by AdvisorAnalyst.com Editorial Team
Every retiree gets one shot at one sequence of returns. According to David Varadi, MBA, CFA, instructor of Personal Finance and Investments at the Schulich School of Business at York University, that fact explains why so many well-built retirement plans fail. Speaking with Pierre Daillie on Insight is Capital, Varadi shared findings from stress-testing 123 retirement cohorts back to 18711, introducing what he calls the "sequence tax": the calculable gap between what a portfolio earns and what a retiree actually realizes after withdrawals begin.
Varadi's path ran through RBC, Macquarie, Flexible Plan Investments, and QuantX, building decumulation-focused ETF strategies before returning to academia. Asked why decumulation is advisors' top anxiety, he pointed to layered, unresolved risks. "Once you introduce liabilities, you have to consider how the portfolio interacts with those liabilities... you also have longevity risk, which is how long am I going to live," he said.
Defining the Sequence Tax
If a portfolio isn't being drawn down, the order of returns doesn't matter; compound return ends up the same. Withdrawals change everything. "If you happen to have poor returns and you have poor returns early, then you actually have worse realized returns than the market," Varadi said. "The difference between that eight percent and that four percent that you actually saw on your statement is what I call the sequence of returns tax."
Withdrawals during a downturn force share sales at depressed prices, permanently shrinking the unit base. "If you had 100 shares of equity... now the market's down, maybe you only have eighty-three shares," he said. "When the market rebounds... you don't capture what someone does if they had 100 shares." Daillie called it cannibalizing the portfolio: recovering from a 50% drawdown after withdrawals requires earning well past the textbook 100% needed to break even.
Why the Early Years Carry Outsized Weight
The data is stark: the first ten years explain 80% of lifetime sequence damage, the first five alone account for 53%. Varadi's levers scale with funding status. Well-funded clients with surplus liquidity can finance the first four or five years without touching the portfolio. Others can cut withdrawals during downturns ("that is extremely powerful... one of the easiest and best ways to reduce your risk"), trim equity exposure in a trend-following manner, or build a short-term bond or GIC ladder, each with trade-offs, including longevity risk from holding too much in bonds too long. "If you've gone through the first five to ten years, then your probability of survival is very high," he said.
The Limits of the 60/40 Portfolio
Varadi framed the deeper problem through a four-box growth-and-inflation matrix: equities thrive when growth rises and inflation falls, bonds favor deflationary contractions, but stagflation crushes both, as in 2022. "A stock and bond portfolio is incomplete," he said. The diversification investors relied on for forty years was largely "an artifact of the growth dimension," propped up by a rate decline unlikely to repeat. Daillie added that an X-ray of a 60/40 portfolio reveals bonds contribute so little diversification that the risk profile resembles 90% equity, an instinct that often pushes investors toward more equity risk rather than the real fix: breadth.
Replacing What Bonds Used to Do
Varadi named long-term treasuries the best deflationary hedge, with utilities offering similar duration sensitivity plus inflation-linked dividend growth. To offset that bucket, he pointed to energy: "The assets that best hedge long-term bonds are energy... they tend to perform well when long-term bonds are performing poorly." For inflation protection, he highlighted pipeline operators like Enbridge, TransCanada, and Pembina, companies that "have monopolies and have cash flows that rise with inflation." Managed futures function as a "utility player," performing in three of four regimes: "When there is a large trend, they will have convexity to those trends," making a portfolio "more adaptive."
Capital Efficiency as the Underfunded Client's Best Tool
The conversation's most novel territory was capital efficiency: modestly levered structures, portable alpha, or 2X index funds paired with T-bills to free up liquidity without abandoning core exposure. For underfunded clients juggling sequence, longevity, inflation, and liquidity risk at once, Varadi called this essential. "For the underfunded client, capital efficiency is the only way that they can effectively address everything, in my opinion," he said. "A hundred percent equity, while it may maximize your probability of your retirement being feasible, is a pure gamble."
Freeing up 20% to 30% of notional exposure lets an underfunded client redirect capital toward annuities, tontines, managed futures, or real assets instead of leaning entirely on equities. For funded clients, the priority shifts to an efficient "floor", real return bonds, government benefits, bond ladders, annuities, or tontines covering essentials, while discretionary spending stays the lever to cut in a bad year.
Closing the Risk-Tolerance Gap
Varadi closed with a challenge to standard advisory practice. "Every advisor should be calculating the retirement required rate of return for their clients," he said, warning that risk tolerance questionnaires alone create dangerous mismatches between how a client feels and what their portfolio can actually sustain. "Without creating that required rate of return and determining their funding status... you're guaranteeing that they will not be safe in retirement. So they will be comfortable, but they won't necessarily have a safe retirement." The goal, he said, is optimizing for shortfall risk rather than standard deviation, a ratio he is actively researching and preparing to publish, aimed squarely at maximizing the probability of retirement survival.
Five Key Takeaways for Advisors and Investors
1. The first five to ten years carry disproportionate weight. Eighty percent of lifetime sequence damage occurs in the first decade, 53% in just the first five years.
2. Withdrawals during downturns inflict permanent damage. Selling shares at depressed prices shrinks the unit base, so a 50% drawdown plus withdrawals can require well over 100% to recover.
3. A 60/40 portfolio offers far less diversification than it appears. An X-ray reveals risk exposure closer to 90% equity, since bonds add little diversification when inflation rises.
4. Real assets, energy, and managed futures can replace what bonds used to provide. Energy hedges long-term bonds; pipelines offer inflation-linked income; managed futures add convexity across regimes.
5. Capital efficiency, not higher equity risk, is the answer for underfunded clients. Modestly levered or portable-alpha structures free capital for annuities, tontines, or real assets, avoiding the all-equity gamble.
Footnote:
1 Insight is Capital Podcast. AdvisorAnalyst.com. "David Varadi: The Early Years of Retirement Are The Most Dangerous." YouTube, 18 June 2026, www.youtube.com/watch?v=O_YJ-NTyfFI.
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