The risks that matter most in retirement are fundamentally different from those accumulation portfolios are designed to handle. This demands a different investment approach.
Sequencing risk
Retirement introduces a set of risks that are either absent or manageable during accumulation. The first is sequencing risk: the risk that the order of investment returns, not just their average, determines whether income can be sustained.
A market downturn is undesirable at any time, but if one happens during accumulation, investors are not withdrawing money from their pension and not liquidating investments. And, of course, their pension pot has time to recover. During retirement, investors may be making withdrawals from their pension savings to provide income. If those withdrawals are made during a downturn, the investor is selling at a lower price and permanently reducing the capital base from which all future returns are generated.
As shown in Figure 1, after 30 years of accumulation, the end outcome is the same whether return sequences were favourable or not - what matters is the average return over many years. In decumulation, with withdrawals of six per cent a year, an unfavourable sequence of withdrawals (taking capital out during market downturns) means the client runs out of money after just 17 years.
Figure 1: Two balanced portfolios with the same annualised return (five per cent) over 30 years but with different return sequences
Forecasts and simulated performance are not reliable indicators of future performance. For illustrative purposes only and not intended as an investment recommendation.
Chart is for illustration only and highlights a good and bad sequencing outcome. Sequencing risk happens when the order of investment returns and withdrawals affects how long a pension pot lasts. If withdrawals begin during a period of poor market performance, the pot can reduce much faster than expected. Even if markets improve later, those early losses combined with withdrawals make it harder for the savings to last throughout retirement.
Outcomes assessed over a 30y horizon per December 2022 CMA release. Based on stochastic modelling using model portfolios which make the above assumptions.
Source: Aviva Investors.
This is not a theoretical concern. The years since 2020 have produced some of the largest single-day market drawdowns since the financial crisis. Compounding this is the fact that the traditional bond-equity relationship – whereby bond prices would rise when equities fell – has broken down, with both assets falling together at critical moments. Relying on a simple equity–bond split is no longer sufficient to avoid sequencing risk.
Figure 2: Top 20 one-day market drawdowns (per cent)
For illustrative purposes only.
Global equities are represented by the MSCI All Countries World Index GBP and global bonds are represented by Bloomberg Global Aggregate GBP Hedged.
Source: Bloomberg as at 31 January 2026.
A poor sequence of returns in the first five years of retirement can permanently impair a portfolio – even if long-run average returns are exactly as planned.
Longevity risk
For a couple where both are 65, the probability that at least one survives to 90 is over 50 per cent. And most retirees care deeply about maintaining their standard of living – which means the investment problem is not just “sustain the portfolio” but “sustain real spending power” across an uncertain and extended timeframe.
Inflation compounds this challenge, as a fixed-income stream that appears adequate at retirement can lose a third of its real value over two decades at even modest inflation rates.
Longevity also interacts with sequencing risk in a way that can make both worse. A longer retirement means more periods in which markets may suffer downturns and so more occasions in which withdrawals could have a damaging effect. A longer period in retirement also means that any depletion of capital from early drawdowns will compound over more years.
Despite this, the time horizons of many retirement portfolios are still too short, implicitly planning for average life expectancy rather than the realistic upper range.
Longevity is not a tail risk – it should be the central planning horizon for retirement income.
Income sustainability
Income sustainability is the probability that a portfolio can continue to fund withdrawals at the target level, in real terms and over the full investment horizon.
Instead of asking what return we need, we must ask what the probability is that the income plan succeeds, and what failure looks like in the scenarios where it occurs. These questions matter for a retiree whose livelihood depends on their portfolio.
In decumulation, return targets and benchmarks alone are no longer the right measures of success. A portfolio that outperforms its benchmark over five years but which includes a sharp drawdown early in the client’s retirement may not deliver a sustainable income. For the retiree, that is failure. A portfolio that looks conservative in its return targets but sustains income reliably over a 25-year horizon has succeeded.
In practice, assessing income sustainability requires running thousands of potential market paths. This helps introduce an explicit probability of success, a clear picture of what the downside could involve, and the ability to test the sensitivity of the income plan to different assumptions.
The question is whether the income plan can succeed across the full range of outcomes a retiree might face.
How these risks shape the way retirement portfolios are built
A retirement portfolio must be built to sustain income across a range of market environments, with particular attention to avoiding losing capital in the early years.
This changes how the portfolio is constructed:
Greater emphasis on downside protection and drawdown control. The portfolio is designed to try to limit losses in the portfolio’s value and improve recovery speed after a fall.
Natural income can reduce reliance on selling assets. Funding withdrawals from dividends, coupons and other natural income sources helps smooth cash flows and can reduce the need to crystallise losses during a market downturn.
Genuine diversification across economic regimes, not just asset classes. With the traditional equity-bond relationship less reliable, broader diversification is needed across return drivers, inflation sensitivities, and market regimes.
Liquidity management built in. The need to fund ongoing withdrawals makes liquidity planning important, to meet short-term income needs without forced selling.
The result may look broadly similar to an accumulation portfolio, but it is implemented and monitored differently to reflect the specific risks of decumulation.
What it means for retirement income conversations
The most common questions clients ask are: how much can I take, and how long will it last?
These are the right questions. But they can only be answered by acknowledging the range of outcomes and the trade-offs involved:
Income level versus sustainability. A higher withdrawal rate improves income today but makes it harder to sustain over 25 or 30 years. It’s essential to make that explicit.
Nominal versus real income. To maintain living standards, clients need income that grows with inflation. The investment implications are significant, and they matter hugely over 30 years.
Legacy and flexibility. The degree to which capital preservation matters should shape the portfolio, not be treated as an afterthought.
A framework that makes these decisions explicit, quantifiable, and revisable over time gives clients and advisers a stronger basis to navigate the uncertainty retirement income involves.
The bottom line
Sequencing risk, longevity, and income sustainability are the central questions in retirement investing. Addressing them directly and building portfolios around them is entirely different from accumulation. Getting it right will help deliver better outcomes for clients.
