Sequencing risk is the risk that the timing and order of the investment return by your client are less favourable which in result means less money for their own retirement. As illustrated below, sequencing risk is amplified when the client to is closer to retirement or in retirement as they will often have a larger balance and less time to recover with the added issues of selling down assets at a lower price to sustain cost of living.

Impact of Sequencing Risk in Retirement

In early retirement, negative investment returns can be problematic. If the investor has experienced a larger number of negative returns in their early years of retirement, it can have a long-term negative result on their retirement savings. This can ultimately decrease the amount of income in which they are able to withdraw throughout their retirement years.

Using the example above, we can apply the same however, Investor A and Investor B are both withdrawing $25,000 per year to their retirement fund with both having the same starting super balances of $350,000. They both have an average return of 5% p.a. over the 11-year period. Though, Investor A’s retirement balance is sitting $169,475 lesser than that of Investor B’s. This is the impact of sequencing risk.

Although Sequencing Risk cannot be avoided it can be minimised using some clever retirement or transition to retirement strategies.

  • Diversification – do not have all your eggs in one basket. Asset classes will perform differently over time. Diversifying enables your investment returns to smooth out. In some cases, fixed income investments can perform well when equity markets are decreasing, which can limit the impact on your overall portfolio.
  • Use a ‘bucket strategy’ – this entails keeping a few years of drawings in cash investments, so that if markets fall dramatically you have cash reserves to call on for a few years whilst the equity component of your portfolio recovers.
  • Consider buying an annuity – Placing a portion of your retirement savings in an investment that is not affected by market returns when you retire can help safeguard against running out of money too soon.

If you require help with understanding what’s best for you, the team at Superannuation Advice Australia can help.  Contact us today!