You’ve probably thought about various risks that might affect your retirement income.
You might have thought about currency movements, or interest rate fluctuations.
But have you considered sequencing risk?
Here’s what you need to know, and how you can mitigate the impacts.
What is sequencing risk?
Sequencing risk refers to the potential for the timing of withdrawals in retirement to negatively affect your outcome.
Sequencing is not about the average return that your investment makes but about when returns happen. If you have poor returns early in retirement, or in the years just before you stop work, that can have a lasting impact.
Losses aren’t locked in until you start selling your investments at lower values than you paid for them. But if you’re in a position where you have to do that, it could mean you need to change the rest of your retirement plan.
If, for example, there’s a big downturn at the start of your retirement and you need to withdraw money then, you could end up with less money over the following years than someone who retires into a strong market and does not have to pull out as much of their capital early on.
Crossing borders
Sequencing becomes even more important when your retirement savings are invested in different systems, such as UK pensions and KiwiSaver.
Having investments in two different countries can mean sequencing risk is amplified.
When you are straddling two systems, there are twice as many timing decisions and market movements to take into account.
It will be important to consider your drawdown as a whole if your retirement income is coming from a number of different investments.
Rules matter
If you have investments that can be accessed at different ages, it might affect your sequencing risk.
If one investment allows you access at 60, for example, and another not until 65, you may find market conditions at each milestone are quite different.
If they’re both available at the same time, you could find that drawing them down together doubles your risk – or compounds your returns if the market is on your side.
Investments that are required to be paid out as an annuity will also have different exposure compared with investments that can be withdrawn in stages or as a lump sum.
If a KiwiSaver balance becomes available at a time when markets are down, you might choose not to withdraw funds. But if you find that conditions are not great for a UK withdrawal when it becomes accessible, you might choose to use KiwiSaver savings as a buffer to support income in the meantime.
Understanding the rules around each part of your retirement savings picture will allow you to develop a strategy to address things such as sequencing risk, as well as an appropriate rate of drawdown.
It’s a common misconception that all retirement savings become accessible at the same time. But if you have savings in different vehicles, particularly in different countries, the settings could be quite different.
People might also assume sequencing is not an issue for the UK pension because it tends to be more of a long-term income stream. You might find, though, that it just becomes a multilayered concern.
Time to check in?
The new year is a good time to take a step back and develop a, or review your existing, plan for your retirement.
It could be a chance to build your understanding and awareness of the options available to you, and the strategy you currently have in place.
Because overseas pensions are often subject to different regulations, specialist advice can help you clarify your options.
When you have investments in other countries, there are other considerations that will form part of the picture, too, such as currency fluctuations and tax considerations.
Want to talk?
If you would like to talk about whether to move your pension to New Zealand, or your investment plans more generally, get in touch with the team at Pension Transfers. We can help with any aspect of the process, from thinking about moving the money to determining an appropriate investment strategy for your goals.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.
