Sequence of Returns Risk: A Canadian Retirement Case Study

Q: "What is sequence of returns risk in retirement?"

"Sequence of returns risk is the danger of experiencing poor investment returns in the early years of retirement while making regular withdrawals. When you sell assets to fund income during a market decline, you sell more units at lower prices — and those units are permanently gone. When markets recover, you have a smaller base compounding the recovery. Two retirees with identical portfolios, identical average returns, and identical withdrawal rates can end up with dramatically different outcomes depending solely on when the bad years arrive. The risk is highest in the first five to seven years of retirement, which is why the structure you build before retirement matters more than your long-run average return."

Q: "What is a cash wedge strategy in retirement?"

"A cash wedge is a formal segmentation of retirement assets into three distinct pools based on time horizon and risk. Wedge 1 — typically 12 months of expenses in cash or a high-interest savings account — funds near-term living costs with no market exposure. Wedge 2 — typically two to three years of expenses in a GIC ladder or short-term fixed income — automatically replenishes Wedge 1 as each tranche matures. Wedge 3 is the long-term growth portfolio — equities and balanced assets that are never sold during a market downturn, only used to refill Wedge 2 when markets are positive. The result is a retiree who can experience three or more consecutive years of negative equity markets without being forced to sell a single investment at a loss. The wedge structure removes real-time judgment calls entirely — the system runs itself."

Q: "Should I reduce my equity allocation before I retire?"

"For most retirees without a pension, yes. If your portfolio is the primary income source, higher equity exposure in the early retirement years creates meaningful sequence risk. A common framework: hold enough in stable assets — cash, short-term bonds, GICs — to fund three to five years of withdrawals without touching equities, with the remainder in a growth-oriented allocation that has time to recover from any downturn. The transition from an accumulation allocation to a distribution allocation should begin two to three years before retirement, not on the day you stop working.\n"

Q: "How does CPP deferral help with sequence of returns risk?"

"CPP is a guaranteed, inflation-indexed income stream that pays regardless of market conditions. Deferring CPP increases the monthly benefit by 0.7% for every month past age 65, permanently and indexed. For retirees without a pension, a higher CPP reduces the amount that must come from the portfolio each year — directly reducing the units that need to be sold during any market decline. For many Canadians without a pension, deferring CPP to 67 or 68 while drawing down the RRSP in the bridge years simultaneously reduces sequence risk, reduces lifetime tax, and increases guaranteed lifetime income."

Q: "How do I protect my retirement portfolio from sequence of returns risk?"

"The most effective protections reduce the amount you need to withdraw from your equity portfolio during a market decline. Build a formal cash wedge — segmenting short-term, medium-term, and long-term assets so equities are never touched during a downturn. Defer guaranteed income sources like CPP and OAS to create a larger income floor. De-risk the equity allocation as you approach and enter retirement. And build a flexible withdrawal policy that allows modest spending reductions in bad years. No single strategy eliminates the risk, but a combination significantly reduces the exposure — and the cash wedge structure removes the need for real-time judgment calls during the most emotionally difficult market conditions."

By Seun Adeyemi, CFP®, CKA®

Published July 1, 2026 7 min read

In thirty years of investing, Diane had never experienced a serious loss. She had stayed the course through every correction. But two years from retirement, she asked a question none of those years had prepared her for: what if the drop happens now? The answer restructured everything.

The Situation

Diane, 57, is a senior administrator at a healthcare organization in the GTA. She has been a disciplined, consistent investor for her entire working life — monthly contributions, no withdrawals, minimal tinkering. Her combined RRSP and TFSA balance at the time of our first meeting was approximately $920,000, invested in a balanced growth portfolio with approximately 72% equity exposure. She has no defined benefit pension. Her projected CPP at 65 is approximately $980 per month based on her contribution history.

She came to us not because her portfolio was struggling. It was performing well. She came because a colleague had retired in early 2022, watched her portfolio drop 22% in the first eight months of retirement, and was now back at work part-time to recover the shortfall. Diane had watched that happen from a distance and recognized, with two years left before her own planned retirement date, that she had never once thought about what that scenario looked like for her specifically.

“I’ve never panicked. I’ve always stayed in. But I never had to stay in while I was also drawing money out. That’s a different thing, isn’t it?”

— Diane, at their first meeting

This is a composite case study. Names, ages, and financial figures are illustrative. It is based on real planning scenarios we encounter with pre-retirees who have accumulated well but have not yet transitioned their portfolio or their thinking from accumulation to distribution.

The Complication

Diane’s instinct was correct. Staying invested during a downturn when you are accumulating is a discipline that rewards patience. Staying invested during a downturn when you are withdrawing is a fundamentally different mathematical problem — and one where patience alone is not a strategy.

