Sequence of Returns Risk and XEQT: Why When You Retire Matters More Than Returns

A few years ago, I sat down with my dad over Thanksgiving dinner and the conversation turned to retirement. He’d just turned 63, had a solid portfolio of index funds, and was thinking about pulling the trigger. “The math works,” he said. “I’ve got enough.” And he was right – on paper. His average annual return over the past 20 years had been a respectable 8%. His savings were above the threshold every online calculator said he needed.

But something nagged at me. I’d been reading about a concept that doesn’t show up in simple retirement calculators – something that can take two investors with the exact same average returns and leave one of them comfortable for life while the other runs out of money a decade early.

That concept is sequence of returns risk. And if you’re holding XEQT – a 100% equity ETF – as the core of your retirement portfolio, understanding it isn’t optional. It’s essential.

Let me show you exactly why this matters, how devastating it can be, and – most importantly – what you can do about it.

1. What Is Sequence of Returns Risk?

Here’s the simplest way I can explain it: sequence of returns risk is the danger that the order of your investment returns will work against you during retirement withdrawals.

When you’re saving and contributing to your portfolio (the “accumulation phase”), the order of returns barely matters. If you invest for 30 years and earn an average of 8% annually, you end up in roughly the same place whether the good years come first or last. Your contributions keep buying shares regardless, and time smooths everything out.

But the moment you flip from adding money to taking money out, everything changes. The order of returns becomes the single most important factor in whether your portfolio survives.

Why? Because when you withdraw from a portfolio that’s just dropped 30%, you’re doing two things simultaneously:

• Locking in losses by selling shares at depressed prices
• Removing shares that can never participate in the recovery

Those shares are gone. They won’t be there when the market bounces back 40% the following year. And that creates a compounding problem that gets worse over time.

Think of it like this: if your portfolio drops from $1,000,000 to $700,000 and you withdraw $40,000, you’re left with $660,000. Now the market needs to return roughly 52% just to get you back to $1,000,000 – and you’ll be withdrawing another $40,000 next year regardless.

This is fundamentally different from a crash during your working years, where you’d actually be buying shares at those depressed prices. During accumulation, crashes are opportunities. During retirement, they’re threats.

2. Why Sequence Risk Doesn’t Matter During Accumulation (But Devastates in Retirement)

When you’re dollar-cost averaging into XEQT every paycheque, a market crash is actually your friend. Prices drop, your regular contributions buy more shares, and when the market recovers, those cheap shares multiply your wealth. The crash of 2020, for example, was a gift for anyone who kept investing through it. The crash of 2008 was even more of a gift for patient investors who stayed the course.

During accumulation, the math works like this:

• Bad returns early + good returns later = fine (you bought cheap shares early)
• Good returns early + bad returns later = fine (your later contributions bought cheap shares)
• The average return is what matters, not the sequence

But in retirement, you’re doing the opposite. You’re selling shares instead of buying them. And that inverts the entire equation:

• Bad returns early + good returns later = potentially catastrophic (you sold cheap shares early, fewer shares left to benefit from recovery)
• Good returns early + bad returns later = usually fine (your portfolio grew big enough to absorb later losses)

This asymmetry is what makes sequence risk so dangerous. It’s not about average returns at all. It’s about when those returns show up relative to your withdrawals.

3. A Worked Example: Same Average Return, Wildly Different Outcomes

Nothing illustrates sequence risk better than a side-by-side comparison. Let me introduce you to two hypothetical Canadian retirees: Priya and David.

Both retire at 65 with exactly $1,000,000 in XEQT. Both withdraw $40,000 per year (the classic 4% rule). Both experience exactly the same set of annual returns over 10 years – just in a different order. The average annual return for both is 4.4%.

Priya retires in a lucky year. She gets her best returns up front.

David retires in an unlucky year. He gets his worst returns up front.

Here are their actual year-by-year results:

After 10 years, both investors experienced the exact same set of returns. The average annual return was identical. But look at the outcomes:

• Priya’s portfolio: $1,037,095 – she’s withdrawn $400,000 in income and her portfolio still grew
• David’s portfolio: $724,317 – he’s withdrawn the same $400,000 but has lost over 27% of his starting capital

David’s portfolio is now $312,778 smaller than Priya’s. And the gap will only widen from here, because David’s smaller portfolio will generate less growth while he continues withdrawing the same dollar amount. At this trajectory, David may run out of money before age 85. Priya could likely last past 95.

