Unless you understand this…

Sequencing risk refers to the potentially devastating impact of poor investment returns occurring at the outset of your retirement, rather than later.

The order in which returns are experienced matters enormously when you are drawing down a portfolio, even if the long-run average return is identical. A retiree who encounters a severe market correction in years one to three faces a fundamentally different outcome to one who experiences the same correction in year fifteen – by which point their portfolio has had years of growth and withdrawals are drawing on a much larger accumulated base.

Consider two retirees, both with £500,000 on day one, both withdrawing £20,000 a year. The first retires in 2000, immediately ahead of the dot-com crash, and sees their portfolio fall sharply just as withdrawals begin. The second retires in 1995, enjoys five years of the bull market, and only then encounters the same crash. Despite facing identical market conditions over the long run, the first retiree may exhaust their funds a decade earlier. The maths is unforgiving: selling units at depressed prices to meet income needs permanently reduces the number of units available to recover in value when markets rebound.

However, many UK financial planners now regard 3% to 3.5% as more prudent, given today’s environment of lower expected real returns, elevated valuations, and the uncomfortable reality that many of us will spend 30 to 35 years in retirement rather than the 20 years Bengen originally modelled.

It is worth emphasising that the 4% rule is a historical observation, not a guarantee. A retiree who retired in Japan in 1990, or indeed anyone who has faced a prolonged period of stagnant markets combined with persistent inflation, would have found the rule a poor guide.

The sensible approach is to treat any withdrawal rate as a starting assumption, subject to regular review — reducing spending modestly in years when markets fall, and remaining alert to the compounding danger of drawing too heavily from a portfolio that has not yet had the chance to grow.

The following is a more detailed version for those wanting more detail!

The threat nobody warned you about (until it’s too late)

Sequencing Risk and Safe Withdrawal Rates: A Framework for Decumulation

Sequencing risk – formally, sequence-of-returns risk – is the sensitivity of a decumulating portfolio to the temporal distribution of investment returns, as distinct from their arithmetic or geometric mean.

It is a phenomenon that is largely irrelevant during the accumulation phase, where pound-cost averaging actually causes poor early returns to be advantageous, but becomes the dominant risk factor the moment a portfolio transitions to drawdown. The cruel irony is that the retiree has no ability to influence the sequence they are dealt; they can only structure their portfolio and withdrawal strategy to be resilient to adverse outcomes.

The mathematical intuition is straightforward but worth stating precisely. Two portfolios with identical compound annual growth rates over a 30-year period will produce entirely different terminal values – and entirely different probabilities of ruin – if one experiences negative returns in years one to five and the other experiences them in years twenty-five to thirty.

In the latter case, the portfolio has had two decades of compounding on a largely intact capital base; in the former, withdrawals have been funded by the forced crystallisation of losses, permanently impairing the unit count available to participate in any subsequent recovery.

A Numerical Illustration

Consider two retirees, each beginning with a £1,000,000 portfolio and withdrawing £40,000 per annum in real terms (a 4% initial withdrawal rate). Both experience an identical set of annual returns over 30 years, but in reverse order — Retiree A receives the poor returns first, Retiree B receives them last.

The illustration above captures the essential asymmetry. Retiree A, despite experiencing the same long-run average return as Retiree B, exhausts their portfolio before year 30. Retiree B, buffered by early compounding of the capital base, retains substantial wealth at the same horizon. The returns are identical in aggregate – only their sequence differs.

Safe Withdrawal Rates: The Academic Landscape

The safe withdrawal rate (SWR) literature originates principally with William Bengen’s 1994 paper in the Journal of Financial Planning, in which he analysed rolling 30-year historical periods using US equity and bond return data and concluded that a 4% initial withdrawal rate – subsequently inflation-adjusted – had never caused portfolio exhaustion over any historical 30-year window. This figure was later reinforced by Cooley, Hubbard and Walz in the 1998 “Trinity Study,” which introduced the concept of portfolio success rates across varying asset allocations and time horizons.

The chart above – based on historical US return data – illustrates the sharp deterioration in success probability as withdrawal rates rise above 4%. It is, however, critical to note the limitations baked into this analysis.

First, it is predicated on US market returns, which have been historically exceptional by global standards; applying the same framework to a UK, European or globally-diversified portfolio has typically produced more conservative SWR estimates in the range of 3.0% to 3.5%.

Second, the 30-year horizon assumption is increasingly anachronistic for a 60-year-old retiree in reasonable health, for whom a 35-year horizon is statistically plausible.

Third, and perhaps most importantly, the original research was conducted in a period characterised by considerably higher structural bond yields than those that prevailed for much of the post-2008 era, though the recent normalisation of rates has partially restored the diversifying and income-generating role of fixed income.

The Mechanics of Sequencing Risk in Practice

The vulnerability to sequencing risk is not uniform across a retirement. It is most acute in what researchers have termed the “retirement red zone” — broadly, the five years either side of the retirement date. A sustained drawdown during this window, whether from equity market correction, inflationary erosion of real returns, or both simultaneously (as experienced in the 1970s and to some extent in 2022), can set a trajectory from which a portfolio relying on a fixed real withdrawal strategy may never recover.

