to help you make informed decisions about your wealth

Timely withdrawal

01 March 2018

When the time comes to start drawing on your retirement fund, the right investment strategy can reduce the danger of market downturns speed-shrinking your capital.

One of the beauties of investing for retirement is that, over the long haul, the effect of short-term market downturns should become negligible. The compounding effects of long-term equity market growth and reinvested dividend income make for a compelling mix.

However, once you retire and can no longer pay into your pension pot, you need it to provide an income instead. At that point, an unfortunately-timed market downturn can be far more costly to your finances than while you are still contributing to your retirement fund. Without careful advice and the right investment strategy, the sustainability of your retirement fund could be contingent on mere timing luck. While you can largely ignore short-term volatility when you are building your retirement fund, the truth is more complicated when you are drawing on it as a retiree.

‘Sequence risk’, also known as sequence-of-returns risk, is the risk of receiving lower returns from a fund because early withdrawals coincide with a market downturn. As a consequence of having to realise more units at a lower price simply to receive the same income payments, there is an increased risk that your capital will be depleted; in some cases, it may never recover.

As the chart below shows, three identical retirement pots can look completely different 25 years after withdrawals were first taken, simply as a result of when in the market cycle each one was first accessed. In the examples shown, the size of the initial pension pots and the regularity and size of withdrawals were all the same. The only difference was the timing of the good and bad years on markets.

As the illustration shows, Mrs Doe was fortunate to reach the age of 65 at just the right moment. She retired at 65 with a £1 million pension pot and, at the age of 90, her pension pot was worth almost 10 percent more, despite making all her regular withdrawals . Mr White, on the other hand, suffered due to a bad couple of years of returns early in his retirement, and his pot, which had been worth £1 million when he was 65, had run out entirely by the time he was 89.

Source: BlackRock*

Reduce the risk

Fortunately, there are steps that can be taken to mitigate sequence risk, although they are not always straightforward. Getting the right advice is key, especially as what steps you should take will depend on your personal circumstances, your attitude to risk and your retirement goals.

Ensuring that your retirement fund is appropriately invested and sufficiently diversified is crucial.

That might involve investing a greater proportion of your fund in lower risk, income-generating assets to help cushion it against the impact of a downturn in equity markets. However, the extra security provided by this approach needs to be balanced against the likelihood of lower returns. Given the rise in average lifespans – and thus in retirement spans – many retirees will want to be sure their money is still working for them, highlighting the need to keep your fund under regular review.

It’s also important that the income expectations you set are realistic. You should also be willing to consider reducing the level of withdrawals in the event of a market downturn, in order to improve the capacity of the fund to recover.

Holding sufficient funds readily available in cash is also vital, because it means you can help meet short-term income needs whilst avoiding the need to encash investments at the wrong time, in other words, when markets are down.

The challenges facing retirees can look quite different to those facing workers who are saving for retirement. More broadly, however, both groups will benefit from planning well ahead, and from seeking out advice tailored to their particular needs. If they do, the threat of sequence risk can be managed.


The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up.  You may get back less than you invested.

* This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes, expenses related to investing and the number of years of retirement funding (life expectancy). This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of £1,000,000, annual withdrawals of £60,000 adjusted annually by 3% for inflation and a hypothetical sequence of returns.


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