Same returns. Same withdrawals. Same average performance. Completely different retirements. That’s sequence of returns risk in a nutshell.

4. The “Retirement Red Zone” – The 5 Years Before and After Retirement

Financial planners use a term borrowed from football: the retirement red zone. This is the period from roughly 5 years before retirement to 5 years after retirement – a 10-year window where your portfolio is most vulnerable to sequence risk.

Why this window?

The 5 years before retirement: Your portfolio is at or near its peak value. A major crash at this point means you either delay retirement (not always possible) or start withdrawals from a significantly diminished portfolio. If you’re 60 and planning to retire at 65, and the market drops 35% when you’re 62, you’ve just lost hundreds of thousands of dollars that you were counting on. You might need to work an extra 3-5 years to recover.

The 5 years after retirement: Your withdrawals have the most compounding impact during this period. Early withdrawals from a depressed portfolio permanently reduce your portfolio’s ability to recover. Research by Michael Kitces and Wade Pfau has shown that the returns in the first decade of retirement explain the vast majority of whether a 30-year withdrawal plan succeeds or fails.

The key insight: sequence risk is a problem with a time limit. If you can get through the first 5-10 years of retirement with your portfolio mostly intact, the risk drops dramatically. Your remaining time horizon is shorter, your withdrawals represent a smaller percentage of your (hopefully grown) portfolio, and government benefits like CPP and OAS are providing additional income.

5. Strategies to Mitigate Sequence of Returns Risk

Here’s the good news: while you can’t eliminate sequence risk, you can significantly reduce its impact. These are the most effective strategies, roughly in order of how practical they are for a typical Canadian XEQT investor.

Cash Buffer / Cash Wedge (2-3 Years of Expenses)

This is the simplest and most widely recommended approach. Keep 2-3 years of living expenses in cash or a high-interest savings account (HISA), separate from your XEQT portfolio. When markets are down, you draw from the cash buffer instead of selling XEQT at depressed prices. When markets recover, you replenish the buffer.

For a retiree spending $50,000/year from their portfolio:

• Cash buffer: $100,000-$150,000 in a HISA or money market fund
• XEQT portfolio: the remainder of your retirement savings

The cash buffer gives you time. You don’t need the market to recover tomorrow – you need it to recover within 2-3 years, which it historically almost always does.

Where to keep the buffer? A high-interest savings account at a place like EQ Bank or Wealthsimple Cash earning 3-4% works perfectly. You’re not trying to earn big returns on this money. You’re trying to avoid selling XEQT at the bottom.

The Bond Tent / Rising Equity Glide Path

This is a more sophisticated strategy that academic research has shown to be highly effective. The idea is to temporarily increase your bond allocation as you approach and enter retirement, then gradually shift back to equities over your first 10-15 years of retirement.

A typical glide path might look like this:

• Age 60 (5 years before retirement): Start shifting from 100% XEQT toward a mix of 60% XEQT / 40% bonds (using a bond ETF like ZAG or XBB)
• Age 65 (retirement): Hold 60% XEQT / 40% bonds – your most conservative allocation
• Ages 66-80 (gradual shift back): Each year, move 2-3% from bonds back into XEQT
• Age 80+: Back to 90-100% XEQT for long-term growth

Why does this work? The bond allocation protects you during the most vulnerable years (the retirement red zone). Then, as the danger of sequence risk fades, you shift back to equities for the growth you’ll need over a potentially 30+ year retirement.

The “bond tent” name comes from the shape of the bond allocation over time: it rises to a peak at retirement, then slopes back down. It’s elegant, evidence-based, and particularly relevant for XEQT investors who are currently 100% equity.

Dynamic Withdrawal Strategies (Flexible Spending Rules)

Instead of rigidly withdrawing a fixed inflation-adjusted amount every year (as the standard 4% rule prescribes), you adjust your withdrawals based on how your portfolio is doing.

