Can you manage sequencing risk in retirement?
Managing Sequencing Risk: Protecting Your Retirement
We often hear the advice that "time in the market" is what matters most for building wealth. While this is true during your working life, the timing and sequence of those market returns become incredibly important the moment you stop working and start drawing down. This is known as sequencing risk.
The Lucky vs. Unlucky Retiree
Imagine two retirees, both with $500,000.
Retiree A experiences a market crash in their first year of retirement. Because they are withdrawing $40,000 a year while the market is down, they are forced to sell more shares at lower prices to meet their needs. This "locks in" the losses and leaves less capital to benefit from the eventual recovery.
Retiree B experiences five years of steady growth first, and the crash only happens 10 years into retirement. Because their balance has grown significantly, the withdrawal has a much smaller impact on the remaining capital.
Even if both retirees have the same average return over 20 years, Retiree A could run out of money years earlier simply because of the order in which the returns occurred.
How to Manage the Risk
While we can't control the market, we can control our strategy:
Flexible Spending: Being prepared to reduce your lifestyle spending slightly during a market dip can protect your capital. If the market is down, maybe delay that big overseas trip for a year.
The Bucket Strategy: This involves keeping 1-2 years of living expenses in a "Cash Bucket" (Cash ETFs or Term Deposits). When the share market drops, you draw from the cash bucket, giving your growth assets time to recover without being forced to sell them at the bottom.
Conservative Adjustments: Taking less investment risk typically narrows the range of potential outcomes. While you might see lower long-term gains, you also significantly reduce the risk of a devastating "unlucky" start to retirement.
As your Adelaide financial planners, our goal is to build a "sequence-proof" plan that ensures you can sleep soundly regardless of what the ASX does in your first year of freedom.
Source: https://www.morningstar.com.au/retirement/can-you-manage-sequencing-risk-retirement
For further information, or to book an appointment to ensure your business/trust affairs are in order, give Humble Goode Financial a call on 08 7477 8252 or email planning@hgfp.com.au
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