Why market falls early in retirement can affect your long-term plans

You may not have come across the term “sequencing risk” before, but it can play an important role in how retirement unfolds.

“Sequencing risk describes what can happen when someone experiences poor investment returns just as they begin drawing an income from their pension or other savings, rather than while they’re still building those savings,” explains Rayna.

During your working life, market falls can feel uncomfortable, but they rarely change your day-to-day finances. Your salary is still coming in and there is often plenty of time for investments to recover.

Retirement changes that relationship completely. Instead of paying into your pension, you’re now relying on it to pay you.

The easiest way to understand sequencing risk is through a simple example. Imagine two people retire with pension pots worth £500,000. Both withdraw £20,000 a year and both achieve the same average investment return over their retirement.

Most people would expect them to end up in a similar position. But that’s not usually the case. One experiences strong investment growth during the early years of retirement and weaker returns later. The second experiences market falls first and stronger growth further down the line. Both still need to withdraw £20,000 each year. But the second retiree is taking that income from a pension pot that has already fallen in value.

“Even though the average return is identical, the person who experiences losses first can end up with much less money,” says Rayna. “That’s because drawing income during those early downturns forces them to sell investments at a lower price. Those assets are then no longer there to benefit when markets recover.”

This is what makes sequencing risk particularly important. The problem isn’t simply that investments have fallen in value. It’s that withdrawals continue at the same time, leaving less money invested when markets eventually recover.

The years immediately after retirement are often the most financially sensitive.

“It’s usually the point when pension savings stop being something a person is building and become something they’re relying on,” says Rayna. “It’s no longer just an investment account. It becomes their security, independence and future choices.”

Rayna often compares it to a tree. “If a young tree loses a large branch shortly after it’s planted, it may never grow to the size it otherwise would have done,” she says. “But a mature tree that loses a branch after decades of growth is usually far less affected.”

Retirement savings can work in a similar way. Losses that happen early on can have a much greater impact because you’re taking money out at the same time.

“The goal isn’t to avoid volatility,” says Rayna. “Market movements are part of investing. The goal is to avoid being forced to fund spending from a portfolio that has just suffered a large loss.”

Sequencing risk isn’t just about numbers. It’s also about how people feel.

Once you retire, your pension often takes on a very different meaning. It’s no longer a pot of money for the future. It’s the thing helping to fund your lifestyle, your independence and your plans.

There’s also a simple reality: the pay cheque has stopped. Without regular earnings coming in, market falls can suddenly leave you feeling more uncertain about your finances “What I often see is people worrying about whether they have enough time for markets to recover,” says Rayna. “Even if they understand investment risk, it can feel much more emotionally challenged once they’re retired.”

It’s natural to feel losses more strongly than gains, and retirement can amplify that effect. It’s one of the reasons why periods of market volatility sometimes lead people to make decisions they later regret.

The biggest retirement mistakes often happen when people feel they need to act quickly.

When markets fall, it’s natural to want to do something. That might mean moving money into cash, changing investments or taking more income than originally planned. The problem is that these decisions often happen after markets have already fallen.

“A common example is moving out of investments after markets have already dropped,” says Rayna. “It can feel like you’re protecting your money. But actually, by selling, you may be turning a temporary fall into a permanent one.”

It’s also easy to become caught up in today’s headlines and lose sight of what your money needs to do over the next 20 or 30 years. Retirement is a long-term journey. Yet short-term uncertainty can tempt people to focus on what’s happening right now rather than where they want to be years from now.

“The emotional reaction is completely natural,” says Rayna. “The important thing is not letting short-term worry drive long-term decisions.”

While sequencing risk can’t be removed entirely, there are steps that may help reduce its impact.

For Rayna, good planning starts long before retirement itself. Ideally, conversations begin five to ten years before someone expects to stop working. That gives time to understand spending habits, identify essential and discretionary expenditure and build flexibility into future income plans.

“I think the starting point is building a realistic plan that’s grounded in how the client actually lives,” she says.

A well-structured plan often includes drawing income from a range of sources. For some people, that could mean combining State Pension income, workplace pensions, personal pensions, savings and investments in a way that creates greater resilience.

Many people also choose to keep some money in cash or lower-risk assets that can be accessed more easily during difficult market conditions. Having money available for short-term spending can help reduce the need to sell long-term investments after markets have fallen.

One of the tools Rayna uses most often with clients is cashflow modelling.

“I use it with all my clients,” she says. “It’s one of the most effective ways to help people understand how their retirement might work in real life, not just on paper.”

Cashflow modelling allows people to explore different scenarios and see how their plans might cope if life doesn’t go exactly as expected.

• What happens if inflation remains higher for longer?
• What if you spend more than planned?
• What if you live well into your nineties?
• What if investment returns are lower than expected?

For many people, this is the point where retirement planning starts to feel real rather than theoretical.

“It’s not about predicting the future perfectly,” explains Rayna. “It’s about helping people prepare for different possibilities and stress-testing the plan.”