Sequence of Returns Risk: Protecting Retirement Income Internationally

Imagine two investors who each earn an identical average annual return of 6% over a 30-year retirement. One experiences the worst years first and the best years last; the other experiences the reverse. Despite identical average returns, their outcomes are dramatically different. The investor who experiences early poor returns may run out of money entirely before retirement ends, while the investor with good early returns may leave a substantial estate.

This phenomenon — sequence of returns risk — is one of the most important and least understood risks in retirement planning. For internationally mobile retirees drawing from multi-currency portfolios while living abroad, it carries additional dimensions that are rarely addressed in standard financial planning guidance.

Understanding Sequence of Returns Risk

During the accumulation phase, sequence of returns risk does not apply in the same way. When you are contributing regularly to an investment portfolio, poor early returns actually help — they allow you to buy more units at lower prices, a phenomenon known as pound-cost averaging. You benefit from volatility rather than being harmed by it.

In retirement, the dynamic inverts. Once you begin withdrawing regularly from a portfolio, poor early returns are devastating in a way that good early returns are not symmetrical with.

Here is a simple illustration. Suppose you retire with £1,000,000 and withdraw £50,000 per year (5% initial withdrawal rate). In Year 1, your portfolio falls 30%:

• Starting value: £1,000,000
• 30% market fall: -£300,000
• Withdrawal: -£50,000
• Remaining: £650,000

Your portfolio must now generate a return of approximately 54% just to return to its £1,000,000 starting value — before you take another withdrawal. If markets then recover with a strong run, the damage may be recoverable. But if you sustain two or three early years of poor returns, the portfolio may be permanently impaired, meaning you will run out of money before retirement ends even if subsequent returns are excellent.

Now reverse the scenario: strong early returns, followed by a sharp late-career fall. The outcome is far more benign, because the large early gains compound before any significant drawdown occurs, and later withdrawals come from a much larger pot.

The mathematical asymmetry is stark and counterintuitive to many retirees.

Why This Is Worse for International Retirees

Internationally mobile retirees face compounding layers of sequence of returns risk:

Currency Risk as a Sequential Risk

A UK retiree living in Spain, drawing sterling-denominated pension income and spending in euros, faces not just investment return risk but currency return risk — which is similarly sequence-dependent. A sharp sterling depreciation in the early years of retirement (as happened post-Brexit referendum) can damage the real value of the income stream in a way that is difficult to recover from, even if sterling subsequently strengthens.

Multiple Asset Pools With Different Volatility Profiles

International retirees commonly hold assets across multiple wrappers and jurisdictions — UK SIPPs, offshore bonds, ISAs, foreign investment accounts. The interaction of drawdown across these pools creates complex sequence risk. Drawing from the wrong pool in a down year can crystallise a loss in that pool that a different sequencing would have avoided.

Political and Regulatory Risk

Internationally mobile retirees also face regulatory sequence risk: tax rules change, pension regimes are reformed, capital controls are introduced. An adverse regulatory change early in retirement — a new tax on foreign pension income in your country of residence, for example — has a compounding effect if it hits in the early, most financially fragile, phase of decumulation.

Strategies to Mitigate Sequence of Returns Risk

1. The Cash Buffer (Bucket 1 Strategy)

The most commonly recommended mitigation is to hold 1–3 years' worth of living expenses in cash or near-cash at the point of retirement. This means you do not need to sell growth assets in a market downturn — you draw from the cash buffer while the portfolio recovers, refilling the buffer when markets improve.

For international retirees, the cash buffer should ideally be held in local currency (or the primary spending currency) to eliminate concurrent currency risk on near-term spending.

Practical size: most practitioners suggest 12–24 months of essential expenditure. Holding too much in cash is its own risk — opportunity cost and inflation drag can be significant over multi-decade retirements.

2. Floor and Upside Strategy

The floor and upside approach involves securing a guaranteed income floor — through state pensions, annuities, or other guaranteed income sources — sufficient to cover essential expenditure. Discretionary expenditure (travel, leisure, non-essential lifestyle costs) is then funded from an invested portfolio.

In a market downturn, essential costs are met from the guaranteed floor; discretionary spending is temporarily reduced. This provides resilience without requiring you to sell equities at a loss to fund necessities.

For internationally mobile retirees, the floor is typically assembled from:

• State pension(s) from home country and any other qualifying countries
• Defined benefit pension income, if any
• Annuity income covering essential costs

The upside portfolio can then remain invested for the longer term, accepting volatility but without needing to fund essential costs.

