The risk no one warned you about

Why retirement feels different the moment you stop saving

While you are saving, a market fall can quietly work in your favour. Your monthly contributions buy more units at lower prices, and time is on your side to recover. This is why younger investors are often told not to fear volatility. Retirement reverses that logic entirely. Now there are no contributions flowing in — only withdrawals flowing out. When you sell assets to fund an income during a downturn, you lock in those losses permanently, and there are fewer units left to benefit when markets eventually recover.

This shift — from building capital (accumulation) to drawing it down (decumulation) — is where many retirement plans quietly come under strain. A plan that was perfectly sound for reaching retirement can behave very differently once it has to survive retirement.

A quick definition of sequence of returns risk

Why the order of returns matters more than the average

A simple thought experiment

Picture two retirees — call them Retiree A and Retiree B. This is a hypothetical illustration, not a forecast. Both retire on the same day with the same R5 million in a living annuity. Both draw the same income. Over their first decade, both experience exactly the same set of annual returns — identical good years and bad years, producing an identical average. The only difference is the order.

• Retiree A meets the bad years first, while their capital is at its largest and withdrawals are biting into a falling pot.
• Retiree B enjoys the good years first, building a buffer before the same downturn arrives later, against a portfolio that has already grown.

Same money. Same markets. Same average. Yet Retiree A can run dangerously low while Retiree B remains comfortable. Nothing about the returns themselves changed — only the sequence. That is the entire risk in one picture: in the drawdown phase, the timing of returns can matter more than the average return.

See it for yourself

Rather than take the example on trust, you can model it. The interactive tool below lets you enter a starting amount, a drawdown rate and a time horizon, then compare two identical-average sequences — good years first versus bad years first — to see how differently the capital lasts.

Why withdrawals turn an ordinary downturn into permanent damage

A market that falls and then recovers is, for a saver, simply a round trip. For a retiree drawing income, it is not. Every rand you withdraw while prices are down is a rand that can never participate in the recovery. The withdrawal and the downturn compound each other: the pot shrinks faster than the market alone would shrink it, and the rebound, when it comes, works on a permanently smaller base. This is why two retirees facing the same recovery can experience completely different outcomes.

The “fragility window” — your first five to ten years

Sequence risk is not evenly spread across retirement. It concentrates in the early years — roughly the first five to ten — when your capital is at its peak and a poor run of returns plus withdrawals causes the most lasting harm. Survive that window in reasonable shape and the same volatility later in retirement is far less threatening, because your withdrawals are then a smaller share of a portfolio that has had time to grow. Much of the art of building a resilient retirement income is really about protecting this fragile early period.

Watch: the idea in a few minutes

If you prefer to hear it explained, the short video below walks through the same two-retiree idea and the handful of practical defences that follow.

Why this hits South African retirees specifically

Living annuities and the 2.5%–17.5% drawdown band

Many South Africans retire into a living annuity, where they choose an annual income within a band set by regulation. Under the framework overseen by the FSCA, that income can be set between 2.5% and 17.5% of the capital each year. The freedom to choose is also the trap: a withdrawal rate that feels reasonable in a calm market can become unsustainable if a downturn arrives early, because you are taking a fixed percentage out of a falling pot.

Full freedom — and full responsibility

While you are saving, Regulation 28 limits how much of your retirement fund can sit in any one asset class, acting as a guardrail. In a living annuity, that guardrail falls away — you have full investment freedom in the income phase. That flexibility is genuinely useful, but it shifts the responsibility for managing risk squarely onto you and your adviser. An allocation that is too aggressive into the fragility window, or too conservative for a thirty-year retirement, can each cause problems for different reasons.

JSE and rand volatility, offshore exposure and currency swings

South African retirees also contend with a local equity market that can be concentrated and volatile, and a rand that moves sharply against major currencies. Offshore exposure can help diversify, but it introduces currency swings that add their own timing risk. None of this is a reason to avoid growth assets — you will likely need them to outpace inflation over decades — but it does mean the sequence of returns can be more pronounced here than in calmer, more diversified markets.

How the two-pot system changes the runway into retirement

The two-pot retirement system, introduced through National Treasury's retirement reforms, changes how savings are split and accessed before retirement. Drawing from the savings component along the way can leave less capital entering the fragility window — which is precisely the moment sequence risk is most dangerous. The convenience of early access and the long-term resilience of your retirement income are, to some extent, in tension, and worth weighing carefully.

Sequence risk versus the other big retirement risks

Sequence risk versus longevity risk

Longevity risk is the risk of outliving your money — of simply living longer than your capital was planned to support. Sequence risk is about when your returns arrive. The two are closely linked: a bad sequence early on shortens how long your money lasts, which makes longevity risk far more dangerous. Defend against sequence risk in the early years and you give your capital the best chance of going the distance.