Several structural responses have been developed to mitigate this exposure. The bucket strategy segments the portfolio into short, medium and long-duration tranches — cash and near-cash to fund the first two to three years of withdrawals, intermediate bonds or diversified income assets for years three to ten, and growth assets for the long tail.

The objective is to ensure that equity exposure need not be liquidated during a downturn to fund immediate income needs, allowing time for recovery. The dynamic withdrawal approach – variants of which include the Guyton-Klinger guardrails model replaces the fixed real withdrawal with a spending rate that is permitted to flex within defined bands in response to portfolio performance, trading spending certainty for a materially improved probability of portfolio survival.

The trade-off illustrated above is fundamental to decumulation planning. The fixed strategy offers spending certainty but accepts the full weight of sequencing risk; the dynamic strategy smooths that risk at the cost of income variability. For retirees with meaningful fixed income floors – UK state pension, company pensions (those receiving final salary pensions), annuity income – the dynamic approach becomes considerably more tolerable, since discretionary spending, rather than essential expenditure, absorbs the adjustment.

Current considerations for expats living in Spain

The UK context introduces a number of additional variables for expats. The interaction between income from your investments and Self Invested Personal Pensions (known as SIPPs) and the UK State Pension can meaningfully alter the effective withdrawal rate required from the investment or SIPP portfolio in early retirement. Defined benefit pension income, where it exists, operates as a natural hedge against sequencing risk, providing a guaranteed real income floor irrespective of market conditions.

The current environment – characterised by elevated equity valuations, particularly in US markets relative to historic norms, a partial but incomplete recovery in real gilt yields, and persistent uncertainty around long-run inflation – arguably warrants a more conservative baseline withdrawal assumption than the benchmark 4% per annum. The

The Spectrum IFA Group uses cashflow modelling tools that apply “what-if” scenario analysis to assist clients rather than historical sequencing, stress-testing portfolios against a distribution of possible return paths to see that things are on track, rather than solely those observed in the past.

The honest conclusion is that no single withdrawal rate can be “safe” in an absolute sense. What the research provides is a historically-grounded probability distribution of outcomes. The retiree and their adviser should treat any initial withdrawal rate as a base to be revisited annually, with spending adjusted at the margin in response to portfolio performance and revised longevity age assumptions. The goal is not a fixed number, but a resilient and adaptive decumulation framework.

When John and Sarah first arrived in Spain, it felt like they had finally done it.

After years of talking about “one day,” they had left the grey skies behind, bought a beautiful home on the Costa Blanca, and traded rushed mornings for sea views, coffee in the sun, and a slower pace of life.

For the first few months, everything felt exactly as they had hoped.

Their days were filled with setting up their new home, exploring local towns, improving their Spanish, and enjoying the freedom they had worked so hard to create.

Like many people who move to Spain, they had focused on the obvious things:

• Where to live.
• Healthcare.
• Residency paperwork.
• Schools for children.
• Even where to find a proper cup of tea.

What they hadn’t focused on was what would happen to their finances once life settled down. And that’s where the real story began.

It started with what seemed like a simple question.

“Now that we live in Spain… do we need to change anything financially?”

At first, John assumed the answer was probably no. After all, his pensions were in place. Their investments were performing reasonably well. Their UK adviser had looked after them for years.

And surely moving country didn’t suddenly make everything more complicated… did it?

Suddenly, decisions that had once been straightforward in the UK weren’t necessarily straightforward anymore. The first surprise came when John discovered that some of the investments he’d held for years were no longer particularly tax-efficient in Spain.

The second was understanding that Spain may assess not just what you earn—but also what you own.

And the third?

Realising that much of the “advice” he had casually read online was either too general, too UK-focused, or simply not designed for someone in his exact position.

Like many expats, John had assumed moving to Spain was primarily a lifestyle decision.

But in practice, it was also a financial transition.

This is where many people make one of the biggest mistakes I see:

They either do nothing…

Or they change everything too quickly.

Both can be costly.

Some rush to restructure investments without understanding Spanish tax implications.

Others leave everything untouched, assuming familiarity equals suitability.

In truth, the better approach is usually somewhere in the middle:

Pause. Review. Understand. Then act.

For John and Sarah, proper planning didn’t mean tearing everything up and starting again.

It meant asking better questions:

– Is our income structured efficiently for Spain?

– Are our investments still appropriate?

– Could wealth tax affect us?

– Are we relying on advice that considers both jurisdictions?

– What happens if we later return to the UK?

By reviewing their position early, they were able to make measured adjustments—not emotional ones. And perhaps most importantly, they gained clarity.

Because here’s the reality for most people, moving to Spain isn’t just about retiring abroad. It’s about protecting a lifestyle. The lifestyle you imagined when you made the move.

And protecting that lifestyle often requires just as much attention to your financial planning as it does to where you buy your home.

