In its simplest form, sequencing risk refers to the sequence or order of returns – specifically negative returns – occurring at the same time you start to draw capital from your SMSF to fund your retirement.
Apart from the obvious solutions of reducing your living expense cash flow requirements or delaying retirement, what other solutions are available to mitigate sequencing risk if you are approaching retirement? Regarding how much cash you should hold, the general rule of thumb is for retirees to aim for at least two years of living expenses. This balance will ebb and flow with withdrawals and investment income received but if you can aim for this target, it will provide a buffer if there is a prolonged bear market affecting the other asset classes in your SMSF.
Credit investments in particular will offer a higher return if you are happy to forgo liquidity, which could meaningfully add to the expected returns from your defensive component. If you can capture a higher return from your defensive assets to compensate your declining growth assets, once again this will help mitigate sequencing risk causing damage to your portfolio.
Lol. It’s a great way to transfer wealth from the boomers. What a horrible title
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Source: FinancialReview - 🏆 2. / 90 Read more »