. From September one could begin to sell out their stocks quarterly basis as planned

| Quarter | Withdrawal source       | Amount  | Cumulative cash used |
| ------- | ----------------------- | ------- | -------------------- |
| Jan–Mar | Cash buffer             | £12,500 | £12,500              |
| Apr–Jun | Cash buffer             | £12,500 | £25,000              |
| Jul–Sep | Investments (recovered) | £12,500 | £25,000              |
| Oct–Dec | Investments (recovered) | £12,500 | £25,000              |

Note

- Assumes a cash buffer of £25,000 covers the first two quarters while markets are down, allowing the remaining £12,500-per-quarter withdrawals in H2 to come from investments once the market has recovered — avoiding selling at the bottom in Q1/Q2.

### Bond ladder

A bond or essentially government debt, known as gilts[^1], and it's a promise from the government to pay back this debt and pay you a coupon, which is effectively interest.

Bonds have a fixed duration so by purchasing enough that they mature every year during the early years this can be used to supplement income.

In our example, in the year prior to the planned retirement one could begin to purchase 1, 2, 3, and 4 year fixed bonds. This table shows an example requiring approximately £180k of capital with in the ISA being sold out stocks and into Bonds.

This would allow some flexibility around the timing, to avoid a market drop at that point but would effectively guarantee a return in those first four years and allow flexible selling of remaining investments at a suitable time for year 5 and 6.

| Gilt maturity | Illustrative yield | Capital required | Maturity payout      |
| ------------- | ------------------ | ---------------- | -------------------- |
| 1-year        | 4.3%               | £47,938.64       | £50,000              |
| 2-year        | 4.4%               | £45,874.25       | £50,000              |
| 3-year        | 4.4%               | £43,940.86       | £50,000              |
| 4-year        | 4.5%               | £41,928.07       | £50,000              |
| Total         | -                  | £179,681.81      | 200,000 over 4 years |

Note: Illustrative yields only[^2]

This would have left our user with 2 more years to bridge until their pension with markets giving confidence to sell, with additional buffer from the unused capital from the bond ladder and in terms of the 2020 pandemic, the market was at all time highs four years later (Mar 2024)[^3].

### Annuity

An annuity is an insurance product that in exchange for upfront capital, there is a commitment to pay a value per year for a fixed period, this could be a flat amount, adjusted for inflation and these options adjust the cost or amount paid.

Income is paid regardless of market performance — once purchased, the insurer bears all investment risk, not you. This is the trade-off against the gilt ladder: similar upfront cost, but the annuity is a one-way transaction with no access to the lump sum once bought, whereas gilt rungs remain yours to sell early if needed.

| Year | Guaranteed income | Cumulative income received |
| ---- | ----------------- | -------------------------- |
| 1    | £50,000           | £50,000                    |
| 2    | £50,000           | £100,000                   |
| 3    | £50,000           | £150,000                   |
| 4    | £50,000           | £200,000                   |
| 5    | £50,000           | £250,000                   |
| 6    | £50,000           | £300,000                   |

Notes:

- This is an illustrative example using a fixed, level income without any inflation uplift. Inflation linked annuities are available but cost a higher purchase price
- Illustrative purchase price: £257,893.62, based on an insurer discount rate of 4.5% for a 6-year fixed-term annuity. Actual annuity rates vary by provider and are individually quoted (age, health, terms).

Some annuities won't pass on payments to a spouse if there was a death, compared to other investments that form part of the estate and various IHT allowances.

### Expenditure Management

Another mitigation is adjusting expenditure, if markets are down by 20%, can one's expenses also be adjusted down for 20%. This is much easier for high earners, or large posts of investments where drawdown will include a proportion of discretionary spending, but if one has annual bills of £25k they could not afford to adjust for the down turn and only withdraw £20k, leaving £5k of bills unpaid. However, if the plan was to buy a nice cruise in year one and two, perhaps waiting until year three and downgrading certain expenses would negate the market impact.

## Summary

None of these mitigations are mutually exclusive, and in reality you could blend two or three. Cash is the simplest and cheapest, but only buys you a few quarters — it's not a long-term fix. The bond ladder gives you several years of guaranteed income at a similar upfront cost to cash sitting idle, but locks that capital away from any market upside during those years. An annuity goes further still — full certainty, zero effort, but it's a one-way door, and you're trading away the flexibility to change your mind. Expenditure management costs nothing but requires your spending to actually be flexible, which isn't true for everyone.

The right mix depends on how much certainty you want to pay for, and how much flexibility you're willing to give up to get it. My retirement plan has an annual amount with a surplus above basic bills so I would adopt an adjustment to expenditure whilst also using cash reserves. My plan would also include pulling extra during bull markets to replenish cash reserves.

[^1]: Note that gilt coupons income is taxable, but the gilts are exempt from capital gains tax. In our example we've assumed all funds are held within an ISA.

[^2]: Zero-coupon assumption. This treats each gilt as if it pays a single lump sum at maturity (buy at discount, redeem at £50k). Most UK gilts pay semi-annual coupons instead — the actual cost to guarantee £50k at maturity depends on the specific gilt's coupon structure, not just its headline yield. Seek financial advice from a regulated professional.

[^3]: Using data and approximations from the [Vanguard VWRL ETF](https://vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/overview)