A lot has been said about when you invest you need to be able to ride out the ups and downs of markets. In saying this, when you retire if you get hit with a big downward shift in markets straight off the bat this can have a huge impact on your ability to fund your desired retirement for a long period of time. This is called Sequencing risk.
In the example below, we look at two scenarios (based on the S&P) for starting a pension in 1989 and 2008. Both examples use a return of 10.36% per annum, where the retiree withdraws $50,000 per annum each year, and payments are indexed at 3% for inflation.
As you can see the retiree who started in 2008 had the displeasure of experiencing the GFC in the first year of their retirement. This resulted in a large loss in the first year of 37% which meant that they were behind the eight ball from the start. This client effectively runs out of money in 18 years based on this scenario.
Now let’s look at the retiree who started in 1989. As can be seen from the above after 18 years this client had a balance of $4.8 million.
Sequencing risk is a key risk that needs to be managed.
At Shartru Wealth we manage this risk by looking at a portfolio of lowly correlated assets to mitigate the risk of the big drawdown. If you have all of your investments in shares or bonds (which a large percentage of people do) then you are heavily exposed to Sequencing risk.
Article by: Rob Coyte, CEO, Shartru Wealth Management
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