Sequencing Risk and Your KiwiSaver in NZ (2026): Why a Crash Near Retirement Hurts Most

A market fall just before or after you retire does far more damage than the same fall at 40. Here is what sequencing risk is, why cash is not the fix, and how glide paths and buckets help protect a balance in the danger zone.

A market fall is uncomfortable at any age. But the same fall does very different amounts of damage depending on when it lands. A 30% drop when you are 40 is a paper loss you have decades to recover. The same drop a year either side of retirement, just as you start drawing an income, can permanently shrink how long your money lasts. That timing problem has a name: sequencing risk. It is one of the few risks that matters far more in the years around 65 than at any other point in your KiwiSaver journey.

TL;DR: Sequencing risk is the danger that a poor run of returns lands just before or after you retire, while you are starting to draw down. Two people can earn the same average return over retirement and end up with very different outcomes purely because of the order the returns arrived in. The danger zone is roughly the five years either side of retirement. Moving everything to cash is not the fix, because NZ Super pays only about $27,998 a year after tax for a single person ⁴ and a 25-to-30-year retirement still needs growth.

What is sequencing risk in plain English?

Sequencing risk, sometimes called sequencing-of-returns risk, is the risk that the order of your investment returns works against you at the worst possible moment.

While you are saving, the order barely matters. If your KiwiSaver is not paying you anything yet, a bad year followed by a good year leaves you in much the same place as a good year followed by a bad one. You are not selling anything, so a fall is just a lower number on a screen that has time to recover.

Once you start drawing an income, the order suddenly matters a great deal. Every withdrawal you make during a downturn sells units while they are cheap, and those units are then gone, no longer there to recover when the market rebounds. A run of poor returns early in retirement therefore does lasting damage in a way the same run later on does not.

The clearest way to see it is to compare two retirees who earn the exact same average return over their retirement, but in reverse order. Same average, very different result, because one met the bad years early while drawing down and the other met them late.

Figure (described): a line chart titled "Same average return, different order: two retirees' balances". Two portfolios start at the same balance and are drawn down from retirement. Both earn identical returns over the full period, but in reversed order. The portfolio that meets its poor-return years early falls steeply and never recovers, running low well before the end; the portfolio that meets the same poor years late stays far healthier throughout. The two lines diverge sharply despite an identical average return. Source: illustrative return sequencing; Te Ara Ahunga Ora Retirement Commission guidance ⁷.

That divergence is the whole point. The average return tells you nothing about whether your money lasts. The order does.

Why does a crash near 65 hurt more than one at 40?

Three things change as you approach retirement, and together they turn an ordinary market fall into a lasting problem.

First, your balance is at its largest. A 30% fall on a $400,000 balance is a $120,000 hit; the same percentage fall on a $40,000 balance at 40 is only $12,000. The closer you are to retirement, the more dollars are exposed.

Second, you lose time. At 40 you have 25 years for a fall to recover before you need the money. A year out from retirement you may have months, not decades. Diversified growth and balanced funds have historically recovered from major falls within a few years, but "a few years" is a long time to wait when you are about to start spending ⁸.

Third, and most important, you stop adding and start withdrawing. While you are working, a downturn is actually a chance to buy units cheaply with each pay's contribution. In retirement that reverses. You are selling units to fund your living costs, and selling them while they are down locks the loss in.

Put together, these three forces are why the years around 65 are the highest-impact period for investment timing. The same market event that is a buying opportunity at 40 can be a permanent dent at 65.

How big is the danger zone around your retirement date?

There is no exact line, but the most-quoted danger zone is roughly the five years before and five years after your retirement date. This is the window where your balance is near its peak and your withdrawals are about to begin or have just begun, so a poor sequence of returns does the most harm.

It helps to think of your KiwiSaver life in three rough phases:

The danger zone is not a reason to panic in the years before 65. It is a reason to plan deliberately for that specific window, rather than carrying an accumulation-phase mindset straight through retirement and hoping the timing is kind.

Does moving everything to cash solve it? (No — here's why)

The obvious reaction to sequencing risk is to move the whole balance to cash or a defensive fund as retirement nears, so there is nothing left to fall. It removes the short-term volatility, but it usually trades one risk for another.

