Building a more resilient retirement

Retirement changes the way investors need to think about risk

During the accumulation phase, investors can often afford to look through periods of market volatility. There is time to recover from a major drawdown, and regular income from employment means investors are not typically relying on their portfolio to meet day-to-day spending needs.

Retirement is different.

The portfolio is no longer there to simply ride the volatility of the market in order to grow wealth for some point in the future. It needs to provide a reliable stream of income today, while preserving enough capital to support spending for what could be a retirement lasting twenty, thirty or even forty years.

This creates a fundamental challenge: how can retirees generate dependable cashflow without compromising the portfolio’s ability to continue growing over the long term?

This challenge is known as sequencing risk. For retirees drawing an income from their portfolio, suffering losses early in retirement can have a disproportionate impact on long-term outcomes. We believe short-dated bonds can be a highly effective tool for managing this risk.

The retirement dilemma: Income versus resilience

For many retirees, the natural response to this challenge is to hold a notable proportion of their portfolio in cash.

Cash provides a degree of certainty. It does not fluctuate in the same way as risk assets, and it can be used to meet immediate spending requirements without having to sell investments.

But holding too much cash over a long retirement can create its own risks. Interest rates can fall, immediately reducing the income available from cash. There is also reinvestment risk: short-term deposits vary with central bank policies, meaning the return investors receive is subject to rise or fall with little notice. Further, over a retirement that could last multiple decades, inflation can materially erode the real value of cash.

At the other end of the spectrum, investing too heavily in growth assets can expose retirees to significant short-term losses. A market fall is particularly problematic when withdrawals are being made at the same time.

This is the essence of sequencing risk.

Let’s take an example. Consider two retirees, each starting retirement with a £1 million portfolio and withdrawing £50,000 per year. Each portfolio is a typical balanced mandate consisting of:

• 60% global equities
• 20% global fixed income
• 18% alternatives
• 2% cash

Over the next ten years, both retirees  receive the exact same annualised return. The only difference is simply the order in which those returns occur, driven by the different funds selected within each asset class.

Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may rise as well as fall, and investors may not get back the amount originally invested. Capital security is not guaranteed. This material is provided for informational purposes only and does not constitute investment advice or a recommendation. It should not be considered an offer to buy or sell any financial instrument or security.

Although both experience the same average return over the period, Retiree A is forced to lock in early losses as their pension begins decumulating. As capital is withdrawn from a reduced asset base, less money remains to participate in the subsequent recovery.

Result: Retiree A ends the 10-year period with £717,785 remaining in their pension fund, whilst Retiree B’s pot is substantially higher at £874,508.

Impact of sequencing risk

Past performance is not a reliable indicator of future results. The value of investments and the income derived from them may rise as well as fall, and investors may not get back the amount originally invested. Capital security is not guaranteed. This material is provided for informational purposes only and does not constitute investment advice or a recommendation. It should not be considered an offer to buy or sell any financial instrument or security.

The challenge, therefore, is not simply to maximise investment returns, but to construct a portfolio that can meet cashflow requirements while allowing longer-term assets to grow.

The role of short-dated bonds

Not all bonds are equal.

Longer-dated bonds can offer more attractive yields when a yield curve is upward sloping, but they are highly sensitive to changes in interest rates. This makes them an attractive source of diversification should yields fall dramatically, but can also result in meaningful capital losses should yields rise.

Short-dated bonds occupy a different end of the risk spectrum. Given the more imminent maturity date, they are less sensitive to interest rates than longer duration bonds. Alongside this, they can still offer an attractive level income in excess of cash alone.

This makes them a particularly useful solution for retirement portfolios. Short-dated bonds can help provide:

• An income profile with a higher level of certainty
• A known maturity date
• Less interest rate sensitivity and therefore volatility
• A liquidity reserve that can be used for drawdowns during periods of market weakness

This brings us back to the example used above. If Retiree A had instead held an allocation to short-dated bonds, these are likely to have limited the portfolio’s drawdown, providing stability in the early years of retirement when risk assets were under stress. By reducing the need to crystallise losses at an unfavourable time, the retiree would have been left with a larger asset base after withdrawals and, therefore, a greater chance of their portfolio achieving their long-term goals. This is the role short-dated bond can play in mitigating sequencing risk.

This does not remove investment risk, nor does it guarantee capital will be preserved. But it can improve the portfolio’s resilience by reducing the likelihood of market weakness permanently impairing long-term retirement outcomes.

Our approach to retirement investing

At W1M, we believe retirement investing should begin with the cashflows an investor needs to fund, rather than a traditional asset allocation model.

This philosophy underpins our retirement model portfolios, which combine two complementary building blocks: our W1M Growth strategy, which has a record of delivering long-term capital growth, and our Enhanced Short Duration Bond Fund, designed to deliver income, resilience and support retirement cashflows. By varying the blend between the two, we create four retirement portfolios with different risk profiles whilst maintaining a consistent investment approach.

As at 30.06.26, subject to change.

The Waverton Enhanced Short Duration Bond Fund invests primarily in global short-dated bonds, fully-hedged to sterling and seeks to generate attractive levels of income whilst maintaining a low level volatility. The Fund can also allocate up to 10% to the internally managed Protected Equity Strategy, broadening the return drivers beyond traditional fixed income to enhance the long-term return potential whilst maintaining its defensive characteristics.

The result is a building block that sits between cash and traditional growth assets, helping bridge the gap between today's spending needs and tomorrow's growth requirements. In our view, short-duration fixed income is not simply a defensive allocation within retirement portfolios, but an essential component of a retirement framework designed around cashflow planning, portfolio resilience and long-term sustainability.