Two retirees can earn the same average return over their retirement and yet one runs out of money while the other dies wealthy. The difference is timing. Sequence of returns risk is the danger that a run of poor investment years arrives early in your retirement, just as you begin drawing an income, doing lasting harm that good years later cannot fully undo. It is one of the least understood threats to a comfortable retirement, and understanding it changes how you draw down your savings.
This is general information, not financial advice. Investing carries risk, capital can fall as well as rise, and past performance does not predict future returns. For a plan suited to your circumstances, speak to a licensed financial adviser, and confirm current CPF rules with the CPF Board.
Why the Order of Returns Matters So Much
While you are still saving and adding money each month, a market crash can even be helpful, because you buy investments cheaply and benefit when they recover. The moment you retire and start withdrawing, that logic flips. Now you are selling investments to fund your spending. If prices are low when you sell, you must cash in more units to raise the same amount of money, permanently shrinking the pot that needs to recover.
Here lies the cruelty of the effect. When a bad year strikes early in retirement, you are drawing income from a portfolio that is already down, locking in losses you can never recover. The same bad year arriving twenty years later, when your remaining horizon is short, does far less damage. Two portfolios with identical average returns can therefore end up worlds apart purely because of the order in which the good and bad years fell.
This is why averages can mislead. A brochure figure of an average annual return tells you nothing about the path, and it is the path, not the average, that determines whether a drawdown plan survives.
A Simple Illustration
Imagine two retirees who each start with the same savings and each experience the same set of yearly returns, but in reverse order. One meets the poor years first, the other meets them last. The figures below are entirely hypothetical and chosen only to show the shape of the problem, not any real or expected return.
| Factor | Retiree who hits bad years early | Retiree who hits bad years late |
|---|---|---|
| Average return over retirement | Identical | Identical |
| Portfolio after the first few years | Sharply lower while still withdrawing | Higher, cushioned by early gains |
| Units sold to fund income early on | Many, at low prices | Fewer, at higher prices |
| Likelihood the money lasts | Lower | Higher |
| Emotional pressure to change plans | High | Low |
The point of the illustration is not the numbers, which are invented, but the lesson. Same average, very different outcome, driven entirely by sequence. This is why two neighbours who retired a few years apart can have such different experiences despite following similar strategies.
How to Soften the Blow
You cannot control when markets fall, but you can build a plan that is more resilient to a poor early run. Several practical measures help:
- Keep a cash buffer. Holding one to two years of planned spending in cash or very stable assets means you can pause selling investments during a downturn and draw from the buffer instead, giving markets time to recover.
- Anchor essentials to guaranteed income. In Singapore, CPF LIFE provides lifelong monthly payouts that act as longevity insurance. If your essential costs are covered by CPF LIFE and other stable income, a market slump only affects your discretionary spending, not your survival.
- Stay flexible with withdrawals. Trimming discretionary spending in a bad year, rather than selling more investments to keep spending fixed, protects the portfolio when it is most vulnerable.
- Mind your asset mix near the start. The years just before and after you retire are the most sensitive to sequence risk, so many advisers suggest reviewing how much risk your portfolio carries around that transition.
- Draw in a sensible order. Which pot you tap first can reduce forced selling at bad times, a topic explored in the retirement drawdown order guide.
None of these promises a good outcome, and none removes risk. They simply reduce the chance that an unlucky start does permanent damage.
Where This Fits in a Singapore Retirement
For most Singaporeans, CPF LIFE is the single most powerful defence against sequence risk, precisely because its payouts do not fall when markets do. That secure floor means your invested savings are funding extras rather than essentials, so a bad early run threatens your holidays rather than your groceries. Building the rest of your income around that floor is the heart of a robust plan, and it connects closely to setting a sustainable safe withdrawal rate for the invested portion.
It also pays to think about how your savings become a monthly income in the first place, since a well-structured drawdown naturally holds a buffer and spreads risk. Our guide to creating a monthly retirement paycheck covers that in detail. The common thread is that sequence risk is managed not by predicting markets, which no one can do reliably, but by structuring your income so that a bad year early on does not force you into selling at the worst possible time.
Staying Calm When It Matters Most
The hardest part of sequence risk is behavioural. A steep fall in the first years of retirement is frightening, and fear tempts people either to sell everything and lock in losses, or to keep spending at the old level and drain the pot faster. Both reactions tend to make things worse. A plan that already holds a cash buffer and leans on CPF LIFE for essentials gives you permission to do the harder, wiser thing: sit tight, draw from cash, trim the extras, and wait.
Review your plan yearly, keep your healthcare cover such as MediShield Life and CareShield Life in force, and decide in advance how you will respond to a downturn, because decisions made calmly in advance are far better than those made in panic. Sequence of returns risk is real, but it is manageable with structure and flexibility rather than prediction. For advice tailored to you, consult a licensed financial adviser, and verify current CPF and payout details with the CPF Board.
Explore more: The Safe Withdrawal Rate for Retirees · Creating a Monthly Retirement Paycheck · The Retirement Drawdown Order