Two retirees with identical pension pots, identical withdrawal rates, and identical average returns can end up in completely different financial situations. The difference? Pure luck — specifically, the order in which their returns happened.

That, in a nutshell, is sequence of returns risk. And if you are a UK expat retiring in Portugal — drawing down a pension pot to fund decades of Algarve living — it is arguably the single biggest threat to your retirement that nobody talks about.

In this guide I will explain what sequence risk actually is, why it matters disproportionately to expat retirees, and the practical strategies you can use to defend against it. By the end you will understand why averaging matters less than timing, and what concrete steps you can take to give your pension pot the best chance of lasting.

What Is Sequence of Returns Risk?

Sequence of returns risk — sometimes shortened to “sequence risk” — is the danger that poor investment returns in the early years of retirement will permanently damage your portfolio, even if returns recover later.

Here is the key insight: when you are saving for retirement, the order of returns does not really matter. A bad year followed by a good year produces roughly the same end result as a good year followed by a bad year. But once you start drawing income from your pot, everything changes. You are locking in losses by selling assets at depressed prices to fund your withdrawals.

Imagine two retirees. Both start with £500,000. Both withdraw £25,000 a year (the 5% rule). Both experience an average annual return of 5% over their first 10 years of retirement. Retiree A gets her bad years first — say, -20%, -10%, -5% — before things recover. Retiree B gets the same returns in reverse order, with the good years first.

After 10 years, Retiree A’s pot might be down to around £280,000. Retiree B’s could be sitting at over £450,000. Same average, same withdrawals — wildly different outcomes. Retiree A may run out of money in her 80s. Retiree B will likely leave a substantial legacy.

That is sequence of returns risk in action.

Why It Matters More for UK Expats in Portugal

Sequence risk affects every retiree drawing income from investments. But there are three reasons why it hits UK expats in Portugal harder than the average retiree at home.

First, the longer retirement. Many of my clients in the Algarve are retiring earlier than they would in the UK. Lower cost of living, better climate, and the lifestyle drawcard mean people often pull the trigger at 55 or 60 rather than 65 or 67. That extra decade or more of drawing income gives sequence risk much more time to do damage.

Second, the currency layer. You are earning returns in pounds (or globally), but spending in euros. A bad sequence of returns in your portfolio, combined with sterling weakness against the euro, can be doubly painful. I have seen clients lose 15% to markets and another 10% to currency in a single bad year. That is the kind of hit that takes a decade to recover from when you are also drawing income.

Third, the income complexity. UK expats often have multiple income sources arriving in different currencies, taxed in different ways — UK private pensions, possibly UK rental income, eventually UK state pension, sometimes ISA income, sometimes Portuguese investments. Getting the order of withdrawals wrong in a bad market year can compound sequence risk. Pulling from the wrong pot at the wrong time can permanently impair the portfolio’s recovery potential.

The Maths That Should Worry You

If you are sceptical that the order of returns can really matter that much, run the numbers yourself. The arithmetic is brutal.

A 50% drop requires a 100% gain just to break even. A 30% drop requires a roughly 43% gain. When you are also withdrawing 4-5% a year from the pot, you are selling assets at the worst possible time — locking in losses and reducing the base from which future growth can compound.

Research by retirement income specialists such as Wade Pfau has consistently shown that the returns experienced in the first 5-10 years of retirement have a disproportionate impact on whether your money lasts. Some studies suggest these early years matter several times more than later years. If your retirement starts during a bear market like 2000-2002, 2008, or 2022, your portfolio takes a structural hit that is almost impossible to fully recover from while you are also drawing income.

This is why “average returns” can be deeply misleading when planning retirement income. Your retirement is not average. It is a specific 30-year window, and the order matters enormously.

How to Protect Yourself: Practical Strategies

The good news is that sequence risk is manageable — if you plan for it. Here are the strategies I implement most often for clients living in Portugal.

1. The Cash Buffer (Bucket Strategy)

The cash buffer is the simplest and most effective defence. The idea is to hold 2-3 years of essential expenses in cash or near-cash (money market funds, short-dated bonds, premium bonds in the UK). When markets are doing well, you draw from your investment portfolio. When markets are down significantly, you switch to drawing from your cash bucket instead.

This gives your investments time to recover without you being forced to sell at the bottom. You are essentially buying yourself the luxury of waiting out a bad market.

For a couple in Portugal spending €60,000 a year, that is roughly €120,000-€180,000 in cash. Yes, cash earns less than equities. Yes, you are sacrificing some long-term return for safety. But the protection against sequence risk more than justifies the cost for most retirees.

2. Flexible Spending (Dynamic Withdrawal)

Rigid withdrawal rules are dangerous in retirement. The famous 4% rule assumes you increase your withdrawal by inflation every year regardless of market conditions. That is a recipe for disaster in a bad sequence.

A better approach is to flex your spending modestly in response to market performance. Tools like the Guyton-Klinger rules or the “guard rails” approach allow you to adjust withdrawals — perhaps freezing inflation increases or reducing spending by 10% in a bad year. Most retirees can handle a modest spending squeeze for a year or two, and that flexibility dramatically improves portfolio longevity.

In practical terms, this might mean delaying a major renovation, scaling back travel, or eating out less for a year. It is not deprivation — it is prudent management.

3. Diversified Income Sources (The Income Floor)

If a substantial portion of your essential expenses is covered by guaranteed income — UK state pension, defined benefit pensions, annuities — your need to draw from market-exposed assets is reduced. That structurally lowers your exposure to sequence risk.