3. Dynamic Withdrawal Rate

A rigid fixed withdrawal rate is vulnerable to sequence risk. A dynamic approach adjusts withdrawals based on portfolio performance:

• In good years: maintain or modestly increase withdrawals
• In poor years: reduce discretionary withdrawals to allow the portfolio to recover

The spending cut required in a bad year is typically modest — research suggests that cutting spending by 10–20% in portfolio stress periods significantly extends the life of the retirement portfolio.

For internationally mobile retirees, the natural flexibility of discretionary spending on travel and lifestyle provides a genuine mechanism for dynamic withdrawal. Fewer international flights and less dining out in a recession year is a very different proposition from cutting essential housing or healthcare costs.

4. Partial Annuitisation

Converting a portion of retirement assets into a guaranteed lifetime annuity reduces overall sequence risk by providing an income floor that does not depend on market performance. The downside is loss of flexibility and the lock-in of rates at a point in time.

The decision to annuitise is highly sensitive to:

• Current annuity rates (which depend on gilt yields and longevity tables)
• Your health and family longevity history
• Your country of residence (annuities typically pay in the home currency)
• Your other income sources and their stability

For internationally mobile retirees, currency mismatch is a key concern with annuities. A sterling annuity paying for expenses in euros, baht or dirhams creates ongoing currency conversion costs and exchange rate risk.

5. Maintaining a Bond/Income Allocation in the Portfolio

A well-constructed retirement portfolio typically holds a proportion of bonds or other income-generating assets. These serve as:

• A relative stabiliser in equity market downturns (bonds do not always rise when equities fall, but the correlation is typically lower)
• A source of income and redemption in bad years that does not require selling growth assets

For internationally mobile retirees, the bond allocation should consider currency exposure. Bonds denominated in spending currency provide a natural hedge for near-term withdrawals.

6. Rising Equity Glidepath

Conventional wisdom suggests reducing equity allocation as you approach and enter retirement. Recent academic research, most associated with Kitces and Pfau, suggests that a "rising equity glidepath" — actually increasing equity exposure gradually through early retirement — can reduce sequence risk. The logic is that the lowest equity exposure coincides with the period of greatest vulnerability (early retirement), and exposure then increases once the most dangerous early years have passed.

This is a counter-intuitive strategy that requires discipline and a sound understanding of the rationale. It should be discussed with a qualified adviser before implementation.

7. Diversifying Across Asset Classes and Geographies

Sequence of returns risk is most acute when a single large adverse event hits the whole portfolio simultaneously. Diversification across asset classes (equities, bonds, property, alternatives), geographies and currencies reduces the probability that all portfolio components fall simultaneously.

For internationally mobile retirees, the natural diversification of assets across multiple currencies and countries — if managed deliberately — can actually be a form of sequence risk mitigation.

Monitoring and Review

Sequence of returns risk is not a one-time problem to solve at retirement. It requires ongoing monitoring, particularly in the first ten years of retirement when the risk is most acute. An annual review with your financial adviser should assess:

• Portfolio performance against projections
• Withdrawal rate in the context of current portfolio value
• Whether the cash buffer needs replenishing
• Whether any tactical adjustments to the asset allocation are warranted
• Currency positioning relative to spending

If the portfolio has performed well in early retirement — a favourable sequence — you have some latitude to increase withdrawals or accept the safety margin as an improved legacy position. If the early sequence is poor, early corrective action (reducing withdrawals, temporarily increasing income from other sources) is far more effective than attempting to compensate later.

The Psychological Dimension

Sequence of returns risk also has a behavioural component. Watching a retirement portfolio fall significantly in value — even in the context of a market correction that is ultimately temporary — triggers emotional responses that can lead to poor decisions: selling at the bottom, abandoning the investment strategy, or making unnecessary changes.

Having a plan — ideally written, agreed with a professional adviser, and stress-tested before retirement — provides an anchor when markets are volatile. The plan should specify in advance what actions will be taken in different scenarios, removing the need for emotional in-the-moment decision-making.

How Global Investments Can Help

Managing sequence of returns risk requires a combination of structural design (the right portfolio, the right income sources, the right currency exposure) and ongoing management (the right response to good and poor sequences as they unfold).

Global Investments works with internationally mobile retirees to build retirement income strategies specifically designed to be resilient to sequence of returns risk. Our approach integrates portfolio construction, income layering, currency management and dynamic withdrawal planning into a coherent strategy that holds up under stress.

We welcome conversations with clients approaching retirement who wish to understand their vulnerability to sequence risk and build a plan that addresses it.

Contact us for an initial consultation with one of our senior advisers.

The value of investments and the income from them can fall as well as rise. Past performance is not a reliable indicator of future results. This guide is for information purposes only and does not constitute regulated financial advice. Seek qualified regulated advice before making decisions about retirement income or investment strategy.