Two people retire on the same day. Same pension pot, same average annual return over the following twenty-five years, same income drawn every year. One runs out of money before age 88. The other leaves over €1m to their children. The only difference is timing.

That, in a nutshell, is sequence of returns risk. In twenty years of working with people approaching and in retirement, I’d say it’s the risk that surprises them most. Not because it’s complicated. Because it’s counterintuitive. An awful lot of people planning for retirement focus on two things: how much they’ve accumulated, and what annual return they can expect. Both matter. But there’s a third factor that can override both of them completely, and it gets nowhere near the attention it deserves.

So let’s walk through what sequence of returns risk actually is, why it matters most in the decade around retirement, and what you can practically do about it. The impact here can be massive. That’s exactly why it’s worth ten minutes of your attention.

When the Order of Returns Doesn’t Matter

Here’s the thing most people don’t expect: sequence risk doesn’t apply to everyone equally. It might appear complicated, but essentially what is happening is simple. If you have a lump sum invested, a retirement bond, for argument’s sake, or an investment account you’re not drawing from, the order in which your annual returns arrive genuinely doesn’t matter. At all.

We first ran this illustration in sequence of returns risk in ARFs, and it still holds. Imagine four investors, each placing €500,000 into a diversified fund on the same day. Over fourteen years they each average 6% per year. But their year-by-year experience is completely different. One has strong early returns and poor late ones. Another has the reverse. A third sits somewhere in the middle, and the fourth achieves a flat 6% every single year, which has never once happened in practice.

After fourteen years, all four end up in the same place: approximately €1.13m each. The sequence is completely irrelevant, because nobody is taking money out.

The moment that changes, the moment you flip from accumulating to drawing, everything changes with it.

Why Drawdown Changes Everything

When your fund drops 25% in a bad market year and you’re not withdrawing anything, you simply wait. The fund recovers; you haven’t crystallised a single loss. But when you’re drawing an income from that same fund and it drops 25%, you have to sell units, right now, this month, to generate that income. And you’re selling them at their lowest price. You’re extracting real capital at the worst possible moment. That’s what you’re doing.

The maths of recovery makes this brutal. A fund that falls 40% doesn’t need to rise 40% to recover: it needs to rise 67%. A 50% fall requires a 100% recovery. That recovery takes time, and every withdrawal made during it extends the damage. Researchers call the decade around the transition from work to retirement the ‘retirement risk zone’, roughly ages 60 to 70.

Wade Pfau's research, published in the Journal of Financial Planning, has estimated that the returns achieved in the first ten years of drawdown explain approximately 77% of the final retirement outcome. His research is built on US data and US portfolios, so it doesn’t transfer to an Irish ARF without adjustment: Irish retirees face Revenue’s mandatory imputed distribution, a different tax structure and different retiement products. But the underlying mechanism is identical, and the implication is the same: you could make all the right decisions for thirty years and still be undone by one bad sequence in the first ten years of retirement. Not because you chose the wrong fund. Because of timing.

Billy and Dinny: Same Average Return, Very Different Outcomes

If I’ve explained that okay, the next step is to make it concrete. Billy and Dinny, both from Dublin, retire at 65 on the same day. Each has exactly €1m in an ARF. Each goes on to achieve an average annual return of 7% over twenty-five years, and each draws €60,000 per year, 6% of the starting fund, increasing annually with inflation.

Billy retires into strong early markets: +22%, +15%, +12%, −4%, −7% in his first five years. Dinny gets the mirror image: −7%, −4%, +12%, +15%, +22%. Same five numbers, same long-term average, completely different first three years.

If neither man drew a single euro, both would have approximately €5.4m at age 90. Identical outcomes, because sequence is irrelevant without withdrawals. But they are drawing income. Billy, at 90, still has over €1m in his ARF after twenty-five years of withdrawals. Dinny runs out of money completely before he reaches 88. Same pot, same average return, same withdrawal. One legacy, one crisis, purely because of the order in which the returns arrived. (Billy and Dinny are fictional, I should say. The maths, unfortunately, is not.)

And one more number worth sitting with. When we modelled a €1m ARF drawing 6% per year with 3% annual inflation increases, invested in a diversified equity portfolio with peaks and troughs reflecting real market history, the probability of the fund surviving a full retirement, across thousands of simulations, came out at 48%. At that withdrawal rate, you are essentially tossing a coin to decide whether your ARF outlives you. That is not a strategy. Right.