The problem is how long retirement now lasts. Many people will spend 25 to 30 years drawing on their savings. Over that span, the quiet danger is not a single crash; it is inflation slowly eroding what your money buys. Cash and very defensive funds have historically struggled to stay ahead of inflation after tax and fees, so an all-cash balance can shrink in real terms even as the dollar figure holds steady.

NZ Super sets the floor under this. For a single person living alone it pays about $538.42 a week, roughly $27,998 a year after tax ⁴. For a couple where both qualify, it is about $799.18 each per fortnight, a little under $41,600 a year combined ⁵. That base is guaranteed and inflation-indexed, but it is set at only around 40% of the net average wage for a single person living alone, and 66 to 72.5% for a couple ⁶. For most people it sits well below their pre-retirement income, which is exactly why KiwiSaver drawdown is there to fill the gap, and why that money usually needs to keep growing through retirement, not sit idle.

So the goal is not to eliminate growth. It is to make sure you are never forced to sell growth assets while they are down. That is a different and more achievable aim, and it points to two practical tools rather than an all-cash switch.

What is a glide path and a bucket strategy?

A glide path is a gradual, planned reduction in how much investment risk you carry as you approach and move through retirement. Instead of one abrupt switch to cash, you ease down the share of growth assets over several years, so the balance is less exposed to a large fall right at the danger zone, while still keeping enough growth to outpace inflation for the decades ahead. Many KiwiSaver default and target-date style funds apply a version of this automatically; others leave the timing to you.

A bucket strategy organises your money by when you will spend it:

• A cash bucket holding roughly one to two years of the spending you fund yourself (above NZ Super), in bank savings and short term deposits. This is what you live on during a downturn, so you are not selling investments at a loss.
• An income or middle bucket of money for roughly years three to ten, often in a balanced fund. It refills the cash bucket and takes less risk than pure growth.
• A growth bucket of money you will not touch for a decade or more, kept in growth assets to stay ahead of inflation.

The two ideas work together. The glide path manages your overall risk level as you cross the danger zone; the buckets give you a cash reserve so a fall in the growth bucket never forces a sale. The trade-off with both is cost: holding more cash and dialling down growth steadies the ride but tends to lower long-run returns, so the sizing has to suit your own spending and comfort with risk rather than being maxed out. Our guides on the bucket strategy for retirement income and choosing a KiwiSaver fund at retirement go deeper on both.

How does KiwiSaver drawdown make sequencing risk worse?

Drawdown is the stage where sequencing risk stops being theoretical. Once you turn 65 you can leave KiwiSaver invested, take lump sums, or set up a regular withdrawal, and the mechanics of how you do it can quietly amplify the timing problem.

The main reason is the order of operations. When you take a fixed regular payment, say a set dollar amount each month, a falling market means you have to sell more units to raise the same cash. In a downturn that accelerates the depletion of your balance at the very moment you most want to leave it alone. This is the mirror image of saving, where regular contributions buy more units when prices are low.

A few features of KiwiSaver drawdown interact with this:

• Fixed-dollar withdrawals are convenient but pro-cyclical: they sell hardest when prices are lowest.
• A single growth fund with no cash reserve leaves you no choice but to sell growth assets in a fall, locking the loss in.
• PIR and fees keep nibbling at the balance regardless of markets, so a poor early sequence and ongoing costs compound. Your PIR (Prescribed Investor Rate, the tax rate on your KiwiSaver earnings) is worth checking, as many people move into a lower band in retirement.

The Retirement Commission's modelling of post-Budget-2025 settings illustrates how much the drawdown phase matters: under the settings it examined, KiwiSaver balances could last meaningfully longer, with figures of up to around 30% longer fund duration cited under the modelled assumptions ⁷. The lesson is not the exact number, which depends on the assumptions, but the direction: how and when you draw down is one of the biggest levers over how long your money lasts. Our guide to KiwiSaver drawdown options at retirement covers the choices in detail.

How do you protect a balance in the danger zone?