The guardrails approach is particularly practical:

• If the market has a great year and your withdrawal rate drops below 3.5% of your current portfolio, give yourself a 10% raise
• If the market tanks and your withdrawal rate rises above 5.5% of your current portfolio, cut your spending by 10%
• Otherwise, adjust for inflation as normal

This approach naturally reduces withdrawals during down markets (when sequence risk is highest) and increases them during good markets. Research shows it can increase the safe initial withdrawal rate to 4.5-5% while maintaining a high success rate.

The key is being genuinely willing to cut spending when needed. This is easier said than done, but having CPP and OAS as a stable income floor makes it more manageable – you’re only cutting the discretionary portion of your spending, not your basic living expenses.

Part-Time Work in Early Retirement

I know, I know – the whole point of retirement is to stop working. But even modest part-time income in the first few years of retirement can dramatically reduce sequence risk. Why? Because every dollar you earn is a dollar you don’t have to withdraw from your portfolio.

Earning just $15,000-$20,000/year from part-time consulting, freelancing, or a passion project in your first 3-5 years of retirement can:

• Reduce your withdrawal rate from 4% to 2.5-3%
• Give your portfolio more time to grow before heavy withdrawals begin
• Provide structure and social connection during the retirement transition
• Create a natural “cash buffer” without needing to hold as much in savings

Delaying CPP and OAS to Age 70

This is one of the most powerful and underutilized strategies available to Canadians. By delaying CPP from 65 to 70, your benefit increases by approximately 42%. By delaying OAS from 65 to 70, your benefit increases by 36%.

For someone eligible for maximum CPP, that could mean the difference between roughly $17,800/year at 65 and over $25,000/year at 70. Over a 20+ year retirement, that extra guaranteed income is worth hundreds of thousands of dollars.

How does this help with sequence risk? In your early retirement years (65-70), you draw more heavily from your portfolio. But from age 70 onward, CPP and OAS provide a significantly larger income floor, which means you can reduce your portfolio withdrawals dramatically. The higher government benefits act as a form of insurance against sequence risk in your later years.

The trade-off is clear: you withdraw more from your portfolio in your 60s (when sequence risk is highest) in exchange for much higher guaranteed income in your 70s and beyond. For healthy Canadians with a reasonable expectation of living past 80, delaying typically pays off handsomely.

6. How XEQT Specifically Handles This – And Why You Need a Plan

Let’s be honest about what XEQT is: a 100% equity ETF holding roughly 9,000 stocks across the globe. It’s a phenomenal wealth-building tool during your accumulation years. But its strength – pure equity exposure – is also its vulnerability when it comes to sequence risk.

XEQT has no built-in buffer. There are no bonds to cushion a downturn. No cash allocation to draw from during a crash. When global equity markets drop 30%, XEQT drops 30%. Period. If you’re withdrawing from a portfolio that’s 100% XEQT with no other safety net, you’re fully exposed to sequence risk.

This isn’t a criticism of XEQT – it’s doing exactly what it’s designed to do. But it means that the burden of managing sequence risk falls entirely on you. XEQT won’t manage it for you the way a balanced fund like XBAL (60% equity / 40% bonds) might partially do.

Here’s what this means practically:

• During accumulation (20s to late 50s): XEQT is ideal. You want maximum equity exposure for maximum long-term growth. Sequence risk is irrelevant because you’re buying, not selling. Stay the course, keep automating your investments, and don’t worry about short-term volatility.

• Approaching retirement (late 50s to 65): You need to start building a plan. This is when you should be establishing your cash buffer, possibly beginning a bond tent strategy, and thinking about your withdrawal approach. The transition from 100% XEQT to a retirement-ready portfolio doesn’t happen overnight – give yourself 3-5 years.

• In retirement (65+): XEQT can and should remain a core holding for long-term growth. But it shouldn’t be your only holding anymore. Pair it with a cash buffer and possibly some bond allocation to create a portfolio that can weather early retirement storms.

The investors who get into trouble are the ones who ride 100% XEQT all the way to retirement day and then start withdrawing without any buffer in place. That’s like driving a sports car without brakes. The engine is great, but you need a way to stop.

