What Is Sequencing Risk?

& How Does It Impact Retirement Income

Sequencing risk is the danger that poor investment returns early in retirement permanently reduce the value and longevity of your retirement savings. When withdrawals are made during a market downturn, more assets must be sold at depressed prices, leaving less capital available to recover when markets eventually rise.

Quick Summary

Sequencing risk occurs when market falls coincide with retirement withdrawals. Poor returns early in retirement can cause far more damage than the same falls later. Diversification, cash reserves, appropriate defensive assets, flexible spending and disciplined portfolio management can reduce the risk without abandoning long-term growth.

Table Of Contents

• What Is Sequencing Risk?
• Why Does Sequencing Risk Matter More Once You Retire?
• Accumulation Phase Versus Retirement Phase
• Why Can Two Investors Experience Completely Different Retirement Outcomes?
• How Do Market Falls Early In Retirement Reduce Future Income?
• Are Market Falls Early In Retirement Worse Than Falls Later?
• How Is Sequencing Risk Different From Ordinary Market Volatility?
• Who Is Most Exposed To Sequencing Risk?
• How Do Financial Planners Reduce Sequencing Risk?
• Maintaining A Cash Reserve
• Bucket Strategies
• Flexible Withdrawal Strategies
• Dynamic Rebalancing
• Staged Investing
• Which Sequencing Risk Strategies Work Best?
• Should Retirees Move Everything Into Cash?
• How Should Investment Strategy Change Throughout Retirement?
• Transitioning Into Retirement
• How Does Sequencing Risk Fit Into A Complete Retirement Income Strategy?
• What Retirement Mistakes Increase Sequencing Risk?
• What Does Sequencing Risk Look Like In Real Retirement Decisions?
• When Does Professional Financial Advice Add Significant Value?
• Final Thoughts
• Frequently Asked Questions (FAQ)

What Is Sequencing Risk?

Sequencing risk, also called sequence of returns risk, is the risk created by the order in which investment returns occur.

It becomes particularly important when a retiree begins drawing income from a portfolio because withdrawals can convert temporary market losses into permanent capital depletion.

Investment returns rarely arrive in a smooth pattern. A diversified portfolio might earn an acceptable average return over ten or twenty years, but the individual annual results may include strong gains, modest gains, flat periods and significant falls.

During wealth accumulation, the order of these results often matters less because the investor is generally adding money rather than withdrawing it. Market falls may even allow ongoing superannuation contributions to purchase more investments at lower prices.

Retirement changes the equation. Once regular pension payments and lump-sum withdrawals begin, a retiree may need to sell investments regardless of whether markets are rising or falling.

If significant losses occur in the first few years, withdrawals are taken from a smaller balance and more assets must be sold to fund the same level of spending.

The portfolio is then left with fewer units or shares participating in the eventual recovery.

That is the essence of sequencing risk: the combination of poor returns and ongoing withdrawals can cause damage that an apparently similar accumulation portfolio would not experience.

Why Does Sequencing Risk Matter More Once You Retire?

Sequencing risk matters more after retirement because regular withdrawals interrupt the portfolio’s ability to recover from investment losses.

Retirees also have less time, less employment income and often less willingness to wait through prolonged downturns.

A 20% fall in a portfolio is uncomfortable at any age. However, the practical consequences differ considerably depending on whether the investor is contributing $30,000 each year or withdrawing $60,000.

An employee aged 45 may continue making super contributions throughout a downturn. A retiree aged 65 may need to sell assets to pay for groceries, insurance, travel, home maintenance and medical expenses, which can cause compounding to work in reverse.

Investment gains normally compound because earnings remain invested and generate future earnings. During an adverse retirement sequence, losses reduce the capital base, withdrawals reduce it further, and future returns are earned on a smaller amount.

Consider a retiree with $1 million who experiences a 20% decline. Ignoring withdrawals, the balance falls to $800,000 and requires a 25% gain to return to $1 million.

If the retiree also withdraws $50,000, the recovery task becomes harder. The portfolio must rebuild from an even lower base while continuing to fund future income.

A market fall does not automatically make a retirement plan unsuccessful. The real question is whether the plan has enough flexibility, liquidity and risk capacity to avoid repeatedly selling growth assets at depressed prices.

Accumulation Phase Versus Retirement Phase

The same investment portfolio can behave very differently depending on whether money is flowing into or out of it.

Factor	Accumulation Phase	Retirement Phase
Typical cashflow	Contributions are added	Pension payments and lump sums are withdrawn
Effect of a market fall	New contributions may buy assets at lower prices	Assets may need to be sold at lower prices
Recovery time	Often measured in decades	May be limited, particularly in early or later retirement
Employment income	Usually supports living costs	Often reduced or no longer available
Primary objective	Grow wealth	Fund spending while preserving long-term sustainability
Main investment concern	Long-term return and volatility	Return, volatility, liquidity and withdrawal timing
Behavioural pressure	Concern about account balance	Concern about both account balance and immediate income
Sequencing risk	Generally lower while contributions continue	Highest around the transition into retirement
Portfolio management	May tolerate greater growth exposure	Must balance growth, income and capital preservation

Why Can Two Investors Experience Completely Different Retirement Outcomes?

Two retirees can start with identical balances, withdraw the same income and earn the same average return, yet finish with very different outcomes. The difference can be caused entirely by the order in which those returns occur.

Consider two retirees who each:

• begin with $1 million;
• withdraw $50,000 at the beginning of each year;
• experience the same ten annual returns; and
• earn an average nominal return of 2.5% a year over the period.

Retiree A – experiences the weakest returns first:

-20%, -10%, 8%, 10%, 12%, 7%, 6%, 5%, 4%, 3%

Retiree B – experiences the same returns in reverse:

3%, 4%, 5%, 6%, 7%, 12%, 10%, 8%, -10%, -20%

After ten annual withdrawals, the approximate outcomes are:

Retiree	Return Sequence	Approximate Balance After Ten Years
Retiree A	Major losses occur first	$565,000
Retiree B	Major losses occur last	$734,000

Both investors earned the same average annual return. Both withdrew the same amount. Yet Retiree B finished with approximately $169,000 more.

The example is simplified and excludes tax, fees, inflation, pension rules and investment-option differences. Nevertheless, it demonstrates the mechanism clearly: losses experienced while the balance is large and withdrawals have just commenced can have a disproportionate effect on future retirement income.

Average-return projections can obscure this risk. A retirement model assuming a smooth 6% return every year may produce a reassuring result while failing to show what happens if the same long-term average contains a severe decline in year one or year two.

Good retirement modelling therefore considers a range of return sequences rather than relying solely on one straight-line projection.

How Do Market Falls Early In Retirement Reduce Future Income?

Market falls early in retirement can reduce future income by forcing investments to be sold when prices are low. This locks in losses, reduces the capital participating in any recovery and may lower the sustainable amount that can be withdrawn over the remaining retirement period.

Suppose a couple retires with a portfolio heavily weighted towards Australian and international shares. A major market correction occurs six months later.

Their living expenses continue. Their account-based pension payments continue. They may also have planned a new car, renovations or overseas travel in the first few years of retirement.

If those expenses are funded by selling growth assets after a fall, the couple is not merely observing a lower account balance. They are reducing the quantity of investments they own.

When markets recover, they participate with fewer assets.

The consequences may include:

• a lower future portfolio value;
• reduced capacity to increase income with inflation;
• less scope for discretionary spending;
• greater reliance on the Age Pension later in retirement;
• increased concern about longevity risk; and
• pressure to take more investment risk in an attempt to recover.

The last response can be particularly dangerous. A retiree who reacts to early losses by pursuing aggressive returns may expose the portfolio to a second damaging fall. Conversely, moving everything into cash after markets have already declined may crystallise losses and remove the portfolio’s recovery potential.

Sequencing risk is therefore both a mathematical and behavioural problem.