There is no way to remove sequencing risk entirely, short of giving up growth altogether, which brings its own inflation problem. The realistic aim is to reduce how exposed you are during the danger zone and to make sure a fall never forces a badly-timed sale. A few practical levers, none of which is a guarantee:

• Hold a cash reserve. One to two years of the spending you fund yourself, in cash and short term deposits, lets you ride out a downturn without selling growth assets.
• Glide your risk down gradually. Easing the growth-asset share down over several years around retirement softens the impact of a fall at the worst time, without dropping all the way to cash.
• Keep some growth for the long haul. Money you will not touch for 10-plus years can usually stay invested for growth, because that is what fights inflation over a long retirement.
• Be flexible with withdrawals. Trimming spending, or pausing growth-bucket withdrawals, in a poor year reduces the damage that fixed-dollar selling does.
• Use NZ Super as your floor. Because NZ Super is guaranteed and inflation-indexed ⁴⁵, your investments only have to fund the gap above it, which shrinks how much you are exposed to market timing.
• Check your settings. The right PIR and a fee-aware fund choice both help the balance work harder regardless of markets.

How much weight to put on each lever depends on your spending, your other income, your health and how much market movement you can stomach. Returns are not guaranteed. The value of investments can go down as well as up and you may get back less than you invested. Past performance is not a reliable indicator of future performance. Pairing these steps with a sustainable spending rate is what keeps the plan on track, and our guide to the safe withdrawal rate in NZ goes deeper on that.

KiwiSaver is a long-term savings scheme. Government contributions, contribution rates, withdrawal rules and tax (PIR) settings are set by the Government and can change. Figures are correct as at 17 August 2025. Check current rules at ird.govt.nz, kiwisaver.govt.nz and sorted.org.nz, and the relevant scheme's Product Disclosure Statement.

Frequently asked questions

What is sequencing risk in simple terms? It is the risk that a poor run of investment returns arrives at the worst time, just before or after you retire, while you are starting to draw an income. Two people can earn the same average return over retirement yet end up with very different balances purely because of the order their returns arrived in. The one who met the bad years early, while withdrawing, fares worse, because selling units in a downturn locks in the loss ⁷⁸.

When is sequencing risk highest? Roughly the five years before and five years after your retirement date. In that window your balance is near its peak and your withdrawals are about to begin or have just begun, so the order of returns matters most. While you are still saving, with contributions going in and years to recover, the same market fall does much less lasting harm.

Should I move my KiwiSaver to a cash fund before I retire? Moving everything to cash removes short-term volatility, but it usually trades one risk for another. A retirement of 25 to 30 years still needs growth to stay ahead of inflation, and NZ Super alone pays only about $27,998 a year after tax for a single person ⁴⁶. Easing risk down gradually (a glide path) and holding a cash reserve is a common alternative to an all-cash switch. What suits you depends on your circumstances, so personalised advice helps.

How big a cash buffer should I hold near retirement? Many approaches hold one to two years of the spending you fund yourself, above NZ Super, in cash and short term deposits, so you can keep spending through a downturn without selling investments. The right size depends on your spending, your other income and how much market movement you are comfortable with. Holding much more than two years tends to drag on long-run returns.

Does the bucket strategy fix sequencing risk? It helps, but nothing fixes it entirely. Buckets give you a cash reserve so a market fall does not force you to sell growth assets at a loss, which is the core of sequencing risk. How long your money lasts also depends on how much you spend each year, so a bucket structure works best paired with a sustainable withdrawal rate. Returns are not guaranteed and can go down as well as up.

Does KiwiSaver protect against sequencing risk automatically? Not by default. Some KiwiSaver funds apply a glide path that reduces risk as you near a target date, but many leave the fund choice and drawdown method to you. A single growth fund with fixed-dollar withdrawals and no cash reserve can actually make sequencing risk worse, because you sell hardest when prices are lowest. It is worth reviewing your fund and drawdown approach as you approach 65.

This article is general information only and is not personalised financial advice. It does not take into account your particular financial situation, goals or needs. Before acting, consider whether it's right for you and seek advice tailored to your circumstances. 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 17 August 2025.