Retirement planning has traditionally focused on expected long-term returns. That measure is useful during accumulation, when contributions continue and a long horizon gives a portfolio time to recover from a bad year. It is less reliable once a retiree starts drawing income from the same capital. At that point, sequence-of-returns risk becomes a central consideration: the order in which returns occur can materially influence how long retirement savings lasts.
A market fall in the first few years of drawdown can leave a retiree with less capital to participate in the recovery. Two retirees may therefore earn the same long-run average return but experience very different outcomes because those returns arrive in a different order.
Why decumulation changes the risk
During accumulation, volatility is mainly a timing issue. During decumulation, withdrawals turn it into a capital risk.
A significant early decline reduces the base supporting future withdrawals, and that damage can persist after markets recover. Average or median return assumptions do not show this clearly.
What a smoothed bonus fund changes
A smoothed bonus fund does not eliminate market risk. Its underlying assets remain market-linked but gains and losses are credited to the member more gradually. This can moderate the immediate effect of a sharp market fall on the capital value used to determine future income.
For this illustration, we used a simplified mechanism rather than modelling any insurer’s bonus declarations, reserves or market value adjustments. The smoothed return is the average of the preceding 24 months’ realised market-linked returns, less a smoothing fee. It isolates the effect of changing the timing and volatility of credited returns, not the underlying investment exposure.
Smoothing does not guarantee a better long-term result. It may, however, reduce the impact of adverse sequencing when income is periodically reset with reference to fund value.
How the illustration was constructed
Illustrative Monte Carlo design
10,000 simulations of monthly returns over 27 years. Each year, the retiree draws 5% of the opening fund value in equal monthly instalments; income is recalibrated annually and is not fixed in real or nominal terms.
Market-linked proxy: the median return profile of a representative peer group
of market-linked multi-asset funds. It is product- and provider-agnostic.
Smoothed portfolio: the same return stream, credited as a rolling 24-month
average of realised monthly returns, net of a smoothing fee.
All outputs are hypothetical and illustrate the mechanism. They are not forecasts, named-product comparisons or investment advice.
What the illustration shows
The chart below compares the final retirement savings outcomes of the market-linked and smoothed investment strategies across many different simulated retirement journeys.
Each dot represents one possible retirement outcome after drawing a regular income over a 27-year retirement period.
The dotted line shows where both strategies produce the same outcome. Dots above the line indicate outcomes where the smoothed strategy ended with a higher final value, while dots below the line indicate outcomes where the market-linked strategy ended with a higher final value.
The chart helps illustrate how the two strategies compare across a wide range of possible market conditions. The illustration is hypothetical and is provided for explanatory purposes only.
Figure 1 Illustrative final outcomes: market-linked vs smoothed strategies
The limits of smoothing
Smoothing dampens volatility but does not remove market risk. A sustained market decline will still affect credited returns, although with a lag.
Product design matters. Averaging periods, bonus declarations, fees and market value adjustments on early exit differ. Advisers must assess the mechanics of the specific product rather than infer them from this illustration.
Implications for advice and product design
Sequence risk should be a first-order consideration, alongside expected return, when advisers compare market linked and smoothed options for the drawdown phase. Providers should also explain their smoothing mechanics, fees and early exit adjustments clearly so that clients understand the trade-off between a steadier income path and potentially forgone upside.
Neither approach is universally preferable. Suitability depends on the retiree’s objectives, risk tolerance, income needs, investment horizon and the features of the products being considered. The decision is not only about expected return. It is also about how much sequencing risk a retiree can absorb while drawing an income. Scenario analysis can make that risk visible before the choice is made.
