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This guide shares some key insights and research into money and retirement, to help you look forward with confidence.
Negative returns near retirement could mean less money to live on than if you were to experience the same returns several years earlier, or later.
Sequencing risk is greatest at, or near, retirement when your retirement savings tend to be at their highest value. A run of negative returns close to retirement, can be hard to recover from. There are two key reasons for this - time and withdrawals.
In retirement, you don’t have as much time to recover from falls in the share market. It can take six to ten years for share markets to recover from significant dips. If you’re withdrawing money in the form of account-based pension payments for example, it’s even harder for the value of your investments to recover. That’s because withdrawing money from investments that are performing poorly is usually more costly.
The impact of sequencing risk means two investors can experience the same average share market returns over a 20-year period and yet one person can run out of money sooner than the other. This is all because of timing, as shown in this chart below.
The blue line shows the actual value of a retirement portfolio invested in 50% Australian equities and 50% bonds between 1992 and 2019. The green line shows the value of that same portfolio if the order of the returns had been reversed. In this case, poor returns at the start of the sequence would have had a significant impact on the value of the investor’s savings.
It’s not possible to control the performance of the share market, or the order in which you experience returns, but there are strategies available to help you manage sequencing risk. We cover some of your options below.
Here are some steps you can take to manage sequencing risk in retirement:
