Sequencing-of-Returns Risk in Retirement (NZ, 2026): Why the First Five Years Decide Everything

Two retirees can earn the exact same average return and end up with wildly different outcomes — purely because of when the bad years land. Here is how sequencing-of-returns risk works, and the practical NZ defences that blunt it.

Two people can retire on the same balance, earn the exact same average return over 20 years, and follow the same withdrawal plan — and one runs out of money while the other dies wealthy. The difference is not skill, fees, or fund choice. It is luck of timing: which years the market falls. When you are still working, the order of your returns barely matters. Once you start drawing an income, it matters enormously — and it matters most in the first few years after you stop work. This is sequencing-of-returns risk, and it is one of the least understood threats to a New Zealand retirement.

This guide explains what it is in plain English, shows in dollars how two identical-average retirements can diverge, and sets out the practical defences a KiwiSaver investor can use either side of 65.

TL;DR: A market fall in the first few years of retirement does far more damage than the same fall later, because you are selling units to fund withdrawals while prices are low. The commonly cited "safe" starting drawdown for a 30-year retirement is around 4% a year ¹, but that rule assumes you survive a bad early run. The main NZ defences are a cash buffer, a flexible withdrawal rate, and not being 100% in growth assets the moment you stop work.

What is sequencing-of-returns risk, in plain English?

Sequencing-of-returns risk is the risk that a poor run of investment returns early in retirement does lasting damage, even if your average return over the whole retirement turns out fine.

While you are still working and contributing, a market crash is almost a non-event — arguably a buying opportunity. You are putting money in, not taking it out, so a fall just means your next contributions buy more units cheaply. The 2020 COVID drop, when KiwiSaver posted a scheme-wide loss of $820 million in the year to 31 March 2020 ⁶, hurt on paper but recovered quickly for people who kept contributing.

Retirement flips that logic. Now you are withdrawing, not adding. If the market falls in your first year or two of drawing an income, you have to sell more units to fund the same dollar of spending — and those units are gone for good. They never get to participate in the recovery. A modest withdrawal during a downturn quietly locks in the loss, year after year, until your balance is permanently smaller than it would have been if the same crash had hit a decade later.

That is the whole idea: same average return, different order, very different result.

Why does the order of returns matter so much when you're withdrawing?

It comes down to a simple piece of maths. When you draw a fixed income from a falling fund, you sell a bigger proportion of your remaining units to raise the same dollars.

Imagine a fund priced at $1 a unit. You need $24,000 this year, so you sell 24,000 units. Now the market falls 30% and the unit price drops to 70c. Next year you need $24,000 again — but at 70c a unit you must sell roughly 34,300 units to get there. You are burning through your holding far faster, right at the moment the fund is depressed. When the market eventually recovers, you own far fewer units to enjoy the rebound.

That is why a crash in year 1 or 2 of retirement is so much more dangerous than the identical crash in year 18 or 19. Early on, your balance is at its largest and you have decades of withdrawals still to fund, so forced selling at low prices does maximum damage. Late in retirement, the pot is smaller, the remaining withdrawals are few, and a fall has little time left to compound against you.

KiwiSaver has lived through exactly this kind of swing. The FMA's KiwiSaver Annual Report 2022 showed total investment returns of just $1.3 billion for the year to 31 March 2022 — a steep fall from the extraordinary $13.2 billion gain the year before ⁵. A retiree who started drawing down just before that reversal would feel sequencing risk in full; one who had a strong first few years would barely notice.

How can two retirees with the same average return end up with very different outcomes?

Here is the part that surprises people. Two retirees can earn the identical average annual return over their whole retirement, draw the same income, and finish with wildly different balances — purely because of when the bad years fell.

The figure below models two retirees, each starting with $300,000 and drawing $24,000 a year (about 8% to make the effect visible). Both experience the same set of yearly returns over 20 years — so their long-run average is identical. The only difference is the order: one hits a sharp crash in years 1–2, the other hits the same crash in years 18–19.

Figure: Same average return, different luck — two $300k retirements Two balance paths over 20 years, each drawing $24,000/yr from a $300,000 start, with an identical set of annual returns in a different order — a crash early versus a crash late. Same average annual return, very different ending balances. Line chart. Illustrative modelling from historical KiwiSaver return ranges (FMA) ⁵⁶.

Smiths illustrative model. Figures are an illustration to show the mechanism, not a prediction; actual results depend on the real sequence of returns, fees and tax. Returns are not guaranteed and the value of investments can go down as well as up; past performance is not a reliable indicator of future performance.

The "crash early" retiree is forced to sell a large slice of a big balance at low prices in years 1 and 2, then spends the rest of retirement trying to claw back from a smaller base. The "crash late" retiree enjoys good early years, draws most of their income before the crash ever arrives, and the late fall lands on a pot that is already nearly spent. Identical average return; very different retirement.

The lesson is not "time the market" — nobody can. It is that the first five years carry outsized weight, so they deserve outsized protection.

How exposed is a typical KiwiSaver balance at 65 to this risk?

More exposed than it used to be. Two things have changed.

First, more KiwiSaver money now sits in higher-risk funds. The FMA found the share of KiwiSaver in its highest-volatility risk category (category 5) rose from about 10% in 2021 to more than 40% by 30 June 2024 — $51.5 billion, up from $6.8 billion in 2021 ⁷. Higher-volatility funds hold more shares, which is sensible for a long horizon but means a deeper potential drawdown right when sequencing risk peaks.

Second, the cohort reaching this danger zone is large and growing. New Zealand's population aged 65+ was projected at about 926,200 in 2025, growing by roughly 80 people a day, and is forecast to pass one million by 2028 ². That is broadly on the order of 100,000+ New Zealanders crossing into the retirement red zone each year, many holding the largest KiwiSaver balances they will ever have.

There is one important cushion that softens the picture: NZ Superannuation. It is a public-pension floor that keeps arriving regardless of how your KiwiSaver performs. On the rate in force at the time of writing, NZ Super paid $1,110.30 a fortnight after tax for a single person living alone (M tax code) ³, and $854.08 each per fortnight after tax for a qualifying couple ⁴. That guaranteed, inflation-linked base means your KiwiSaver does not have to fund every dollar of spending — which gives you room to ride out a bad early market without selling everything at the bottom. The more of your essential spending NZ Super covers, the less sequencing risk can hurt you.

If you are not sure how your KiwiSaver fund would behave through an early downturn, the KiwiSaver fund at retirement guide walks through how the main NZ funds behave at 65, and a free KiwiSaver health check gives a quick read on your current mix.

What practical defences reduce sequencing risk in NZ?

You cannot stop markets falling, and you cannot pick when. But you can change how exposed your withdrawals are to a bad early run. Four defences do most of the work, and they stack.

The cash buffer is the workhorse. The idea is to hold a couple of years of spending in cash or a conservative fund, draw your income from that bucket when markets are down, and top the bucket back up from growth assets only after they have recovered. It does not improve your average return — it changes the timing of when you sell, so you are not a forced seller at the bottom.

Flexibility is the cheap, underrated one. The "safe" 4% starting rule ¹ assumes you mechanically lift your withdrawal for inflation every year, good market or bad. Simply pausing the inflation increase after a poor year — or trimming a little discretionary spending — sharply reduces the odds of running short, because you are taking less out while the fund is down.

Crucially, none of these is "go all to cash at 65." That swaps one risk (an early crash) for another, larger one over 25 years (inflation grinding down your spending power). The job is balance, not avoidance.

How does this change how you should invest in the five years either side of 65?

The five years before and after you stop work are the period when sequencing risk is highest, because your balance is near its peak and you are about to start (or have just started) drawing on it. That argues for a deliberate, gradual shift rather than a single dramatic switch.

A common adviser approach over that window is to ease back the growth share somewhat — not to nothing — and to build the cash buffer before you need it, so you are never forced to create it by selling into a falling market. Many people use this stretch to move from, say, an aggressive growth fund toward a more blended growth/balanced mix, while keeping enough growth to outpace inflation across the decades still ahead.

Two cautions. First, going fully conservative or fully cash at 65 feels safe but usually is not, because a 25-year retirement means roughly half your money is still invested into your 80s — that money needs to grow. Second, the KiwiSaver settings around you keep shifting: the maximum annual government contribution was $521.43 at the time of writing (50c per $1, up to $1,042.86 of your own contributions) ⁸, and minimum employee and employer rates were each 3% of gross pay ⁹. Those figures are set by the Government and change — so it is worth checking the current rules at ird.govt.nz before relying on any of them.

