Fidelity's Richard Dinham

Australians in the final years of accumulation are facing a heightened degree of sequencing risk due to concerns that favourable global equities conditions will eventually come to an end, according to Fidelity International head of retirement and client solutions, Richard Dinham.

Speaking at a media event in Sydney, Dinham said he’d “absolutely be cautious” about sequencing risk if he was in the lead up to retirement in the current market.

Sequencing risk refers to the timing of drawdowns; a market crash is especially dangerous to retirement balances that are both at their peak and unlikely to benefit from further contributions.

Monthly pension withdrawals also cost a higher percentage of the overall balance if an account loses significant capital, and any sharemarket recovery would be of lesser benefit to a smaller account.

With the US stockmarket on its longest bull run in history and Australia without a recession in 27 years, a sharp downturn in either market could have a devastating effect. A recent study from Investment Trends and Powerwrap showed that the three major concerns of high-net-worth investors were (a) tension between the world’s major economies, (b) a china slowdown and (c) a global market crash.

Global actuarial firm Milliman recently flagged the risk sequencing pose to SMSFs, in particular, with a study showing typical member funds have a one in 12 chance of experiencing a double-digit loss.

A ten per cent loss in the first year of retirement (with a 6 per cent drawdown over 30 years) would necessitate an increase in return from CPI + 4.2 per cent to CPI + 5.9 per cent to recoup the loss, Milliman estimates.

Like de-ja-vu

Fidelity’s Dinham was asked: If you were three years out from retirement with a balance of $700,000, would you be concerned about sequencing risk, given the current market conditions?

“Absolutely,” he responded. “A lot of investment professional, advisers and mums and dads are wondering how long this bull market can run. Surely there’s a downturn somewhere around the corner, it could be tomorrow or five years’ time.”

Dinham noted that the risk is compounded by declining income from domestic equities, which retirees have historically favoured due to their consistency and imputation credits; three of the major banks announced some form of dividend cut during last week’s full year results calls.

“Banks used to be very stable,” he said. “Now they’re not.”

Despite the sequencing risk, Dinham isn’t totally convinced that an eventual market correction is just around the corner.

“My own view is that things could carry on for a long time,” he said, noting that the possible dangers in the global economy have remained for some time without causing extensive damage.

“It’s sort of like de-ja-vu, we’ve been thinking this for a number of years; you think there’s a catalyst that could cause a reversal, be it Trump or Brexit or trade wars, whatever it might be that could cause a market downturn, and it’ll be the correction we’ve all been waiting for,” he said.

“There seems to be a bit of volatility but unless something else comes up this could continue for a while,” he added.

Tahn Sharpe is a Sydney-based financial services journalist with a background in financial planning. He writes on advice, superannuation, investment, banking and insurance issues, is a certified SMSF Adviser and holds an Advanced Diploma of Financial Planning.
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