DURING & POST
Sequencing risk
Sequencing risk is the risk that the order and timing of your investment
returns is unfavourable, resulting in less money for retirement.
Two people about to retire might have made identical
super contributions and experienced average returns
of 8 per cent a year over a 20-year period and yet
have significantly different balances to retire on, all
due to sequencing risk. Investment returns, good and
bad, have more impact at some points in your pension
lifecycle than at others. Negative investment returns
early in retirement can be particularly damaging.
Retirement portfolios are exposed to sequencing risk
Your retirement portfolio has cash flows if you are
making contributions, or are withdrawing from it.
Where there are no cash flows in a portfolio, there is
no sequencing risk. Similarly, without volatility, all the
return sequences are the same, so there is no
sequencing risk.
Sequencing risk peaks at retirement
Sequencing risk is typically greatest at the point of
retirement, when you switch from building up your
nest egg to drawing down from it. This is because
usually there is more money at risk if markets drop
around the time of retirement. This is the concept of
the retirement risk zone. The zone actually starts a few
years before retirement as your nest egg has been
largely built. It continues post retirement until you
have spent a reasonable chunk of your retirement
savings. The consequences of sequencing risk are
potentially at their strongest around the point of
retirement. If you have a run of poor market results
close to the time you stop working, it can ruin your
retirement plan and your life.
There are ways to avoid this risk:
If markets are down when you are about to retire,
consider waiting until they recover before you stop
working
If you have to retire, then it is a good idea to live off
cash without drawing down from your
investments, as you will be liquidating them at a
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