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

Why a fall in your first years of drawing costs you far more than the same fall later, and what you can change about it.

By Nate Sorensen Reviewed for accuracyUpdated Oct 202612 min read
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You've saved for thirty years, and the market falls hard in the year you plan to stop working. While you were only paying in, the order your returns came in made no difference to where you ended up. Once you start taking money out, it makes a large one. Two people can earn the same average return over the same twenty-five years and finish in completely different places, because of when their bad years came. You don't get to choose your years. You do get some say in how much you have to sell during the bad ones.

Key takeaways

  • The order of your returns costs you nothing while you're still adding money. It only starts to matter once you're taking money out.
  • A bad run in your first years of drawing hurts you more than the same run later, because you sell more of your holdings at low prices and have less left when prices come back.
  • A registered retirement income fund, or RRIF, sharpens this for you in Canada. Your minimum withdrawal is worked out from your January 1 balance, so a fall in March doesn't lower what you have to take out.
  • Guaranteed income lowers the amount you have to sell for, so when you start your public pensions changes how much of this reaches you at all.

Why does the order of your returns matter if the average is the same?

The difference is that you're the one selling. When you take $30,000 out of an account that's fallen, you hand over more of what you own than the same $30,000 costs you in a good year, and the units you sold aren't yours any more when prices recover. That is what people mean by sequence-of-returns risk. The same average return, arriving in a different order, leaves you somewhere different.

Here's one set of ten yearly returns, run twice. Both average 5.5% a year. In the first run your bad years come first, and in the second the identical returns reach you in the opposite order.

You start with $500,000 and take out $30,000 a year. The first run leaves you about $346,000. The second leaves you about $487,000.

The same ten returns, in two different orders
Two withdrawal paths from the same ten returns in opposite ordersTwo lines starting together at five hundred thousand dollars. The line with the bad years first drops to about two hundred and ninety-five thousand dollars by year four, recovers only partly, and finishes at about three hundred and forty-six thousand. The line with the same returns reversed climbs to about seven hundred and thirty-nine thousand by year seven before the late bad years pull it back, and finishes at about four hundred and eighty-seven thousand. The gap at the end is about one hundred and forty-one thousand dollars.Bad years firstSame returns, bad years last$800,000$600,000$400,000$200,000$0$487,000$346,000StartYr 2Yr 4Yr 6Yr 8Yr 10Same returns. Same withdrawals. About $141,000 apart.
Illustrative. A $500,000 starting balance with $30,000 taken out at the end of each year. The returns are the same ten numbers in both runs, just reordered: minus 15, minus 10, 0, plus 10, plus 20, plus 20, plus 10, plus 5, plus 10 and plus 5 per cent. Both average 5.5% a year.
Source Illustrative. Round assumed returns, not a sourced figure and not any real market.

Now take your withdrawals away. Left alone, both runs finish at $808,259, to the dollar, because you get the same answer whichever order you multiply those ten numbers in. Every dollar of that $141,000 gap came from you selling, not from the market.

There's nothing more to it than that. While you're paying in, a cheap year buys you more units for the same money, so an early slump does you a favour. Once you're taking money out, that same cheap year makes you hand over more units to raise the same $30,000, so the cheap year that helped you at 40 costs you at 66.

It's also worth knowing what a fund's advertised annual return assumes. That figure has to be worked out on the assumption that every distribution was reinvested and that nothing was cashed out until the end of the period,1 which is exactly what you stop doing when you start living off the money. Yield versus total return goes further into what a reported return actually measures.

When you're most exposed

The years around the day you stop adding and start taking. Your savings are at their largest then, so the same percentage fall costs you more dollars than at any other point in your life, and you still have the most withdrawals ahead of you to take out of whatever survives.

Retirees in Canada have lived through both versions of this. If you'd finished work in May 2008, you'd have watched the S&P/TSX Composite fall 44.8% by February 2009, and you wouldn't have seen a month close back above that peak until June 2014.2 Six years. If you'd finished in January 2020, you'd have watched the same index fall 22.7% by March and close back above where you started in December of the same year.3 Eleven months.

