Tag: savings

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Understanding Sequencing Risk: Protecting Your Retirement Savings

Market performance is unpredictable, and as you approach retirement, these fluctuations can have significant consequences. Careful planning and sound financial advice are essential during this critical period.

What Is Sequencing Risk?

The “retirement risk zone” refers to the 5-10 years around retirement when savings are most vulnerable to market downturns. Unlike younger investors, retirees may face compounding losses from early negative returns while drawing down their savings, known as sequence of returns risk.

How Sequencing Risk Impacts Retirement

For example, if you retire with $1 million and withdraw $40,000 annually, an initial 15% market drop followed by gains of 5%, 10%, and 20% over the next three years can still deplete your savings faster. Conversely, retiring in a bull market can offset withdrawals, preserving your balance.

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How to create a budget

If you are trying to manage your cashflow position and looking toward building and maintaining wealth, creating a budget is essential.

By sitting down and completing a budget, you create a snapshot overview of your personal financial position. In doing so, you give yourself the opportunity to gain a better understanding of the movement of your money – inflows and outflows. This information can help you work out how to achieve your financial goals and objectives, such as paying down debt or investing for the future.

The 50 / 30 / 20 budgeting rule

There are many ways to manage your budget. One popular tool is the 50 / 30 / 20 budgeting rule.

Essentially, this budgeting rule provides a rough guide as to how your money should be allocated towards your needs, wants and savings. For example:

  • 50% NEEDS: 50% is allocated towards needs, such as rent or minimum home loan repayments, transportation, groceries, minimum credit card and car/personal loan repayments, insurances, education, utilities, private health insurance, phone and internet, etc.
  • 30% WANTS: 30% is allocated towards wants, such as daily coffee, eating out, shopping, entertainment (e.g. subscription services, such as Netflix), hobbies, holidays, etc.
  • 20% SAVINGS: 20% is allocated towards savings, such as emergency funds, savings accounts (e.g. saving for a new car or a housing deposit), additional debt repayments, as well as investments inside and/or outside of superannuation.

Do you know what percentage you are currently allocating towards your needs, wants and savings?

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