For clients I work with, I often model what I call the “essential income floor”: the basic cost of living in Portugal (housing, food, healthcare, utilities). If guaranteed income covers that floor, then market drawdowns affect only the “lifestyle” portion of your budget — things you can flex on. That is a much more comfortable position to be in than relying on a volatile portfolio for everything.

4. The Asset Allocation Glide Path

There is an old saying in financial planning: take risk when you can afford to, not when you have to. For most retirees, that means being more conservative at the start of retirement, when sequence risk is highest, and potentially taking more equity risk later, once you have survived the danger zone.

This is sometimes called a “rising equity glide path” — increasing your equity allocation over time rather than decreasing it. It runs counter to traditional advice, but the research supports it. Studies by Pfau and Kitces have shown that a portfolio starting at 30% equities and gradually increasing to 60% can outperform a static or declining glide path for retirement income outcomes.

5. Currency Diversification

For Portugal-based UK expats specifically, holding some assets in euros — not all, but some — provides natural currency hedging for your spending. If your essential Portuguese expenses are matched by euro-denominated assets, you have insulated part of your retirement from GBP/EUR volatility. This is not strictly a sequence risk strategy, but it reduces one of the variables that compounds it.

Why “Just Pick a Good Year to Retire” Is Not a Strategy

I sometimes hear clients say they will just delay retirement if markets look bad. In principle, that is not crazy. In practice, it rarely works.

Markets do not telegraph when they are about to turn. The early 2020s have shown how quickly conditions can shift. Trying to time your retirement to market peaks is a fool’s errand, and most people simply cannot keep working indefinitely — health, family circumstances, employer decisions, or motivation often dictate timing.

What works better is building a retirement plan robust enough that the timing of your retirement matters less. Cash buffers, flexible spending, and a sensible asset allocation mean you can retire roughly when you want to, and ride out whatever the market throws at you. The Financial Conduct Authority’s guidance on pension options is a useful starting point if you want to understand the broad framework, though it will not get into expat-specific nuance.

Putting It All Together: A Worked Example

Let me sketch a realistic example. Suppose you and your spouse have £750,000 across pensions and ISAs, plus a combined UK state pension of around £22,000 a year from age 67. You want to retire to the Algarve at 60 on €55,000 a year of spending.

A sequence-risk-aware plan might look like this. Hold €150,000 (roughly £130,000) in cash and short bonds — about three years of essential spending. Keep the remaining £620,000 invested in a globally diversified portfolio, starting at perhaps 50% equities and gradually rising. Plan to bridge from 60 to 67 entirely from the investment pot and cash bucket. From 67 onwards, the state pensions take roughly 40% of your essential needs off the portfolio, dramatically reducing the load. Use the cash bucket in any year where markets drop more than 15%. Build in flexibility to trim spending by €5,000-€8,000 in difficult years.

That kind of structure dramatically reduces sequence risk without being overly conservative. It is the difference between a plan that survives one nasty market scenario and a plan that survives most of them.

Frequently Asked Questions

How many years of cash should I hold to protect against sequence risk?

Most retirement researchers suggest 2-3 years of essential expenses in cash or cash equivalents. Some advisers go up to 5 years, but holding too much cash creates its own problem — inflation erosion. The right number depends on your other income sources, your equity allocation, and your risk tolerance. For most expat retirees in Portugal, 2-3 years of essential spending is a sensible starting point.

Is sequence risk the same as longevity risk?

No, though they are related. Longevity risk is the risk of outliving your money simply because you live longer than expected. Sequence risk is about the order of returns shortening your portfolio’s lifespan even if your time horizon is normal. Both are managed by similar strategies — appropriate withdrawal rates and asset allocation — but they are distinct problems.

Does sequence risk only matter at the start of retirement?

Mostly, yes. The first 5-10 years of retirement are the high-danger zone. Once you are well into retirement and your portfolio has had time to grow and recover, the impact of any individual bad year is reduced. That said, late-retirement bear markets can still derail plans for those who have not built sufficient buffers, so the principles still apply.

Should I just hold an annuity to eliminate sequence risk?

Annuities — particularly fixed annuities — eliminate sequence risk on the portion of your wealth you annuitise. The trade-off is loss of flexibility, no inheritance value, and lower long-term growth potential. For most retirees a partial annuitisation — covering essential expenses with a guaranteed income floor — gives the best balance.

Does NHR 2.0 status affect my sequence risk strategy?

Not directly, but your Portuguese tax treatment affects how you should sequence withdrawals across different pots. Pension income that is tax-favoured under NHR 2.0 may be the natural first port of call, with UK ISA or general investment account drawdowns optimised around the tax position. A coordinated tax and sequence strategy is genuinely powerful — and worth getting professional advice on if your portfolio is meaningful.

What to Do Next

Sequence of returns risk is not a reason to fear retirement. It is a reason to plan for it properly. With a cash buffer, flexible spending, an appropriate asset allocation, and ideally a guaranteed income floor for essentials, you can substantially neutralise the threat — and approach your Portuguese retirement with confidence rather than anxiety.

If you would like to stress-test your own retirement plan against sequence risk, or talk through how the strategies above could be applied to your specific situation, get in touch with our team. We specialise in helping UK expats in Portugal build retirement income strategies that hold up under pressure.

Matthew Renier is a Chartered Financial Adviser at Arthur Browns Wealth Management, based in the Algarve, Portugal. He has over 20 years of experience helping British expats manage their pensions and financial planning across borders.

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