Sequence of returns risk is the danger specific to the early years of retirement: if markets decline while you are making regular withdrawals, you are forced to sell more units at lower prices to generate the same income. Those units are gone permanently. When markets recover, you have fewer shares participating in the recovery. The same average return over 30 years can produce dramatically different outcomes depending on whether the bad years come first or last.

When we modelled Diane’s current plan against a stress scenario, three specific vulnerabilities appeared:

No income floor. With no DB pension, Diane’s entire retirement income in the first three years — before CPP and OAS began — was dependent on portfolio withdrawals. A 25% market decline in year one would have required her to liquidate approximately $47,000 in depressed assets to fund her first year of spending. Those units would not come back.
72% equity exposure two years from retirement. A portfolio built for a 30-year accumulation horizon is not automatically appropriate for a 30-year distribution horizon. The risk profile that made sense at 40 does not make sense at 59 without a deliberate transition. Diane had never rebalanced for retirement approach.
No structured income segmentation. Every dollar of retirement income was to come from the same undifferentiated pool. There was no separation between short-term spending money and long-term growth assets — which meant any bad year would immediately require selling growth positions at a loss to fund living expenses.

What We Found

We ran three retirement scenarios side by side: a base case using historical Canadian balanced-portfolio returns, a stress case modelling a 28% equity decline in the first two years of retirement, and a recovery case where the same decline happened in years 8–10 instead.

The difference between the stress case and the recovery case, with identical average returns over 30 years, was approximately $310,000 in terminal portfolio value. Same investments. Same average return. Different sequence. That is the number that made the risk concrete for Diane rather than theoretical.

With no pension income floor, we identified CPP deferral as the most efficient way to create guaranteed income in the early retirement years. Deferring CPP from 65 to 68 increases Diane’s monthly benefit from approximately $980 to $1,226 — a 25% permanent increase, indexed to inflation for life. RRSP drawdowns of approximately $38,000 per year bridge the gap between retirement at 60 and CPP at 68, drawn in lower-income years to reduce the eventual RRIF forced-income tax hit in Diane’s seventies.

Keeping RRIF income manageable also protects against the OAS Recovery Tax — the clawback that reduces OAS benefits by 15 cents for every dollar of net income above the annual threshold. For a retiree with no pension income floor, unmanaged RRIF withdrawals stacked on top of CPP and OAS can silently erode hundreds of dollars per month in government benefits that a structured drawdown plan would have protected.

We also reviewed Diane’s investment management costs. Her portfolio had been managed inside a mutual fund structure through her bank for the full 30 years of accumulation, carrying a blended management expense ratio of approximately 2.45%. Transitioning to Odyssey Wealth’s investment management — at an all-in fee between 1.1% and 1.6% — reduced her ongoing cost by approximately 1.1 percentage points annually. On her $920,000 portfolio, that is a saving of roughly $10,350 per year. Compounded across a 25-year retirement horizon, that annual saving represents an estimated $494,000 in additional capital that stays invested rather than being paid in fund expenses. For a retiree with no pension income floor, keeping those dollars in the portfolio is a direct contribution to sequence-of-returns resilience.

The Decision

Diane implemented a four-part transition plan over the 24 months before her retirement date:

Portfolio de-risking: equity allocation reduced from 72% to 52% over 18 months through systematic rebalancing — staged to avoid selling during any single down period and to capture rebalancing opportunities as they arose.
Cash wedge strategy established: rather than a single undifferentiated cash pool, Diane’s retirement income was segmented into a formal three-wedge structure. Wedge 1 — $100,000 in a high-interest savings account — covers the first 12 months of expenses with zero market exposure and no decisions required. Wedge 2 — $200,000 structured as a staggered GIC ladder with tranches maturing at 12, 18, 24, and 30 months — automatically replenishes Wedge 1 as each tranche matures, regardless of market conditions. Wedge 3 is the repositioned investment portfolio itself — it is never touched during a market downturn. Only when markets are positive and Wedge 2 needs refilling does any sale occur from the equity portfolio. The structure gives Diane three full years of negative equity markets without selling a single investment unit.
CPP deferred to 68: RRSP withdrawals of approximately $38,000 per year fund the gap between retirement at 60 and CPP at 68, drawn during the lower-income bridge years to keep Diane in a manageable tax bracket while reducing the eventual RRIF forced-income concentration in her seventies.
Investment management transitioned: portfolio repositioned from high-MER mutual fund structure to Odyssey Wealth’s managed mandate at the reduced all-in fee, with asset allocation now matched to Diane’s distribution horizon rather than her prior accumulation profile.