The Irish Layer: Revenue’s Minimum Withdrawal

There’s a specifically Irish dimension to all of this. The reality is, from age 61 onwards, if you hold an ARF, you’re going to have to take a minimum of 4% of the fund each year, whether you want it or not, and whether markets are up or down. That rises to 5% from age 71, and to 6% where your combined ARF and vested PRSA value exceeds €2m. You’re taxed on these amounts either way, so most people draw them. The detail is set out in Revenue’s Pensions Manual, Chapter 28. The figures are subject to change, so always verify the current rules.

The point for sequence risk is this: an Irish ARF holder cannot simply stop withdrawing during a downturn the way the textbook solution suggests. The floor is set for you. At a 4% withdrawal with a sensible investment mandate, the risk is materially lower than at 6%, but it doesn’t disappear. And meeting Revenue’s minimum is not the same as having a plan, a distinction we explored in detail in our piece on safe withdrawal rates for Irish ARFs.

Four Ways to Protect Your ARF

There’s no perfect solution here: anyone who tells you they’ve eliminated sequence risk entirely is oversimplifying. What you can do is reduce the exposure, and give yourself more runway if the sequence goes against you.

1. The cash buffer. Hold two to three years’ worth of living expenses in cash or near-cash within the overall portfolio. In a bad year, income comes from the buffer instead of selling equities at depressed prices; when markets recover, the buffer is replenished. If you’re drawing €50,000 a year, that’s €100,000–€150,000, ten to fifteen per cent of a €1m ARF, sitting in lower-volatility assets. There’s a modest drag on long-term returns for that portion. In practice, what we tend to see is that clients with a buffer sleep far better during downturns, because they have a plan rather than just a fund value.

2. Dynamic withdrawal. In strong years, draw a little more or let the growth run; in difficult years, flex downwards. Even a 10–15% reduction during a sustained downturn meaningfully extends fund longevity. This only works if you have a genuine working distinction between essential and discretionary spending — the people who handle sequence risk best know exactly what they must spend each month, and what they’d merely like to.

3. Portfolio construction. The instinctive response, going fully conservative, usually swaps a sequence problem for a longevity problem, because a low-return portfolio gets steadily drained by withdrawals it can’t offset. The better approach is a structural separation of time horizons: growth assets for the long-term portion of the fund, lower-volatility assets for nearer-term withdrawal needs. We looked at one side of that balance recently in whether bonds still earn their place in your ARF.

4. Timing flexibility. If you can adjust when you begin drawing from your ARF, even by twelve to eighteen months, avoiding a retirement that begins in the teeth of a downturn makes a real difference. It isn’t always possible. But where other income exists — rental income, a partner still earning, savings outside the pension — delaying the first major withdrawal shortens your exposure to the critical early window.

Most of the people we work with use a combination of the first three. The right blend depends on fund size, withdrawal rate, investment mandate and, honestly, temperament. Ultimately it’s a case of choosing your trade-offs deliberately.

Three Mistakes Worth Avoiding

Assuming it takes a crash. Sequence damage doesn’t require a 2008-level event. A couple of flat or modestly negative years early in retirement, nothing that would make a headline, can cause cumulative harm that’s very hard to recover from while income is being drawn throughout. You don’t need a crisis. You just need bad timing.

Going overly conservative. This one is fierce common. The logic is simple: ‘I can’t afford to lose money in retirement.’ It leads to an ARF in a very conservative mandate, steadily depleted by withdrawals with no growth to offset them. At 63, with a realistic horizon of another twenty-five years, a very conservative portfolio is genuinely risky. Just not in the way most people think.

Treating Revenue’s 4% as a strategy. The imputed distribution is a tax floor, not a financial plan. Whether 4% is the right rate for your specific fund, mandate, other income and age is a separate question — one that needs to be modelled, not assumed.

Final Thoughts

Sequence of returns risk is the specific danger that poor returns in the early years of retirement cause permanent damage to your ARF: damage that compounds with every withdrawal and cannot be fully reversed, even if the long-term averages end up looking perfectly respectable. While you’re accumulating, sequence doesn’t matter. The moment you start drawing, it may matter more than anything else.

The good news is that it’s manageable: cash buffers, dynamic withdrawals, sensible portfolio structure and timing flexibility all reduce the exposure meaningfully. None eliminates it.

So do yourself a favour and have a think about how your own ARF, or the pension that will become one, would handle a poor first five years. The worst thing in the world is to have a thought like that and not follow it up. Whether it’s with us or with another professional financial planning firm, go and have a conversation, because the decisions made in those early years compound, in both directions, for a very long time.

I hope this helps, and thanks a million for reading.

Paddy Delaney QFA RPA APA