Why the order matters more than the average
Two people with the same money and the same average return over thirty years can end up one with money past 90 and the other out of money at 79. The difference is which years were the bad ones.
Two people with the same money and the same average return over thirty years can end up one with money past 90 and the other out of money at 79. The difference is which years were the bad ones.
While you are saving, two people with the same average return over thirty years end up with roughly the same outcome. The order of the returns barely matters.
Once you start taking money out, the order of the returns can change the outcome by more than a decade.
When you are saving, a bad year means you buy at lower prices, which can help. When you are drawing, a bad year means you sell at lower prices. The units you sold are gone and cannot recover when the market does, so the loss becomes permanent.
Two people stop at 62 with £500,000 each. Both take £30,000 a year, rising with inflation. Both experience exactly the same set of annual returns over the next twenty-five years — the same numbers, in a different order.
Three poor years right at the start. They draw £30,000 from a falling pot, selling more units each time to raise the same money. By 70 the pot is far smaller than it should be, and the good years that follow are working on much less capital. The money runs out in their late seventies.
The same three poor years arrive in their mid-seventies instead. By then the pot has had a decade of growth behind it and can absorb the hit. They still have money past 90.
Exactly the same annual returns. The order they arrived in produced a difference of more than a decade.
Neither person made a worse decision or a worse investment. The difference came from the year each of them stopped work.
The free projection uses one flat growth rate, which treats every year as an average year.
That gives a smooth line and shows nothing about how fragile the plan is. Two plans can show the same answer on a flat-rate projection while one survives almost any sequence and the other only works if the first five years behave.
This is why the Financial Plan runs your numbers two thousand more times with the good and bad years reshuffled, and tells you in how many of them the money lasted. That percentage is not a forecast. It measures how much the plan depends on the order of returns.
Sequence risk cannot be removed. Each of these reduces it, and each has a cost.
Keeping a year or two of spending in cash means a bad market at the wrong moment doesn't force you to sell into it. It costs growth in every year it isn't needed. Whether that cost is acceptable is your decision.
A plan that can cut spending by 10% in a bad year survives far more sequences than one with fixed outgoings.
Even modest income in the first few years reduces how much you have to sell at the worst time. Two days a week in the first years of retirement reduces drawing in the years that matter most.
Where the State Pension and any defined benefit scheme cover the non-negotiable costs, a market fall affects what you can spend on extras, and the essential costs stay paid.
How you structure investments to manage this is a regulated advice question, and Buzz is not authorised to answer it. The Financial Plan shows how exposed your plan is and what each of the above does to the numbers, which you can take to an authorised adviser.
Sequence risk means a plan has to keep working when returns differ from its assumptions.
Every real retirement follows one specific sequence of returns, and nobody chooses theirs. So test any plan by how far the inputs have to move before the answer stops being comfortable. A plan that fails when growth is half a percent lower, or when the first two years are poor, depends on a precision no forecast has.
The stress tests in a Plan give their answers in years: in the worked example, a bad first three years costs seven years at the end. The responses above are measured the same way. Holding two years of spending in cash, working two days a week until 63, or cutting spending by a tenth in a bad year each buys back a measurable number of those years.
A robust plan has guaranteed income covering the essential costs, room to take less for two years if returns are poor, and a stop date that can move if the first years go badly.
Sequence risk is related to market risk, but distinct from it. Market risk is the risk that investments fall in value. Sequence risk is the risk that they fall at a particularly damaging moment, which for a retirement means just as you begin taking money out. The two can come apart completely. You can experience a perfectly respectable long-run average return across thirty years and still be badly hurt, because the poor years arrived at the start. Equally, a retirement that begins with a good decade can absorb a severe fall later without much lasting harm. The investments and the average return can be identical, and timing alone changes the outcome.
Roughly the five years either side of the day you stop work. That is when the pot is at its largest, so a percentage fall costs the most in pounds. It is also the point at which you start selling units to fund your income. A fall in your first drawing year does damage in two directions at once: the pot is smaller, and you are converting units into income at the worst available price. Before that period, a fall means contributions buy more. Long after it, the pot has usually had enough growth behind it to absorb the hit. That ten-year window has the largest effect on whether the money lasts.
Not necessarily, because moving everything to cash swaps one serious problem for another. Cash reliably loses purchasing power across a retirement that might run thirty or forty years, and inflation does that damage gradually, without a visible fall. The question is how much of the first few years you want insulated. That is a matter of degree, and it costs growth in every year the insulation is not needed. Where to hold it and in what is a regulated advice question, which Buzz is not authorised to answer.
Run the same plan thousands of times. Reshuffle the good and bad years, keep everything else identical, and count how often the money lasted. If it lasts in 95% of the sequences, the plan is robust and does not need luck. If it lasts in 45%, the plan works when the next few years are kind and fails when they are not, which a single smooth projection line does not show. Neither number is a prediction about markets. Both measure how much your particular plan depends on timing you cannot control, and you see that figure before you commit to a stop date.
No. The free projection runs on one flat growth rate, which is the simplification described in this guide. It answers a different question: roughly what age your money runs out on a set of assumptions. What it cannot do is tell you how fragile that answer is. Two plans can produce an identical result on a flat-rate projection while one survives almost any sequence and the other only works if the first five years behave. Seeing which one you have needs the full version, and that is one of the main things the Financial Plan is for.
An hour with a planner on whether the Financial Plan suits your position.
A written plan: every year to age 100 with UK tax applied, each risk measured in years, and your next ninety days.