You may be familiar with the types of risks involved with investing. The pattern in which returns are realised by investors, known as sequencing risk, also plays a critical role in determining the ultimate value and long-term sustainability of your retirement savings.
What is sequencing risk?
When you are growing your savings, most market losses can be cancelled out by a long-term investment strategy; it makes sense that things will eventually "average out". But, as you get closer to your retirement, the way markets perform becomes an increasing concern. And, when coupled with the need to start taking out income from your savings, just one negative year on the sharemarket can be a significant adversary for your retirement lifestyle.
The examples below highlight the impact of sequencing, showing how the simple act of reversing the order of the returns results in two drastically different outcomes – when building your wealth and when pension withdrawals are taken into account. Read more…