A bad first year of retirement can undo years of saving

Summary: Most people retire thinking the hard part is over. But one invisible risk in your first few years can shrink your hard-earned savings. And no, we aren’t talking about inflation here. Known as sequence-of-returns risk, this silent threat is very real and yet hardly anyone’s talking about it. So, let’s understand what this risk means with a simple example and then give you a solution. The good news is that the fix is surprisingly simple.

Most investors spend their working years chasing better returns and clever tax hacks. But when you retire, the next few months become critical because there’s one evil force that can undo decades of discipline without warning.

It’s called sequence-of-returns risk. And it is both under-discussed and wildly consequential.

Simply put, it can determine whether your retirement corpus lasts comfortably or collapses prematurely.

What does sequence-of-returns risk mean?

Imagine two retirees.

Both have a starting retirement corpus of Rs 1 crore, an annual withdrawal of Rs 6 lakh and the same long-term average return. And yet, one of them runs out of money years earlier. Not because of their behaviour, but because of the sequence in which the market returns arrived.

Let’s explain this risk with an example.

Scenario 1: When markets give positive returns in the first two years after your retirement

Year 1: Investment grows by 10 per cent
The corpus of Rs 1 crore has grown to Rs 1.10 crore. You then withdraw Rs 6 lakh to meet your expenses in your first year. As a result, you are left with Rs 1.04 crore.

Year 2: +10 per cent
Rs 1.04 crore grows to Rs 1.144 crore → withdraw Rs 6 lakh → Rs 1.084 crore left

Year 3: –10 per cent
Rs 1.084 crore falls to Rs 97.56 lakh → withdraw Rs 6 lakh → Rs 91.56 lakh left

By the end of the third year, you are left with Rs 91.56 lakh

Scenario 2: The market falls in the very first year after retirement

Year 1: The market falls by 10 per cent
Your Rs 1 crore corpus falls to Rs 90 lakh → withdraw Rs 6 lakh → Rs 84 lakh left

Year 2: +10 per cent
Rs 84 lakh grows to Rs 92.4 lakh → withdraw Rs 6 lakh → Rs 86.4 lakh left

Year 3: +10 per cent
Rs 86.4 lakh grows to Rs 95.04 lakh → withdraw Rs 6 lakh → Rs 89.04 lakh left

By the end of the third year, your corpus is reduced to Rs 89.04 lakh

Even though the returns are the same in both scenarios, you end up with around Rs 2.5 lakh less simply because the equity market delivered negative returns in the first year of your retirement.

Sequence-of-returns risk occurs when your portfolio takes a hit right at the start. In such cases, it hurts more because that’s when your money pot is at its biggest. A fall on a large corpus wipes out more rupees.

And once that early dip happens, your later gains don’t feel as powerful, simply because you now have fewer rupees left to grow. Even if the returns improve later, they’re working on a smaller base, so the recovery never fully catches up.

So, how to protect yourself from this risk?

Fortunately, sequence-of-returns risk is not unmanageable. It merely requires structure.

1. Maintain a cash buffer of one to two years

Keep the first year or two of your retirement expenses in a liquid fund or a sweep-in deposit.

2. Don’t keep more than 50 per cent of your money in equity

Retirees can often swing to extremes: 100 per cent equity or 100 per cent fixed income. Neither works.

The sweet spot lies in balancing longevity risk with sequencing risk. Which is why we recommend you keep only 33 to 50 per cent of your retirement corpus in equity, depending on your risk profile.

3. Use flexible withdrawals

Rigid rules (like always withdrawing the same rupee amount) increase fragility. Dial withdrawals down in bad years, and up in good years.

4. Review your allocation regularly

Imagine you retire with a 50-50 mix of equity and debt. If the market rallies in Year 1, your equity may suddenly become 60 per cent of the portfolio. That’s great for you, but a market fall in the second year will hit you harder. So, ensure you rebalance your portfolio each year, so that you are not vulnerable during your silver years.

The last word

Sequence-of-returns risk won’t show up in a fund factsheet or on your statement. It doesn’t trend on social media, either. But it quietly determines one of the biggest financial questions of your life: Will your retirement corpus last as long as you do?

Most people underestimate this risk simply because they haven’t seen it play out. But it’s as real as inflation risk. So, it’s better to plan and build a buffer and have a strategy that is fully within your control.

For more such insights, keep reading Value Research.

Also read: The question nobody asks

This article was originally published on November 21, 2025.