Your accumulated savings pool is likely to be highest in the years nearing retirement – and just after you retire. Investment decisions made at this time can greatly impact your income down the track.

The risk they don’t talk about in the papers

When it comes to investing we are all familiar with the most common definition of risk; investment returns can and will vary. But risk needs to be considered in context of not achieving your objectives – and how a lesser known risk called ‘sequencing risk’ impacts whether or not you meet your goals.

Critical investment period near retirement

Returns matter the most when you have the most capital at risk. Sequencing risk relates to the order in which returns occur.

Rather than just assessing how assets go up or down over a given time horizon, the path of the return also needs to be assessed. This is because your outcome will be a function of both the investment returns achieved and the size of your investment savings. Let me show you with an example.

A poor investment outcome at the wrong time can be very costly

Consider an investor in their accumulation phase who saves $10,000 each year for 10 years. In the below two scenarios, the investor experiences a large negative loss over the course of that decade. In Scenario 1, the investor experiences the loss in the first year, while in Scenario 2, the loss occurs in the final year of their investment.

Both scenarios have the same compounded annualised return and volatility. If you were to read about these returns in the newspaper at the end of the decade, the returns would be the same under either scenario. But the dollar outcomes for the investor are vastly different.

Timing Matters: different outcomes due to different timing of returns

In Scenario 1, the market decline occurred early and impacted savings when the accumulated investment balance was low. In Scenario 2, ten years of savings contributions and years of steady market gains were impacted by the poor returns in the last year.

The difference for the investor who experienced a draw down in the last year was -17.1%. A poor investment outcome at the wrong time can be very costly.

The value of seeking expert advice

Why haven’t you read about sequencing risk more often? Financial markets don’t experience sequencing risk, only investors do. It relates to where you are in your own working/retirement journey and the savings balance you are accumulating ahead of retirement.

Investment strategies are available that aim to improve the outcomes during this important ‘transition to retirement’ phase. These strategies aim to reduce volatility and improve the stability of returns.

This highlights the benefit of seeking expert financial advice to assist with these challenges. Your financial planning adviser can tailor an investment strategy that matches your personal circumstances and seeks to address your multiple objectives. They have required skills and experience to determine if strategies designed for the transition to retirement may be appropriate for you in terms of achieving your long-term financial goals. Top 10 Microgaming Casinos in Australia​​ GunsBet – 100% deposit bonus + 100 free spins. Spin Samurai – 125% match bonus. We recommend these microgaming casino sites to play online. Best Microgaming Casinos For Australians ; 1 · Pokie Spins Casino ; 2. Jackpot Jill Casino ; 3. BitStarz Casino ; 4 · Hell Spin Casino ; 5. National Casino. Play Microgaming casino on PC & mobile software platforms · For AUD players, banking is simple and safe. Microgaming pokies can be found at HellSpin, DundeeSlots, Bizzo and Ricky casino. What is the best Microgaming pokies?

Taking the time to plan your ‘transition to retirement’ can be well worth the effort.

Speak to your Newcastle financial advisors at Leenane Templeton Wealth Management today.

Call (02) 4926 2300 or email us today.

Source: First Sentier

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Let’s look at some options available to 62-year-old accountant, Brian. He works full time and is on an annual salary of $100,000.

Easing into retirement

First up, Brian might consider reducing his hours as he prepares for retirement. Dropping from five to three days a week will see his $100,000 annual salary reduce by $40,000 to $60,000. But as his tax bill also falls, from $26,497 to $12,147, his net income only drops by $25,650. Subject to minimum and maximum pension payment rules, and as the pension payments are exempt from tax, Brian only needs to start a TTR pension paying $25,650 each year to maintain his current life.*

One thing to be aware of

Based on Brian’s reduced hours his employer’s super contributions will decrease by $3,230 after contributions tax of 15% is taken into account. Most simply, Brian could add this amount to his pension payments, and make a non-concessional contribution to his super.

Bridging a gap

TTR pensions can also help bridge the gap if household income takes a hit. What if Brian has no plans to reduce his hours, but illness prevents his partner from working for several months? He could start a TTR to tide them over and help meet mortgage repayments or medical expenses. However, once the crisis has passed the TTR pension will need to continue, as it can’t be withdrawn as a lump sum. Alternatively, it can either be converted to a regular account based pension when Brian either turns 65 or permanently retires, or rolled back into the accumulation phase.

Boosting super savings by reducing tax

With his partner restored to health and back at work, and Brian still working full time, what can he do with the now surplus income from the TTR pension? One strategy is to make salary sacrifice contributions to super.

Brian is able to salary sacrifice up to $15,500 of his pre-tax income to superannuation (the difference between the concessional cap of $25,000 less compulsory employer contributions of $9,500). Taken as salary, $5,932 of that $15,500 would go in tax. Make a concessional contribution to super and the tax could be reduced to just $2,325, a difference of $3,607! *

If there’s still money to spare after the salary sacrifice contribution is made Brian can look at making non-concessional contributions to superannuation where earnings will only be taxed at 15%, significantly less than his marginal tax rate.

Getting it right

If you’re approaching retirement, it might be worth checking out what a TTR strategy may be able to achieve for you. It’s a complex area, so make sure you talk to your licensed financial planner before you act.  

Speak with one of our advisors about your transition to retirement or for retirement planning. Contact Us

*All figures above as for example purposes only and can vary depending upon your personal circumstances and must not be relied upon. Always seek advice for your own personal circumstances.

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