How long each fall kept you selling low
Two Canadian market falls and how long each took to get backBoth runs start at 100 at their peak. The 2020 run drops to 77 by March 2020 and is back above 100 by December 2020, eleven months in total. The 2008 run drops to 55 by February 2009 and does not close a month above 100 again until June 2014, seventy-three months in total. The 2008 line is deeper and stays below the starting level for six years.From May 2008: down 44.8%, back in 73 monthsFrom January 2020: down 22.7%, back in 11 months1009080706050Back, Dec 2020Back, Jun 2014Peak1 yr2 yrs3 yrs4 yrs5 yrs6 yrsThe dashed line at 100 is the level each run started from.
S&P/TSX Composite, month-end closing values, each run rebased to 100 at its own peak month. The 2008 line runs from May 2008; the 2020 line from January 2020.
Source Statistics Canada, table 10-10-0125-01, Toronto Stock Exchange statistics. Accessed 2026-09-04. Index levels only, so they exclude dividends.

Those are index levels before dividends, so if you held a fund that paid you along the way, you got back to where you started sooner than the index alone suggests. You lose more the longer you go on selling while prices are down. In 2020 you would have sold at poor prices for a couple of quarters. In 2008 you would have done it for years, and every one of those sales came out of money you needed later.

You need it for a while. If you reach 65, you can expect another 20.85 years on average,4 and that's an average, so plenty of people live well past it. Savings that survive a rough first decade still have to keep paying you into your late eighties.

Joanne is 61, single, and finished paying for her house two years ago. She's a community college instructor with $318,000 in her registered retirement savings plan, or RRSP, and she's worked out that a year of her life costs $34,080. The Canada Pension Plan, or CPP, will pay her an estimated $712 a month at 65, before tax. That's $8,544 a year reaching her whether markets rise or fall, and Old Age Security, or OAS, will add to it. Everything above those amounts she has to sell for. Her next step is to price the same year at 70, when both pensions pay more, before she settles on a date. "Counting What's Already There" is where she adds up a year of her own life.

Why a falling market can force you to sell more

Most of what you'll draw on is probably sitting in an RRSP, and you have until the end of the year you turn 71 to move it into a RRIF.5 From the year after you set it up, your RRIF has to pay you a minimum, and whoever holds it works that out from the fair market value of what's inside at the start of the year, multiplied by a percentage that depends on how old you are.6 The percentage at 71 is 5.28%.7 The rule on the amount runs to one line. You can withdraw more, but not less than the minimum.8

Put those two together and you can see what a bad spring does to you. Your percentage is fixed in January. The balance it gets applied to is fixed in January too. If your investments fall in March, your minimum doesn't fall with them.

That percentage also climbs as you get older, whatever your investments are doing. It's 6.82% at 80 and 11.92% at 90.7 So if your savings have fallen, each year you're taking a larger percentage of a smaller balance.

Picture $400,000 in your RRIF on January 1, the year you turn 71. Your minimum works out to $21,120. If you're down 20% by the spring, you're holding $320,000 and you still have to take out that same $21,120, which is 6.6% of what you actually have. You take out the same dollars, and they're now a quarter more of what you have left.

A fall after January 1 doesn't lower what you have to take out
The RRIF minimum stays the same in dollars after the account fallsTwo columns. The first is a four hundred thousand dollar RRIF on January the first, with a gold band at its base showing the twenty-one thousand one hundred and twenty dollar minimum, which is 5.28 per cent of it. The second column is the same account after a twenty per cent fall, three hundred and twenty thousand dollars, and it is shorter. The gold band at its base is exactly the same size, because the dollar minimum has not changed. Underneath, two short bars show what that fixed amount is as a share of each balance: 5.28 per cent on January the first, and 6.60 per cent after the fall.On January 1$400,000By spring, down 20%$320,000$21,120 has to come out$21,120 has to come outAs a share of the balance it is taken from5.28%6.60%
Illustrative. A $400,000 RRIF balance on January 1 at age 71, using the prescribed factor of 5.28%, followed by a 20% fall. The dollar minimum is unchanged; the share of what is left rises from 5.28% to 6.60%.
Source Illustrative balance. The 5.28% factor and the January 1 valuation rule come from the Canada Revenue Agency; see sources 6 and 7.