Sequence risk versus inflation risk

Inflation quietly raises the income you need each year just to maintain the same standard of living. If an early downturn forces you to draw a rising income from a shrinking pot, inflation and sequence risk pull in the same destructive direction. This is why an income that looked comfortable at retirement can feel tight a decade later.

How these risks compound each other

None of these risks acts alone. A poor early sequence, a rising inflation-adjusted income need, fees that nibble at returns, and a long life all interact. The encouraging news is that the defences against sequence risk — a sensible drawdown rate, a cash buffer, the right asset mix — tend to help with the others too.

How to defend against sequence of returns risk

You cannot control markets, and no one can promise a particular outcome. What you can control is your exposure to the timing of returns. The following levers are the ones that, in practice, make the biggest difference. They work best together, and they are most powerful when set up before a downturn rather than in the middle of one.

1. Start with a sustainable, realistic drawdown rate

The single biggest lever is how much you draw. The less you take, especially early on, the more capital survives a poor run and the more it can recover. A drawdown rate that is comfortably sustainable in good years can become punishing in bad ones, so the question is not “what is the maximum I am allowed to draw?” but “what can I draw and still leave the plan resilient if the first few years disappoint?”

2. Hold a cash buffer

Many advisers suggest holding two to three years of income in cash or low-volatility assets. The purpose is simple: when markets fall, you draw your income from the buffer instead of selling growth assets at depressed prices — giving those assets time to recover. The exact size depends on your circumstances, but the principle is that a buffer turns a forced sale into a deliberate choice.

3. Use a “bucket” approach to income

A bucket strategy extends the cash-buffer idea by splitting your capital into layers: a short-term bucket of cash for near-term income, a medium-term bucket of more stable assets, and a long-term bucket of growth assets you do not need to touch for years. You spend from the short bucket and refill it from the others over time, ideally after good years rather than bad ones.

4. Consider blending a living annuity with a guaranteed life annuity

A guaranteed (life) annuity pays a set income for life, transferring market and timing risk to the insurer. Blending one with a living annuity can cover your essential expenses with income that does not depend on market timing, while leaving the rest invested for growth and flexibility. This lowers the withdrawals required from the market-exposed portion — directly reducing sequence risk — and helps with longevity risk at the same time. Whether it suits you depends on your needs, and is a decision worth reviewing with an adviser.

5. Flex your withdrawals after a bad year (dynamic drawdown)

A fixed income drawn rigidly through a downturn is one of the surest ways to amplify sequence risk. A dynamic approach — trimming withdrawals modestly after a poor year and allowing them to recover after good years — eases the pressure on capital at exactly the moment it is most vulnerable. Even small, temporary adjustments early on can materially improve how long the plan lasts.

6. Keep growth assets — but match them to your time horizon

Defending against sequence risk does not mean abandoning growth. A retirement can last thirty years or more, and an overly cautious portfolio creates its own danger: failing to keep pace with inflation. The aim is to match assets to when you will need them — stable assets for near-term income, growth assets for the years you will not touch — so you are never forced to sell growth at the wrong time.

7. Mind your fees, especially in the early years

Fees act like a small, guaranteed negative return every year. During the fragility window, that drag compounds with withdrawals and any market falls. Understanding your total costs — often expressed as an Effective Annual Cost — and keeping them reasonable is one of the few levers entirely within your control.

What this looks like in practice

Questions worth asking before you convert savings to income

• If markets fell sharply in my first two years, would my income still be sustainable?
• How many years of income do I have outside of growth assets?
• Which of my expenses are essential, and could those be covered by income that does not depend on the market?
• What total fees am I paying, and what are they costing me over time?

When a downturn arrives — what to do, and what not to do

In practice, the most lasting damage in the early years often comes less from the downturn itself than from the decisions made in response to it. The instinct to “do something” when markets fall is powerful — and frequently the most expensive instinct in retirement. A calmer playbook tends to look like this:

Why an annual review matters more than a perfect forecast

No one can forecast the sequence of returns you will retire into. What you can do is review regularly — checking your drawdown, your buffer and your allocation against how markets have actually behaved, and adjusting calmly while there is still room to do so. A plan that is reviewed every year is far more resilient than one built on a single, confident projection.

The bottom line for South African retirees

Sequence of returns risk is a decumulation problem. It barely registers while you are saving, which is exactly why it catches so many people off guard the moment they start drawing an income. A healthy long-term average is no guarantee of a comfortable retirement, because the average hides the timing — and in the fragility window, timing is what counts.

The reassurance is this: while you cannot choose the markets you retire into, you hold real, controllable levers — your drawdown rate, your cash buffer, your asset mix, whether you blend in a guaranteed income, and how you respond when markets fall. Wealth gives freedom of time, and a resilient income plan is what protects that freedom when the early years disappoint.