When you retire, the biggest challenge isn’t how much your portfolio earns on average it’s the order in which those returns arrive. This is known as “sequence of return risk,” and it can make or break a retirement plan.
At retirement, clients face a fundamental choice: the certainty of a lifetime annuity or the flexibility of flexi-access drawdown.
An annuity converts your pension pot into a guaranteed income for life, a natural fit for those with a lower risk appetite who prioritise security overgrowth.
Drawdown keeps your money invested, offering the potential for higher returns and inheritance tax efficiency, but exposes your income to market movements; sequence risk becomes a critical consideration, poor investment return in the early years of retirement, combined with ongoing withdrawals, can permanently deplete a portfolio even if markets recover strongly later.
Neither option is superior; the right choice depends on your risk appetite, health, other income sources, and how much income you need. This is precisely where working with a planner adds value, helping you weigh these trade-offs with clarity, and structuring a retirement income strategy that reflects your personal circumstances, not just market averages.
Why sequence matters more than averages
Imagine two retirees with identical portfolios and withdrawal needs. Both experience the same average returns over 30 years, but one suffers heavy losses in the first few years while taking income, while the other enjoys strong early gains. The first retiree’s portfolio may never fully recover, even if markets later perform well. Research shows that returns in the first decade of retirement can explain up to 77% of the final outcome.
The key question, then, is not which strategy delivers the highest long-term return, but which best protects your portfolio during those critical early years and does so in a way that’s simple, disciplined, and easy to follow.
Our approach: annual replenishment with rebalancing
At Blackdown Financial we prefer the cash buffer approach to manage sequencing risk: which involves maintaining a cash buffer (1 to 2 years of withdrawals), fund spending from it throughout the year, and replenish it annually by selling the asset class that has performed best, simultaneously rebalancing the portfolio back to its target allocation.
This approach is backed by research, showing that when strategies include annual rebalancing, they produce outcomes identical to, or better than, more complex decision-rule systems, but with far greater simplicity.
Retirement income planning is less about chasing returns and more about managing risk with discipline. By combining a modest cash buffer with annual replenishment and rebalancing, you get a strategy that’s sound, simple, and robust, exactly what you need to navigate retirement with confidence.
If you’d like help with planning your future, please contact us on 01823 321616 or email enquiries@blackdownfinancial.co.uk to find out more.
The value of investments can go down as well as up. W & T Limited trading as Blackdown Financial is authorised and regulated by the Financial Conduct Authority. FRN: 439620.
Share