Are Market Falls Early In Retirement Worse Than Falls Later?

A market fall is usually more damaging when it occurs early in retirement because the retiree is withdrawing from the portfolio for many subsequent years.

A similar decline later may affect estate value or spending flexibility but has less time to compound through future withdrawals.

Consideration	Market Fall Early In Retirement	Market Fall Later In Retirement
Remaining withdrawal period	Potentially 25–35 years	Usually shorter
Balance exposed	Often near its highest point	May already be lower
Time for consequences to compound	Extensive	More limited
Ability to return to work	May still be possible, but not always desirable	Often limited
Lifestyle commitments	Retirement plans may have just been established	Spending may be more settled
Recovery challenge	Withdrawals continue throughout recovery	Fewer future withdrawals may remain
Impact on sustainable income	Potentially substantial	Often more manageable
Primary planning response	Liquidity, spending flexibility and portfolio protection	Capital preservation, income security and estate considerations

This does not mean investment risk disappears in later retirement. A retiree aged 85 may be particularly vulnerable to inflation, medical costs, aged care expenses and decision-making complexity.

The nature of the risk changes rather than vanishes.

How Is Sequencing Risk Different From Ordinary Market Volatility?

Market volatility describes fluctuations in investment values. Sequencing risk describes the financial damage that may occur when those fluctuations interact with withdrawals.

A temporary market decline is not necessarily a permanent loss for an investor who can remain invested. The loss becomes more difficult to recover when investments are sold to fund spending.

During accumulation, volatility can often be tolerated because:

• contributions continue;
• investment timeframes are long;
• living expenses are funded from employment income; and
• withdrawals are uncommon.

During retirement, volatility affects both capital and cashflow. The retiree must decide which assets to sell, whether spending should change and whether the portfolio still supports the intended lifestyle.

Behaviour also matters. A retiree watching a portfolio fall while simultaneously withdrawing income may feel greater pressure than an employee making regular contributions. That pressure can lead to panic selling, excessive cash holdings or abrupt strategy changes.

A sound retirement strategy should be designed so that ordinary market volatility does not continually force extraordinary decisions.

Who Is Most Exposed To Sequencing Risk?

Sequencing risk is greatest for people who begin substantial withdrawals shortly before or during a market downturn.

Exposure is also higher where the portfolio is concentrated, spending is inflexible or there are few assets available outside the retirement portfolio.

Recent Retirees

The first five to ten years of retirement are generally the most sensitive. The portfolio is often near its peak value, withdrawals have commenced and the money may need to support spending for several decades.

Early Retirees

A person retiring in their mid-50s may need their investments to fund 35 years or more. They may also need to bridge the period before becoming eligible for the Age Pension.

The ABS reported Australian life expectancy at birth of 81.1 years for males and 85.1 years for females in 2022–2024. Retirement planning should generally consider the possibility that at least one member of a couple lives well beyond average life expectancy.

Account-Based Pension Holders

The investment return earned by an account-based pension affects both the income available and how long the balance lasts. Account-based pension holders must also meet annual minimum payment requirements based on age and account balance.

Retirees With Concentrated Portfolios

A portfolio concentrated in one company, industry, property market or share market can suffer deeper losses than a properly diversified portfolio.

This is particularly relevant for business owners who sell a company and reinvest the proceeds. They may move from having wealth concentrated in their own business to holding a large amount of cash, then feel pressure to invest quickly.

Retirees With High Fixed Withdrawals

A household drawing heavily from its portfolio has less capacity to absorb weak returns. Essential expenditure may be difficult to reduce, while large early lump sums can intensify the problem.

Retirees With Limited Cash Outside Super

A retiree who has no emergency reserve may be forced to make pension withdrawals or sell investments whenever unexpected expenses arise.

How Do Financial Planners Reduce Sequencing Risk?

Sequencing risk is usually managed through several coordinated strategies rather than one product or portfolio adjustment. The appropriate combination depends on the retiree’s spending needs, assets, tax position, risk tolerance, Age Pension eligibility and capacity to change course.

