You’ve probably heard the saying that it’s time in the market, rather than timing, that matters for investment outcomes. Over longer investment periods, short-term market movements may have less influence on overall outcomes.

Once you start making withdrawals, however, the order in which investment returns occur can become particularly important. Here are a few things to think about.

Sequence of returns risk

Sequence of returns risk refers to the effect that the order of investment returns can have when you are regularly withdrawing money. Poor returns early in retirement can have a particularly significant impact, because withdrawals may require you to sell more investment assets while values are lower.

This can mean that two people who reach retirement with similar investment returns and contribution histories can end up with very different outcomes, depending on whether they begin withdrawing funds during a bear market, a flat market, or a bull market.

This risk can be particularly important in the early years of retirement, when withdrawals following a market downturn can leave a lesser amount invested to participate in a subsequent market recovery.

Why withdrawals change the effect of market movements

Generally, market movements are something that happens ‘on paper’ and do not make a difference to the money an investor has in their fund. Things work a little differently when you’re taking money out of your investments. If markets have fallen, you’ll usually need to sell more units to generate the income you need, which means locking in those lower prices. If markets are performing well, you’ll receive more money for each unit sold, allowing you to take advantage of higher valuations.

Asset allocation can help

You can address some of this risk through your use of asset allocation. Many people who are approaching the period in their lives when they’ll start withdrawing money from investments deploy something called the “bucket method”.

They divide off a portion of money they will need in the near future and invest it in lower-risk assets, which are generally less exposed to short-term market movements. Then they have another portion that’s invested in a more balanced way, which is designed to be accessed in the medium term, and then finally a third portion invested in growth assets that they do not expect to need to use for many years.

This approach can provide access to money for shorter-term needs without necessarily having to sell growth investments during a market downturn. By keeping part of the portfolio invested for longer-term growth those assets have the potential to outpace inflation.

A SHARE adviser can help you consider how different approaches may fit your expected withdrawals, timeframe and circumstances.

Dual risks

While people who are withdrawing investments face investment risk, it is also worth considering inflation risk. This refers to the risk that your investment returns won’t keep up with inflation. Cash savings, for example, can lose purchasing power in real terms if the interest earned does not keep pace with inflation.

This is another reason that the buckets, or portion, method can be helpful. Typically using lower-risk investments to reduce exposure to short-term market movements, and balancing the risk with longer-term growth investments that may offer greater potential to keep pace with or outpace inflation over time.

Want to talk?

If you’re thinking about withdrawing from your investments and wondering about an appropriate way to manage that, we are here to help. We can help you develop an approach that is most suited to your goals, timeframe and circumstances.

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.