For how the drawdown phase itself works once you are retired, the KiwiSaver decumulation and drawdown guide covers the bucket approach in more depth, and the inflation in retirement guide explains why the other half of the balancing act — not going too conservative — matters just as much.

When should you get advice rather than guess?

Sequencing risk is one of those problems where a plan made calmly before you retire is worth far more than a reaction made in the middle of a downturn. It is worth talking to an adviser if you are within about five years of stopping work, if a large share of your spending will come from KiwiSaver rather than NZ Super, if you are holding an aggressive or high-growth fund close to retirement, or if you simply do not know how your current fund would behave through a bad first year.

A review can model your drawdown against an early-crash scenario, size a cash buffer, and check whether your fund mix and withdrawal rate give you a reasonable chance of lasting the distance. That is general work that applies to your own numbers — not a one-size figure from a blog. Smiths is independent and holds no in-house product, so we can compare growth, balanced and conservative funds across the major NZ providers — Simplicity, Milford, Generate, Booster, Kernel, Fisher Funds and the rest — on the same terms.

Use the safe withdrawal rate guide to sketch a sustainable starting figure, then bring it to a free review to stress-test it against a bad first five years.

Frequently asked questions

What is sequencing-of-returns risk? It is the risk that poor investment returns early in retirement do lasting damage to your savings, even if your average return over the whole retirement is fine. Because you are withdrawing rather than contributing, a fall early on forces you to sell more units at low prices to fund the same income — and those units never share in the recovery. The same fall later in retirement does far less harm.

Why does a market crash hurt more just after I retire than just before? Just before you retire you are usually still contributing, so a crash lets your next contributions buy cheaply and you have time to recover. Just after you retire you are drawing an income, so a crash means selling units while prices are low, permanently shrinking the pot. Your balance is also near its peak early in retirement, so an early fall does the most damage.

Does the 4% rule protect me from sequencing risk? Partly. The roughly 4% starting-withdrawal benchmark for a 30-year retirement ¹ is designed to survive some bad sequences, but it assumes you stick to it through good and bad years. It is not a guarantee, and a very poor first few years can still strain it. Pairing a sensible withdrawal rate with a cash buffer and the flexibility to trim spending in down years gives much better protection than the rate alone.

Should I move my KiwiSaver to cash before I retire to avoid this? Usually no. Going fully to cash removes an early-crash risk but creates a larger one: over a 25-year retirement, inflation steadily erodes the spending power of cash. A more common approach is to keep some growth assets, hold two to three years of spending in cash or a conservative fund as a buffer, and draw the buffer down in bad markets rather than selling growth at a low. The right balance depends on your circumstances.

How does NZ Super help with sequencing risk? NZ Super is a guaranteed, inflation-linked income that keeps arriving whatever the market does — $1,110.30 a fortnight after tax for a single person living alone, or $854.08 each for a qualifying couple, on the rates in force at the time of writing ³⁴. The more of your essential spending it covers, the less you have to draw from KiwiSaver in a downturn, and the less sequencing risk can hurt you. Rates change each 1 April, so check current figures with Work and Income.

How exposed is a typical KiwiSaver balance to this risk now? More than a few years ago. The FMA found the share of KiwiSaver in its highest-volatility category rose from about 10% in 2021 to more than 40% — $51.5 billion — by 30 June 2024 ⁷. Higher-growth funds suit long horizons but fall harder in a downturn, which matters most for people close to or just past 65 who are about to start drawing an income.

General information, not personalised financial advice. Seek advice tailored to your situation before acting. KiwiSaver and managed funds are investments: returns are not guaranteed, the value can go down as well as up, and past performance is not a reliable indicator of future performance. KiwiSaver is a long-term savings scheme; government contributions, contribution rates, withdrawal rules and tax settings are set by the Government and can change, so check current rules at ird.govt.nz, kiwisaver.govt.nz and sorted.org.nz. Craig Smith Business Services Ltd (FSP712931), trading as Smiths Financial, holds a Class 2 licence issued by the Financial Markets Authority and is a member of the Financial Dispute Resolution Service (FDRS). Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 11 January 2025.