Diversification

Diversification spreads money across different asset classes, investment managers, industries and geographic regions. Its purpose is not to prevent every loss. It is to reduce dependence on any single source of return.

A diversified retirement portfolio may include Australian shares, international shares, fixed interest, cash, property-related assets and other investments.

The disadvantage is that diversification can feel disappointing when one concentrated market is performing strongly. Its value becomes more apparent when that market falls.

Appropriate Asset Allocation

Asset allocation determines how much of the portfolio is held in growth assets and defensive assets.

Growth assets such as shares generally provide greater long-term return potential and a stronger defence against inflation. They also experience larger short-term fluctuations.

Defensive assets such as cash and high-quality fixed interest usually provide greater stability and liquidity, although they can produce lower long-term returns and are not entirely risk-free.

Investment risk exists across all asset classes, and the appropriate mix should reflect the investor’s objectives and timeframe (Moneysmart).

Maintaining A Cash Reserve

A cash reserve can fund planned pension payments and major expenses without requiring growth assets to be sold immediately after a market fall.

The appropriate reserve is not automatically two years, three years or any other standard amount. It should be based on:

• expected expenditure;
• income from dividends, interest and distributions;
• Age Pension entitlements;
• planned capital expenses;
• the defensive assets available elsewhere; and
• the retiree’s tolerance for market uncertainty.

Holding too little cash can force asset sales. Holding too much can weaken long-term returns and expose the portfolio to inflation risk.

Bucket Strategies

A bucket strategy divides retirement assets according to when the money is expected to be spent.

A typical structure might include:

1. a short-term cash bucket for immediate expenditure;
2. a defensive bucket for medium-term needs; and
3. a growth bucket intended to fund later retirement.

The approach can make retirement cashflow easier to understand and may help retirees remain disciplined during volatility.

Its weakness is that the buckets still require an overall asset-allocation and replenishment policy. Without clear rules, the strategy may become little more than several accounts with no coherent investment process.

Flexible Withdrawal Strategies

A flexible withdrawal strategy allows discretionary spending to respond to investment conditions.

This does not mean reducing essential household expenditure every time markets fall. It may mean postponing a vehicle upgrade, reducing travel expenditure, drawing less than initially planned or funding one-off costs from cash rather than growth assets.

Even modest temporary adjustments can improve sustainability because less capital is removed while the portfolio is depressed.

Dynamic Rebalancing

Rebalancing restores the portfolio towards its intended asset allocation. When growth assets fall, rebalancing may involve using cash or defensive assets to purchase them rather than selling them.

This can support disciplined buying at lower prices, but it must be implemented carefully. Rebalancing too aggressively may reduce the liquidity needed for upcoming withdrawals.

Staged Investing

Staged investing may be appropriate where someone receives a large lump sum shortly before retirement, such as proceeds from selling a business or property.

Investing progressively can reduce the risk of committing the entire amount immediately before a market fall. The trade-off is that markets may rise during the staging period, leaving some funds earning lower cash returns.

Staging should be a defined strategy with a timetable and target portfolio—not an indefinite delay caused by fear.

Which Sequencing Risk Strategies Work Best?

No mitigation strategy is universally superior. Each addresses a different part of the problem.

Strategy	Main Purpose	Advantages	Disadvantages	Most Appropriate Use
Cash Reserve	Fund near-term spending	Liquidity, certainty and less forced selling	Inflation drag and lower expected return	Planned expenditure and emergency funding
Diversification	Reduce concentration risk	Broader sources of return	Does not prevent market losses	Almost all retirement portfolios
Defensive Assets	Reduce portfolio volatility	Stability and potential rebalancing capital	Interest-rate, credit and inflation risks remain	Funding medium-term needs
Bucket Strategy	Match assets with spending timeframes	Clear cashflow structure and behavioural comfort	Can become complex or poorly maintained	Retirees who value visible spending reserves
Flexible Withdrawals	Reduce sales during weak markets	Directly improves adaptability	Some expenditure must be delayed or reduced	Households with meaningful discretionary spending
Delayed Retirement	Reduce withdrawals and add savings	Shortens funding period and may increase super	May be impractical or undesirable	People with employment flexibility
Dynamic Rebalancing	Maintain intended risk exposure	Encourages disciplined decisions	Can consume defensive reserves too quickly	Diversified portfolios with clear rebalancing rules

Should Retirees Move Everything Into Cash?

