The risks to be aware of when spending your retirement money
Learn how market volatility might impact how long your KiwiSaver savings will last.
5 minute read
When you reach retirement age and start withdrawing from your KiwiSaver account, you enter what we call the decumulation phase. This is the opposite of when you’re building (or accumulating) your KiwiSaver savings. Having a sound plan for this phase will help you to strike the right balance between withdrawing enough each year to live the lifestyle you want and ensuring your savings last for as many years as you need them to. When you’re making your plan, a key risk to be aware of is sequencing risk.
What sequencing risk is
Sequencing risk is about the order or sequence of the returns you experience in the early stages of the decumulation phase. It can lead to your KiwiSaver balance decreasing faster than you expect.
Sequencing risk exists because of market or fund volatility. Generally speaking, a more volatile fund generates a greater variation in returns than a less volatile fund does over the same period. Funds that have more risk or volatility, are expected to return more on average over the long term, but can have a wider range of returns over the short term. On the other hand, funds that have less risk or volatility, tend to have less variation in returns over the short term, but generate a more modest return over the long term.
Investment markets usually work in cycles – periods of better-than-expected performance can be followed by periods of worse-than-expected performance, and vice versa. If a period of worse-than-expected performance comes in the early stages of the drawdown phase, your account balance can decrease much faster and run out sooner than you might expect.
What sequencing risk looks like
Let’s assume you’ve reached retirement age with a KiwiSaver balance of $100,000 and have stopped contributing. You plan to withdraw $6,000 at the end of each year.
The two tables below show the impact of two different scenarios which can have an impact on your returns. In scenario one, the better-than-expected performance comes first. In scenario two, the worse-than-expected performance comes first.
Scenario one: Better-than-expected performance
| Year |
Starting |
Return | withdrawal | Ending balance |
|---|---|---|---|---|
| Year 1 | $100,000 | 5% | $6,000 | $99,000 |
| Year 2 | $99,000 | 17% | $6,000 | $109,830 |
| Year 3 | $109,830 | 8% | $6,000 | $112,616 |
| Year 4 | $112,616 | -2% | $6,000 | $104,364 |
| Year 5 | $104,364 | 11% | $6,000 | $109,844 |
| Year 6 | $109,844 | 4% | $6,000 | $108,238 |
| Year 7 | $108,238 | 7% | $6,000 | $109,815 |
| Year 8 | $109,815 | 9% | $6,000 | $113,698 |
| Year 9 | $113,698 | 1% | $6,000 | $108,835 |
| Year 10 | $108,835 | -10% | $6,000 | $91,951 |
Scenario two: Worse-than-expected performance
| Year |
Starting |
Fund Return |
withdrawal | Ending balance |
|---|---|---|---|---|
| Year 1 | $100,000 | -10% | $6,000 | $84,000 |
| Year 2 | $84,000 | 1% | $6,000 | $78,840 |
| Year 3 | $78,840 | 9% | $6,000 | $79,936 |
| Year 4 | $79,936 | 7% | $6,000 | $79,531 |
| Year 5 | $79,531 | 4% | $6,000 | $76,712 |
| Year 6 | $76,712 | 11% | $6,000 | $79,151 |
| Year 7 | $79,151 | -2% | $6,000 | $71,568 |
| Year 8 | $71,568 | 8% | $6,000 | $71,293 |
| Year 9 | $71,293 | 17% | $6,000 | $77,413 |
| Year 10 | $77,413 | 5% | $6,000 | $75,284 |
In scenario two, the account balance is much lower after 10 years compared to scenario one. Therefore, in scenario two your KiwiSaver balance could reach zero much sooner.
But the good news is that there are a few steps you can take to reduce the impact of sequencing risk.
How you can manage sequence risk
There are three key things you can do to manage sequence risk.
Choose the right fund for you
Funds that offer more risk tend to have more volatility. Sequence risk is generally lower when you invest in a less risky fund, with smaller ups and downs. If you’re worried about sequence risk then, depending on your goals, a lower risk fund might be a better fit.
Understand how much flexibility you have
You could consider reducing or pausing withdrawals in periods of worse-than-expected performance. To know if this is an option, you need to work out if you have an alternative way of funding the withdrawals you’d normally make from your KiwiSaver account in these times.
Spread out your withdrawals
You could spread out your withdrawals, for example, by setting up a regular monthly withdrawal rather than making a withdrawal once a year. This can reduce the timing risk when you’re making withdrawals, because you aren’t at the mercy of the market at a single point in time.
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This article is solely for information purposes. It's not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article.
BNZ Investment Services Limited, a wholly owned subsidiary of Harbour Asset Management Limited, is the Issuer and Manager of the BNZ KiwiSaver Scheme. Download a copy of the BNZ KiwiSaver Scheme Product Disclosure Statement PDF 1.1MB, or pick up a copy from a BNZ branch.
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