If your first thought is that you'd just take less that year, you can't. The federal government stepped in over this once. In March 2020 it cut every RRIF minimum for that year by 25%, saying it did not want seniors selling RRIF assets to meet a withdrawal requirement while markets were falling.9 A $12,000 minimum became $9,000, and if you'd already taken more than the reduced amount you couldn't put the difference back.10 It happened once, for one year, and you can't count on it happening again. There's more on what a RRIF withdrawal costs you in tax, and on the order to take money out, in drawing down your retirement savings.

What can you actually do about a bad first year?

Everything turns on how many dollars you have to raise by selling, and all six of these work on that one number.

  1. Add up what reaches you on its own. Your CPP, your OAS, a defined benefit pension from work. That money arrives whether markets rise or fall, so you sell nothing to get it. Whatever you spend above that total is what you have to sell for, and once you write it down it's usually smaller than you'd guessed.

  2. Look at when you start CPP and OAS. Every month you wait past 65 raises your CPP by 0.7%, reaching 42% more if you hold off until 70,11 and your OAS by 0.6%, reaching 36% more.12 Both are indexed and neither one moves with markets. For Joanne that's $712 a month at 65 against $1,011 at 70, which takes about $3,600 a year off what she'd otherwise sell for. The catch lands on you in the meantime, because you draw more from your own savings during the years you're most worried about. There's more on that trade in when to start CPP.

  3. Know which account each dollar leaves from. Your RRIF has a minimum. A tax-free savings account, or TFSA, and anything you hold outside a registered plan don't. If you keep cash or short-term savings inside that TFSA, you can spend it in a bad year and never sell a unit at a low price.

  4. A year or two of spending, held in cash. Not as an investment, but so that nothing forces your hand. If next year's withdrawals are already sitting in cash or a short guaranteed investment certificate, or GIC, you wouldn't have to sell anything into a fall in March.

  5. One year of lower spending. Your withdrawal is the one side of this you decide yourself. Dropping a large optional cost in a bad year does more for you than the same cut in a good one, because you're not selling anything to pay for it.

  6. Count your partner's income too. If two of you have pensions that don't stop, you're far less exposed than one person living off a single pot, and splitting eligible pension income between you can lower the tax on whatever you do withdraw.

Nobody else can look this figure up for you. Work out how much of your spending already arrives without you selling anything. Your CPP estimate is waiting in My Service Canada Account, and if there's a plan at work, your pension booklet holds the other half. Subtract the two from what a year costs you, and what's left is the amount you have to raise by selling, in good markets and bad.

Put your own balance against it

Run your own numbers at your own age and balance, and you'll see what you have to take out this year. Then put the same balance in again 20% lower, and you'll see what the rule asks of you after a bad quarter.

What people close to retiring tend to do

If a defined benefit pension already covers most of what you spend, there isn't much of your income left for this to reach, and people in that position mostly do nothing about it.

Without one, drawing mainly from an RRSP or a RRIF, people tend to land on two moves at once. They keep a year or two of spending in cash so that a bad quarter can't force a sale, and they start CPP later to lift the part of their income that never falls. Those who stop working in their early sixties, with years to cover before CPP and OAS begin, feel this hardest, and plenty of them work a little longer or start a little smaller than they first planned.

Two numbers decide it. What a year of your life costs, and how much of that arrives without you selling anything. Both take an evening or two with your statements and your CPP estimate, which is roughly what it took Joanne before she would settle on anything.

?

Common questions

Does this matter if all my money is in a TFSA?

Your market risk is the same, but you've got far more room to move. A TFSA has no minimum withdrawal, so in a bad year you can leave it alone and spend from somewhere else. A RRIF doesn't give you that choice.