Moving everything into cash may reduce short-term market volatility, but it creates significant inflation and longevity risks.

Most retirees require a balance between stable assets for near-term spending and growth assets capable of supporting income over several decades.

Cash can be highly useful in retirement. It provides liquidity, reduces the need to sell assets during a downturn and makes upcoming expenditure easier to manage.

It is not, however, a complete retirement strategy.

Australia’s inflation target is annual consumer price inflation of 2% to 3%. Even inflation within that target range can materially reduce purchasing power over a 25- or 35-year retirement (RBA).

At 2.5% inflation, living costs of $70,000 could rise to approximately $89,600 after ten years and approximately $114,800 after twenty years.

Cash returns may not consistently keep pace with inflation after tax, fees and changes in interest rates. A retiree holding too much cash may preserve the nominal account balance while losing real spending power.

There is also opportunity cost. When interest rates decline, cash income can fall quickly. Growth assets may be needed to support future income increases and later-life expenses.

The objective should not be to eliminate every short-term fluctuation. It should be to hold enough stable and liquid assets that the retiree is not forced to abandon the long-term strategy during normal market stress.

How Should Investment Strategy Change Throughout Retirement?

Retirement investment strategy should evolve as the investor moves from accumulation to withdrawals and then through later retirement. The changes should be driven by cashflow requirements, tax position, life expectancy, risk capacity and the timing of future expenditure—not age alone.

More Than 15 Years Before Retirement

With more than 15 years remaining, growth is generally still important. The investor may have time to recover from substantial market falls and is likely to continue receiving employment income and super contributions.

The priorities are usually adequate contributions, diversification, appropriate growth exposure and avoiding unnecessary reaction to short-term market movements.

Sequencing risk is relatively low because withdrawals have not commenced, although poor decisions during this period can reduce the eventual retirement starting balance.

10–15 Years Before Retirement

Retirement objectives should become more specific. Expected spending, debts, super balances, non-super investments and possible Age Pension eligibility should begin to form part of a coordinated plan.

The portfolio may still need substantial growth exposure. Moving defensively too early can create a different risk: reaching retirement with insufficient capital.

This is an appropriate stage to review concentration risk, particularly employer shares, investment properties or wealth tied to a private business.

5–10 Years Before Retirement

Retirement cashflow modelling becomes increasingly important. The investor should understand how essential and discretionary spending will be funded and identify major planned expenses.

Defensive assets and liquidity may be built progressively rather than through an abrupt portfolio change immediately before retirement.

Tax planning may include concessional and non-concessional super contributions, debt repayment and the intended use of retirement-phase super, subject to eligibility and contribution rules.

Transitioning Into Retirement

The retirement date is a financial risk point. Employment income may stop, pension withdrawals commence and the portfolio may be exposed to market movements at its highest value.

The general transfer balance cap was $2 million for the 2025–26 financial year. A person’s individual cap can differ depending on whether they previously commenced a retirement-phase income stream and how much of their cap has been used (ATO).

An account-based pension can provide flexible regular payments, but its longevity depends on withdrawals, fees and investment returns.

The practical work at this stage includes deciding:

• how much income will be drawn;
• which account will fund it;
• how much liquidity is required;
• whether large early-retirement expenses are affordable;
• how the portfolio will respond to a market decline; and
• what spending changes would occur if returns disappoint.

Early Retirement

The early years usually carry the greatest sequencing risk. Portfolio reviews should focus on whether withdrawals are tracking above plan, whether cash reserves are being used appropriately and whether rebalancing is required.

