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You’ve worked hard to get where you are financially, so you want to make sure your wealth is maintained when you retire.

But the problem with investments is that the market is unstable. And it’s not necessarily what happens to the market that has the most impact on you, but the order and timing in which this happens.

This is known as sequencing.

Sequencing risk is the possibility that an unfavourable order and timing of your investment returns will result in less money at the end of your investment period. So the more accumulated wealth you have at or near your retirement, the bigger an impact unfavourable sequencing can have.

How sequencing works

Let’s look at an example of two clients.

Client A and Client B each have a $100,000 investment, and they invest a further $20,000 a year for 10 years. Each has, on average, an 8% average return rate.

Now, say Client A’s investment returns start off positive, but they receive negative returns in the final three years of their plan. Due to the favourable returns early on, they’ve accumulated more wealth, so the negative returns now have a bigger impact on their investment. This results in a lower balance at the end of the 10 years than they might otherwise have had.

Alternatively, Client B receives negative returns at the start of their investment period. This means that when they receive these negative returns, they’ve got less accumulated wealth at stake, so overall the impacts are lower. So when the market picks up again, the positive returns have a cumulative effect, resulting in greater accumulated wealth, and a higher balance at the end of this period.

In these two examples, it’s apparent that it’s the order and timing of these events—something out of your hands—that plays a substantial role in the outcome of your investment.

How to manage sequencing risk

While there’s no realistic way to control the stability of the market, there are a number of strategies you can employ to compensate for sequencing risk.

Save more money earlier, or keep working longer

Blunt, but true. The more time you have to save, the more your portfolio will grow. The longer you work, the more you’ll earn, and the more superannuation contributions you’ll receive from your employer.

But this only works if you start early, or love your job that much. Otherwise, it delays your retirement—which you want as much time as possible to enjoy.

Reduce your retirement income goal

Reducing the income goal for your retirement means planning to make do living off less. While this will potentially affect the quality of your retirement, it can be successful when implemented effectively.

For example, say you need $50,000 a year to live comfortably. Theoretically, you need less to live off as you age. So at 80 years old, you plan to drop your income goal to $45,000. This reduced rate later means you can use these funds at the beginning, allowing you to still live the lifestyle you’re aiming for, while you can enjoy it.

Income bucketing

Income bucketing is when you split your investment across different asset classes, for different periods of your investment.

You might invest in cash assets for the first three years, invest in fixed-interest assets for the following four years, then invest in shares for the remainder. While this provides a cash reserve for the initial years of your retirement, thus reducing the need to sell assets during any market downturns, the issue is that your risk profile increases throughout your investment period.

De-risking your portfolio

De-risking your portfolio sounds good in theory—less risk means more stable returns. You can achieve this by investing solely in relatively stable asset classes like cash, or bonds. While some bonds can exhibit some volatility, their return profiles are considered to be much more stable than others.

However, you need some risk in your portfolio. Not enough risk means you reduce the number of assets you have geared towards growth, reducing your average long-term returns. So investing completely in cash and bonds means you’ll lose out on the opportunity to make bigger, better investments, and reach your retirement goal sooner. Having a higher-risk portfolio lets you do this.


Layering is when you use an overlapping selection of different retirement products at different times throughout your retirement plan. For example, you might assign a percentage of your retirement funds to a lifetime annuity. This means that when your main retirement funds run out (such as your private superannuation income) you’ll continue to receive an income after the fact in the form of these guaranteed annuity payments, allowing you to still have money to spend during your retirement.

A combination of strategies

Similar to the layering strategy above, employing a combination of strategies means you’re not tied down to one option. With the right financial advice and support, using a number of different strategies provides you with benefits at different stages throughout your retirement.

So, unfortunately, sequencing risk in your portfolio is unavoidable.

To ensure you understand these risks properly, our regular progress meetings are the perfect time to get into more detail about sequencing, and the strategies we put in place for you to ensure we’re limiting the risk of sequencing on your portfolio.

If you’d like to talk about sequencing risk in more detail, just let us know at the start of our progress meeting, or give us a call to organise a time to discuss this issue further.


Disclaimer: Joe/ James Stephan act as Directors of Stephan Independent Advisory (SIA), holder of an Australian Financial Services Licence No. 476427. The article/ blog is of a general nature and does not constitute advice to any individual.
You should seek individual and specific advice before making any financial decision based on information contained in this article/ blog. Failure to seek advice may lead to financial decisions and consequences that are not appropriate to your needs and circumstances and financial loss may be incurred.
Information contained in this article/blog is based on our opinion and our understanding and interpretation of current regulations and policy. SIA and its representatives are not taxation advisers. Any comments regarding tax should be confirmed with your taxation adviser. Any projections of future returns are estimates made for illustrative purposes only. Returns are not guaranteed by SIA and actual returns may vary from those illustrated. Any projections are based on reasonable assumptions based on our analysis and experience.
No investment in or purchase of a financial product should be made without seeking individual advice and without reading the Product Disclosure Statement relating to that product.

Joe Stephan

Director, Stephan Independent Advisory

Joe Stephan graduated in 2002 with a Bachelor of Business (Fin Plan) under the tutelage of his father (Program Leader of Financial Planning at RMIT University).

You will hear Joe bandy about the idea of “pure financial advice”, which is given objectively and focused around the needs of individual and not the internal needs of the business providing advice.

Joe is realising his vision every day through his Independent Advice Firm which he owns and operates with his brother James. Joe also spends a portion of his time teaching tomorrow’s Financial Planners at various Melbourne Universities including RMIT & LA Trobe.

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