The Outcome


Sequence risk quantified	$310,000 difference in terminal value between early-sequence and late-sequence decline — identical average returns
Equity exposure	Reduced from 72% to 52% over 18 months — matched to distribution horizon
Cash wedge structure	$300,000 across three wedges — Wedge 1: $100K HISA (months 1–12), Wedge 2: $200K GIC ladder (months 13–36), Wedge 3: investment portfolio (untouched in any downturn). Full 36-month equity-free runway.
CPP deferral gain	~$3,552/yr additional lifetime income from deferral to 68 vs. 65, indexed to inflation
Lifetime tax reduction	RRSP bridge drawdown reduces RRIF forced-income tax concentration in Diane’s seventies
Annual fee saving	~$10,350/yr transitioning from 2.45% MER to Odyssey Wealth all-in fee
Lifetime fee saving	~$494,000 compounded over 25-year retirement horizon
Retirement date	Confirmed at 60 — unchanged, now supported by a structure that survives a bad market

“I didn’t need to change when I was retiring. I needed to change how I was set up to get there. Those are two very different problems.”

— Diane, after the Life-First Plan™ was delivered

What This Might Mean for You

The investors most vulnerable to sequence of returns risk are often the ones who have done everything right. Thirty years of discipline. A portfolio that has grown consistently. A confidence built from having stayed the course through every prior correction.

That discipline is not wrong. But it was built for accumulation. The rules change when you begin drawing income from the portfolio rather than adding to it. The same market decline that is an opportunity at 40 is a structural problem at 60, if you have no income floor, no income segmentation, and no plan to avoid selling growth assets to fund your monthly expenses.

The two years before retirement are the most important financial planning window most Canadians will ever have. The decisions made in that window — about portfolio structure, cash wedge sizing, CPP timing, and drawdown sequencing — determine whether a market decline in the early retirement years is a manageable event or a permanent setback. There is no recovering lost units. The time to build the structure is before you need it.

Related reading on askacfp.ca: What Is Sequence of Returns Risk? — activate this link once the askacfp article is live.

The result

✦ Sequence risk stress-tested · equity reduced 72%→52% · $300K cash wedge (36-month runway) · ~$494K lifetime fee saving · retirement confirmed at 60

Questions people in this situation ask us

Frequently Asked Questions

What is sequence of returns risk in retirement?

Sequence of returns risk is the danger of experiencing poor investment returns in the early years of retirement while making regular withdrawals. When you sell assets to fund income during a market decline, you sell more units at lower prices — and those units are permanently gone. When markets recover, you have a smaller base compounding the recovery. Two retirees with identical portfolios, identical average returns, and identical withdrawal rates can end up with dramatically different outcomes depending solely on when the bad years arrive. The risk is highest in the first five to seven years of retirement, which is why the structure you build before retirement matters more than your long-run average return.

What is a cash wedge strategy in retirement?

A cash wedge is a formal segmentation of retirement assets into three distinct pools based on time horizon and risk. Wedge 1 — typically 12 months of expenses in cash or a high-interest savings account — funds near-term living costs with no market exposure. Wedge 2 — typically two to three years of expenses in a GIC ladder or short-term fixed income — automatically replenishes Wedge 1 as each tranche matures. Wedge 3 is the long-term growth portfolio — equities and balanced assets that are never sold during a market downturn, only used to refill Wedge 2 when markets are positive. The result is a retiree who can experience three or more consecutive years of negative equity markets without being forced to sell a single investment at a loss. The wedge structure removes real-time judgment calls entirely — the system runs itself.

Should I reduce my equity allocation before I retire?

For most retirees without a pension, yes. If your portfolio is the primary income source, higher equity exposure in the early retirement years creates meaningful sequence risk. A common framework: hold enough in stable assets — cash, short-term bonds, GICs — to fund three to five years of withdrawals without touching equities, with the remainder in a growth-oriented allocation that has time to recover from any downturn. The transition from an accumulation allocation to a distribution allocation should begin two to three years before retirement, not on the day you stop working.

How does CPP deferral help with sequence of returns risk?

CPP is a guaranteed, inflation-indexed income stream that pays regardless of market conditions. Deferring CPP increases the monthly benefit by 0.7% for every month past age 65, permanently and indexed. For retirees without a pension, a higher CPP reduces the amount that must come from the portfolio each year — directly reducing the units that need to be sold during any market decline. For many Canadians without a pension, deferring CPP to 67 or 68 while drawing down the RRSP in the bridge years simultaneously reduces sequence risk, reduces lifetime tax, and increases guaranteed lifetime income.

How do I protect my retirement portfolio from sequence of returns risk?

The most effective protections reduce the amount you need to withdraw from your equity portfolio during a market decline. Build a formal cash wedge — segmenting short-term, medium-term, and long-term assets so equities are never touched during a downturn. Defer guaranteed income sources like CPP and OAS to create a larger income floor. De-risk the equity allocation as you approach and enter retirement. And build a flexible withdrawal policy that allows modest spending reductions in bad years. No single strategy eliminates the risk, but a combination significantly reduces the exposure — and the cash wedge structure removes the need for real-time judgment calls during the most emotionally difficult market conditions.

Diane