Insights

As you approach or enter retirement, one of the biggest threats to the longevity of your retirement savings isn’t just market volatility — it’s something more subtle but potentially more damaging: sequencing risk.

What is Sequencing Risk?

Sequencing risk refers to the danger that the order and timing of your investment returns — especially negative ones — will have a lasting impact on your retirement savings. In other words, if you experience market downturns early in retirement while you’re also withdrawing funds, your portfolio may shrink much faster than expected, even if long-term returns average out over time.

The same investment returns can have significantly different outcomes depending on when they occur. A poor run of returns at the beginning of your retirement can permanently reduce your capital base, making it harder to recover, even if markets improve later on.

How Asset Classes are Affected

All asset classes can be subject to sequencing risk, but the level of impact varies:

• Equities (Shares): Highly volatile and therefore most susceptible to sequencing risk. A sharp market downturn early in retirement can lead to substantial losses.

• Property: While typically less liquid, property can still experience large swings in value. It may not be practical to sell during downturns, exposing retirees to risk if cash flow is needed.

• Fixed Income (Bonds): Generally more stable, bonds can help cushion the blow during downturns. However, in low-interest-rate environments, they may not deliver the returns needed to sustain a long retirement.

• Cash: Not subject to sequencing risk in the same way, but with very low returns, overreliance on cash can erode purchasing power over time due to inflation.

The Role of Sequence Event Risk

Sequence event risk refers to unexpected market events — such as a financial crisis or economic recession — occurring at the start of your retirement. These events can be devastating if your portfolio isn’t structured to withstand them. Protecting against these types of risks requires thoughtful strategy and planning.

Strategies to Reduce Sequencing Risk

The good news is that sequencing risk can be managed. Here are several strategies to help protect your retirement income:

1. Adopt a “Bucket Strategy”: Divide your investments into short-, medium-, and long-term “buckets.” Short-term funds (1–3 years) should be held in cash or low-risk investments to provide stability, while longer-term funds can be invested for growth.

2. Adjust Your Withdrawal Rate: Stick to a sustainable withdrawal rate, such as the 4% rule, and consider reducing withdrawals during down markets to preserve your capital.

3. Increase Portfolio Diversification: Holding a broad mix of asset classes can smooth returns and reduce the impact of volatility.

4. Rebalance Regularly: Rebalancing ensures your asset allocation stays aligned with your risk tolerance and income needs, helping to lock in gains and reduce exposure to underperforming assets.

Don’t Let Market Timing Derail Your Retirement

Retirement should be a time to enjoy the rewards of your hard work — not a time to worry about whether market dips will undermine your financial security. With a well-structured plan and careful risk management, you can reduce the impact of sequencing risk and enjoy greater peace of mind.

Need Help Navigating Sequencing Risk?

Our experienced Advisers are here to help you protect your retirement portfolio with personalised strategies designed for stability and long-term success. If you’re nearing retirement or already retired, now is the time to ensure your investments are resilient.

Contact us today to schedule a consultation — and take the next step toward a secure and confident retirement.

Altitude Financial Planning is a Corporate Authorised Representative of Altitude Financial Advisers Pty Ltd ABN 95 617 419 959 AFSL 496178

The information contained on this website is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Document.