Distribution

Sequencing risk

Sequencing risk is the risk that the order and timing of your investment returns is unfavourable, resulting in less money for retirement.

The example shown in the chart below uses a hypothetical investor and is based on historical Australian market performance data for the period 1992 to 2019. It illustrates how sequencing risk can impact retirement outcomes.

The investor illustrated in the chart below retired at the end of 1992 with an investment balance of $350,000. His portfolio was 50% invested in Australian equities and 50% in Australian bonds. Following his retirement, he lived off his retirement savings, drawing $22,530, indexed to inflation, each year.

The retirement capital remaining at the end of each year is shown by the blue line in the chart. The green line shows what would have happened if exactly the same returns were achieved, but in reverse order (i.e. 2019 returns first). If this were the case, the investor’s money would have run out.

The consequences of sequencing risk are potentially strongest around the point of retirement. If you have a run of poor market results close to retirement, it can really impact your retirement savings. Before you retire, you might be able to extend your working years to save a bit more (if you’re able). But it is much harder to go back to work after you have been retired for many years.

Sequencing table