Retirees should avoid confusing a strong first few years with permanent financial capacity. Higher spending may become difficult to reverse if returns later weaken.

The same caution applies after a downturn. A temporary loss should not automatically trigger a permanent move to cash.

Mid Retirement

In mid retirement, actual experience begins to replace assumptions. Advisers can compare realised spending, returns, inflation and Age Pension eligibility with the original projections.

The portfolio may remain meaningfully exposed to growth assets because the remaining timeframe can still be 15 to 25 years.

The emphasis often shifts towards maintaining purchasing power, simplifying accounts and preparing for possible changes to housing, health and family support.

Later Retirement

Later retirement planning increasingly focuses on reliable cashflow, simplicity, estate planning, cognitive decline risk and possible aged care costs.

Growth exposure may still be appropriate, particularly where the remaining portfolio must support a surviving spouse or provide an inflation-linked income. However, the retiree’s ability to tolerate complexity and recover from losses may be lower.

Investment strategy should therefore consider who will manage the portfolio if the retiree can no longer do so.

How Does Sequencing Risk Fit Into A Complete Retirement Income Strategy?

Sequencing risk should be managed as part of an integrated retirement income plan. Investment allocation alone cannot compensate for unrealistic spending, poor tax structuring, inadequate liquidity or failure to account for longevity and inflation.

A retirement income plan may combine:

• an account-based pension;
• superannuation held in accumulation phase;
• personal savings and investments;
• employment or consulting income;
• the Age Pension;
• home equity;
• annuity or other income-stream solutions; and
• cash allocated to near-term spending.

Moneysmart identifies the Age Pension, superannuation, work, personal investments and home equity as potential sources of retirement income.

The Age Pension can provide an important income floor for eligible retirees. Entitlement is assessed under income and assets tests, and thresholds are reviewed periodically (Services Australia).

A complete strategy should model how these income sources interact over time. For example, a reduction in assessable financial assets may increase Age Pension eligibility, partly offsetting declining portfolio withdrawals for some retirees.

Tax treatment also matters. Superannuation income-stream payments may receive favourable tax treatment depending on the recipient’s age, the type of benefit and the underlying components. Tax outcomes should be assessed alongside investment and social-security consequences rather than in isolation.

What Retirement Mistakes Increase Sequencing Risk?

The most damaging retirement mistakes usually involve excessive withdrawals, inadequate diversification or poorly timed behavioural responses. These errors can turn manageable market volatility into long-term income impairment.

Common Mistake	Why It Increases Risk	Better Alternative
Panic selling after a market fall	Crystallises losses and removes recovery exposure	Review cashflow, asset allocation and risk capacity before changing strategy
Withdrawing too much early	Reduces the capital supporting later income	Separate essential spending, discretionary spending and one-off expenses
Retiring with excessive growth exposure	Creates large potential losses near the first withdrawal date	Hold an intentional mix of growth, defensive and liquid assets
Holding too much cash	Weakens long-term return and purchasing power	Match cash holdings to foreseeable expenditure
Failing to diversify	Exposes retirement to one market or asset	Spread risk across asset classes, regions and investments
Chasing recent performance	Encourages buying after rises and selling after falls	Use a documented long-term asset-allocation policy
Ignoring inflation	Understates future spending requirements	Model income needs in real, inflation-adjusted terms
Failing to review the plan	Allows spending and risk to drift	Review withdrawals, investments and assumptions regularly

What Does Sequencing Risk Look Like In Real Retirement Decisions?

Sequencing risk rarely appears as an isolated calculation. It usually emerges through decisions about retirement timing, spending, business proceeds, portfolio construction and reactions to market stress.

Scenario 1: A Couple Retires Before A Major Correction

A couple retires with $1.4 million in super and plans to withdraw $85,000 a year, including substantial travel during the first five years.

Markets fall shortly after retirement.

Their plan is stronger if the first two years of planned expenditure are partly supported by cash and defensive assets. It is weaker if the entire portfolio is invested aggressively and every pension payment requires selling shares.