7. A Practical Retirement Transition Plan for XEQT Investors

Here’s a concrete, step-by-step plan for transitioning from an all-XEQT accumulation portfolio to a retirement-ready withdrawal portfolio. This is the approach I’d use myself.

Ages 25-55: Pure Accumulation Mode

• 100% XEQT in your TFSA, RRSP, and non-registered accounts
• Automate contributions, ignore market noise, reinvest dividends
• Sequence risk is not a concern – embrace volatility as your friend

Ages 56-60: Early Preparation (5-10 Years Before Retirement)

• Continue holding XEQT but start building a cash reserve
• Target: 1 year of expenses in a HISA by age 60
• Begin running retirement income projections using your actual numbers
• Start thinking about CPP/OAS timing (delay to 70 if health permits)

Ages 61-64: The Transition Window (1-4 Years Before Retirement)

• Build your cash buffer to 2-3 years of expenses
• If using the bond tent strategy, begin gradually selling XEQT and buying bond ETFs (target 60-70% XEQT / 30-40% bonds by retirement)
• Finalize your withdrawal strategy (rigid 4%, guardrails, or VPW)
• Plan your tax-efficient withdrawal order: which accounts to draw from first

Age 65: Retirement Day

• Your target portfolio allocation:
  • 60-70% XEQT (long-term growth engine)
  • 10-15% bond ETF like ZAG (stability during the red zone)
  • 15-25% cash/HISA (your 2-3 year buffer)
• Begin drawing from your cash buffer and bond allocation first
• Only sell XEQT when markets are flat or up

Ages 66-75: The Rising Equity Glide Path

• Each year, shift 2-3% from bonds back into XEQT
• Replenish your cash buffer during good market years
• At age 70, CPP and OAS kick in at their maximum enhanced rates
• Reduce portfolio withdrawals as government income increases

Ages 76+: Back to Growth Mode

• Target allocation: 85-100% XEQT, small cash buffer
• Sequence risk has largely passed – your portfolio survived the red zone
• CPP and OAS cover a significant portion of expenses
• Focus on spending and enjoying your money

This plan isn’t complicated, but it requires discipline and advance planning. The worst thing you can do is arrive at retirement day with 100% XEQT, zero cash, and no withdrawal strategy. Start planning at least 5 years before you plan to retire.

8. Final Thoughts: This Risk Is Real, But Entirely Manageable

Sequence of returns risk is one of those concepts that sounds terrifying when you first learn about it. The idea that two people with the same average returns can end up in completely different financial situations just because of timing feels deeply unfair. And it is unfair. The market doesn’t care about your retirement date.

But here’s what I want you to take away from this: sequence risk is not a reason to avoid equity investing. It’s not a reason to sell your XEQT and hide in GICs. And it’s definitely not a reason to panic.

It’s a reason to plan.

The strategies we’ve covered – cash buffers, bond tents, dynamic withdrawals, delaying CPP/OAS, part-time work – are not exotic financial engineering. They’re common-sense approaches that any Canadian investor can implement. You don’t need a financial advisor charging 1% of your portfolio annually to execute these ideas. You just need awareness and a little advance preparation.

If you’re decades away from retirement, file this away for later and keep doing what you’re doing – buying XEQT, maximizing your TFSA and RRSP, and letting compound growth do its work. Sequence risk is a future-you problem, and future-you will have far more money to work with.

If you’re within 10 years of retirement, now is the time to start building your plan. Get your cash buffer in place. Decide on your withdrawal strategy. Run the numbers on delaying CPP and OAS. You don’t need to do everything at once, but you need to start.

And if you’ve already retired and you’re reading this with a sinking feeling – take a breath. If you have a diversified portfolio, a reasonable withdrawal rate, and some flexibility in your spending, you’re probably going to be fine. The retirees who get destroyed by sequence risk are the ones who have no plan, no buffer, and no willingness to adapt. The fact that you’re reading about this puts you ahead of most people.

The market will crash again. That’s not a prediction; it’s a certainty. But crashes are temporary. Running out of money in retirement is permanent. Build the buffer. Follow the plan. And let XEQT do what it does best: grow your wealth across the world’s markets, one day at a time.