Can I take less out of my RRIF in a year when markets are down?

No. You can withdraw more than the minimum, but you can't go under it. The government did cut all RRIF minimums by 25% for 2020 because of the pandemic, but that was for that one year only, so you can't plan around it.

Is sequence of returns risk the same as market risk?

No. Market risk is your investments changing in value. Sequence risk is the order those changes arrive in, and it only reaches you while you're taking money out. If you're still contributing, you've got the same market risk and none of the sequence risk.

Should I move everything into cash before I retire?

That removes the sequence problem and hands you a different one. A retirement that starts at 65 runs about twenty years on average and often a good deal longer, so money that's all in cash tends to buy less each year as prices rise. Most people who worry about this don't go that far. They keep a year or two of spending in cash and leave the rest invested.

Does waiting to start CPP really help?

It raises a payment that never falls with markets, by 0.7% for every month you wait past 65, up to 42% more at 70. The trade is that you draw more from your own savings while you wait, and that's the same money you're trying to protect. Which way it lands depends on how much you've got and how long you expect to need it.

Sources

  1. OSCNational Instrument 81-102 Investment Funds, s. 15.11(1): the calculation of standard performance data must assume that distributions are reinvested and that a complete redemption occurs only at the end of the measurement period. Accessed 2026-09-04.
  2. Statistics CanadaTable 10-10-0125-01, Toronto Stock Exchange statistics. S&P/TSX Composite Index, month-end close: 14,714.73 (May 2008), 8,123.02 (February 2009), 15,146.01 (June 2014). Accessed 2026-09-04.
  3. Statistics CanadaTable 10-10-0125-01. S&P/TSX Composite Index, month-end close: 17,318.49 (January 2020), 13,378.75 (March 2020), 17,433.36 (December 2020). Accessed 2026-09-04.
  4. Statistics CanadaTable 13-10-0114-01, life expectancy at age 65, both sexes, 20.85 further years (2020 to 2022 estimate, released 2026-01-13). Accessed 2026-09-04.
  5. CRAReceiving income from an RRSP: at any age up to the end of the year you turn 71 you can transfer RRSP funds to a RRIF. Page last modified 2026-01-29. Accessed 2026-09-04.
  6. CRAMinimum amount from a RRIF: the fair market value of the property held in the RRIF at the start of the year, multiplied by a prescribed factor. Accessed 2026-09-04.
  7. CRAChart of prescribed factors, All other RRIFs column: 0.0528 at 71, 0.0682 at 80, 0.1192 at 90, and 1 divided by 90 minus the age at 70 or younger. Page last modified 2025-10-01. Accessed 2026-09-04.
  8. CRAReceiving income from a RRIF: you can withdraw more, but not less than the minimum. Accessed 2026-09-04.
  9. Department of Finance CanadaCOVID-19 Economic Response Plan, 18 March 2020: required minimum RRIF withdrawals reduced by 25% for 2020, so that seniors would not have to liquidate RRIF assets to meet the requirement. Accessed 2026-09-04.
  10. CRARRIF minimum withdrawal reduced for 2020: a $12,000 minimum became $9,000, and an excess already withdrawn could not be re-contributed. Page last modified 2020-05-13. Accessed 2026-09-04.
  11. Service CanadaCPP: starting after 65 increases payments by 0.7% each month, up to 42% at age 70. Page last modified 2026-06-18. Accessed 2026-09-04.
  12. Service CanadaOld Age Security: waiting past 65 increases payments by 0.6% each month, up to 36% at age 70. Page last modified 2026-08-06. Accessed 2026-09-04.

Educational, not financial advice. Figures verified against primary sources on the date shown.

See it in a story: "The Cheque That Grows If You Wait," where Joanne writes out what her pension pays at three different ages. For the withdrawal rule itself, see RRIF minimum withdrawals, and for whether you have enough to begin with, when you can retire. The rest of it is in the retirement hub.

Related guide

RRIF Minimum Withdrawals: The Table, and What It Forces You to Do