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Sequence-of-Returns Risk: Why the First Years of Retirement Matter Most

Retirement · 5 October 2026 · Plan Our Future

Once you start withdrawing, the order of returns matters as much as the average. A bad market in the first 3–5 years of retirement can leave you with a noticeably smaller corpus than the same bad years arriving later, even if the long-run average is identical.

This is called sequence-of-returns risk. While you are saving, a crash is mostly good news: your SIP buys more units cheaply. Once you are withdrawing, a crash forces you to sell units at low prices, and those units never get a chance to recover.

A simple illustration

Take two retirees, each with ₹1 crore, each withdrawing ₹6 lakh at the start of every year. Over three years the market returns are the same three numbers (an assumption for illustration only), just in a different order.

Year	Retiree A	Retiree B
1	-20%	+30%
2	+10%	+10%
3	+30%	-20%
Corpus after year 3	~₹91.2 lakh	~₹97.5 lakh

Both saw the same average return. Without withdrawals, both would end at the same ₹1.14 crore. With withdrawals, A ends about ₹6 lakh behind, and A also enters year 4 with a smaller base that has to carry the same ₹6 lakh (or more, after inflation) every year after. Stretched over 25–30 years, that early dent compounds.

Why it bites hardest early

• A large corpus is exposed. At retirement your corpus is at its peak, so a percentage fall is the biggest rupee fall.
• Withdrawals lock in the loss. Units sold at a low NAV are gone for good.
• Inflation keeps raising the withdrawal. At an assumed 6–7% lifestyle inflation, the amount you need rises every year, whatever the market does.
• The horizon is long. A retirement starting at 55–60 may need to last 30 years or more.

What reduces the risk

1. A cash and debt bucket. Keep roughly 2–3 years of expenses in debt or liquid options so you are not forced to sell equity in a down year. Debt is historically around 6–7%, an assumption, not a promise.
2. A glide path. Reduce equity gradually as retirement approaches instead of holding the same mix to the last day, and keep a measured equity share afterwards for growth against inflation.
3. A flexible withdrawal rate. Trimming discretionary spending in bad years, even by 10%, helps the corpus recover.
4. A realistic corpus. Plan on conservative return assumptions (around 11–12% for equity during accumulation, lower after) so the target has some cushion.
5. Part-income sources. Pension, rental income or annuity cover for essentials lowers how much the portfolio must fund.

Where this fits in a plan

The five years before and after retirement are the "danger zone". A goal-based plan treats retirement as a goal with its own SIP and a glide path that de-risks as the date nears, instead of one big equity bet. This is educational and not personalised advice; for taxation of withdrawals, confirm under current rules or check with a CA.

FAQ

Q. Does sequence risk affect me while I am still investing?

A. Much less. During accumulation, falling prices mean your SIP buys more units. The risk is mainly for people drawing money out.

Q. How big should the safety bucket be?

A. A common rule of thumb is 2–3 years of expenses in debt or liquid options. The right size depends on your other income and comfort with volatility.

Q. Should I move fully to debt at retirement?

A. Usually not. With a 25–30 year horizon and inflation assumed at 6–7%, a fully debt portfolio may fail to keep pace. A gradual glide path is the more common approach.

Q. Can returns be guaranteed for retirement income?

A. Market-linked returns cannot be guaranteed. Only certain products (such as annuities) offer fixed payouts, usually at lower rates, so compare carefully.

Plan Our Future · AMFI-registered Mutual Fund Distributor (ARN-360754). Mutual Fund investments are subject to market risks, read all scheme related documents carefully.