The appropriate response may include using the cash reserve, postponing some travel and rebalancing progressively—not abandoning the portfolio.

Scenario 2: A Retiree Experiences A 25% Fall In Year One

A retiree begins with $800,000 and withdraws $48,000. A 25% market fall occurs during the first year.

The immediate concern is not simply the headline loss. The adviser must determine how much of the portfolio actually fell, what income and distributions remain available, how much cash is held and whether spending is flexible.

Selling the entire portfolio would make the decline permanent. Taking no action may also be inappropriate if the original allocation was excessive. The response requires judgement rather than a slogan.

Scenario 3: A Business Owner Invests Sale Proceeds

A business owner sells a company and receives $2.5 million shortly before retirement. Most of their wealth was previously tied to the business, so they have limited experience managing a liquid portfolio.

Investing the full amount immediately may expose them to an adverse entry point. Leaving everything in cash indefinitely creates inflation and opportunity-cost risks.

A staged investment program, clear target asset allocation and separate provision for tax and near-term spending can reduce decision pressure.

Scenario 4: An Investor Delays Retirement

An employee aged 63 plans to retire during a severe downturn. Their super balance has fallen and planned expenditure would require a relatively high initial withdrawal rate.

They decide to work three days a week for another year. Employment income covers much of their spending, contributions continue and portfolio withdrawals are delayed.

Delaying retirement is not always possible or necessary, but where work remains tolerable and available, even a partial delay can materially improve the plan.

Scenario 5: A Couple Reduces Discretionary Withdrawals

A retired couple experiences an extended period of weak returns and higher inflation. Essential expenditure cannot be reduced significantly, but planned renovations and expensive travel are discretionary.

They postpone the renovation and reduce travel spending for two years. The adjustment lowers the amount sold from the portfolio during the downturn.

When conditions improve, spending is reassessed rather than automatically restored to the original level.

When Does Professional Financial Advice Add Significant Value?

Professional advice is most valuable when retirement decisions involve competing risks rather than a single obvious answer. Sequencing risk often requires balancing current lifestyle, long-term growth, tax, superannuation, Age Pension eligibility and behavioural tolerance.

Advice may add particular value when:

• retirement is expected within five years;
• the portfolio has recently experienced substantial losses;
• a large business or property sale is approaching;
• retirement spending is high relative to investable assets;
• one partner has significantly more super than the other;
• investment holdings are concentrated;
• the retiree is uncertain about account-based pension withdrawals;
• Age Pension eligibility may change;
• major family assistance or capital expenditure is planned; or
• the investor is considering moving entirely to cash.

The adviser’s role is not to predict the next bear market. It is to develop a plan capable of functioning when the timing of the next bear market is unknowable.

Final Thoughts

Sequencing risk explains why a sound retirement strategy cannot be judged solely by its expected average return.

The timing of losses, withdrawals and the retiree’s behaviour during a downturn can matter as much as the original investment selection.

The solution is rarely to remove all growth assets or attempt to predict every market fall. A portfolio that is excessively defensive may fail more slowly through inflation, declining interest income and inadequate long-term growth.

A stronger approach is to construct retirement income deliberately, hold sufficient liquidity, diversify the portfolio, match risk to future spending, maintain realistic withdrawal levels and establish decisions in advance for difficult markets.

A retirement plan should be capable of surviving more than the central forecast. It should remain workable if markets fall 30% shortly after retirement, inflation stays elevated, interest rates decline and one member of a couple lives well into their 90s.

That is the practical purpose of sequencing-risk management, not eliminating uncertainty, but preventing foreseeable market volatility from permanently undermining retirement income.

Frequently Asked Questions (FAQ)

References:

ABS – Life expectancy
Moneysmart – Account-based pensions
ATO – Payments from super
Moneysmart – Develop an investing plan
RBA – Australia’s Inflation Target
ATO – Transfer balance cap
ATO – Retirement withdrawal – lump sum or income stream
Moneysmart – Retirement income sources
Services Australia – Income Test