Over the years, I’ve spoken to many expats—some newly arrived, others who have lived here for years—and the pattern is often the same:

They spent months planning the move…But very little time planning what came after.

So, whether you’ve just arrived or have already been in Spain for some time, ask yourself this:

Do your finances still fit the country you now live in? Because sometimes, the biggest risk isn’t making the wrong decision…

It’s assuming your old plan still works in your new life.

A simple guide to key terms used in cross-border estate planning

Understanding inheritance terminology can be challenging, particularly when dealing with assets in both the UK and Spain. Differences in legal systems, tax rules, and administrative processes can cause confusion for individuals and families managing cross-border estates.

This guide is designed for UK nationals living in Spain, Spanish residents with UK assets, and anyone involved in administering an estate that falls under both jurisdictions. It explains commonly used inheritance and probate terms in clear language to help you better understand the process and make informed decisions.

Will

A written document prepared before a person’s death that sets out their instructions regarding who should manage the administrative aspects of their estate, who will be responsible for looking after their money and possessions while the process is being completed, and who they wish their assets to be distributed to.

Estate

The “estate” is the collective term for all financial interests of the deceased. This includes bank accounts, insurance policies, pensions, property, shares (including private and family-owned company shares), bonds, loans made to third parties that now need to be repaid, and other assets.

Forced Heirship (Spain)

In Spain, rules apply regarding how two thirds of an estate must be distributed. Children take priority over spouses, and only one third of the estate can be freely distributed.

However, for expatriates living in Spain, EU Regulation 650/2012 (“Brussels IV”) allows them to elect for the inheritance laws of their nationality to apply to their Will. For a UK national, for example, this makes it possible to distribute the entire estate in accordance with their wishes.

Please note that this EU regulation only applies if the instruction is expressly included in the Will.

Probate

Probate is the term used to describe the legal process of administering and distributing an estate.

In Spain, the document confirming distribution in accordance with the law and the Will is called the Escritura de Aceptación y Adjudicación de Herencia (Deed of Acceptance and Adjudication of Inheritance), which must be signed before a Spanish notary.

In the UK, the equivalent document is known as the Grant of Probate, which is issued by the Probate Office.

Trustee and/or Executor

A trustee and executor can be the same person, although it is often more than one individual in order to share the administrative responsibility.

The trustee is responsible for safeguarding the assets of the estate until they are formally transferred to the beneficiary. The executor is responsible for ensuring the legal formalities are completed so that the transfer of assets to the beneficiary is valid.

Beneficiary

A beneficiary is a person named in the Will who will receive all or part of the estate.

Bequest

A bequest is the term used to describe what is transferred to a beneficiary. This may consist of a single asset, such as a property, or multiple assets, such as property, bank account balances, and shares. A group of assets transferred together may also be referred to as a bequest.

Modelo 650

Modelo 650 is the Spanish tax form used to declare and pay inheritance tax and to support the preparation of the Escritura de Aceptación y Adjudicación de Herencia.

PA1P and IHT400

The UK form used to apply for a Grant of Probate is Form PA1P (if there is a Will) or PA1A (if there is no Will).

If inheritance tax is due, the executor must first complete Form IHT400.

Who Pays Inheritance Tax in the UK?

In the UK, the estate of the deceased is assessed for inheritance tax. The assessment is based on the total value of the estate.

Who Pays Inheritance Tax in Spain?

In Spain, each beneficiary who is a Spanish tax resident is assessed individually for inheritance tax based on the value of the assets they receive.

Double Taxation on Inheritances

As the UK and Spain tax different entities (the estate in the UK and the beneficiary in Spain), the same entity is not taxed twice. As a result, inheritance tax is generally outside the scope of the Double Taxation Agreement.

However, practical solutions may be available depending on individual circumstances, and appropriate professional advice should be obtained.

When Must Inheritance Tax Be Paid in Spain and the UK?

Inheritance tax is generally due within six months of the date of death. It is important to note that tax is not due from the date the beneficiary physically receives their bequest, which is a common misconception.

This six-month rule applies in both Spain and the UK:

• In Spain, payment must be made within six months of the date of death.
• In the UK, tax must be paid by the end of the sixth month following the death.

Case Study: Protecting Life Insurance from Inheritance Tax

At the start of every client relationship, we carry out a detailed discovery process to fully understand your personal and financial circumstances.

In this case, a married couple, both UK nationals living in Spain, held life insurance policies valued at £1,000,000 each. During our review, we identified that the appropriate Inheritance Tax mitigation documentation had not been put in place. Without this structure, the value of the life insurance policies would form part of their estate and could be subject to UK Inheritance Tax for their UK tax-resident beneficiaries.

Given that their estate exceeded the available allowances, this created a potential Inheritance Tax liability on the life assurance proceeds.

We implemented the appropriate documentation to ensure the policies were structured correctly. As a result, up to £400,000 per policy (£1,000,000 × 40%) in potential Inheritance Tax is avoided for their beneficiaries.

Important Notice

This article is provided for information purposes only and does not constitute legal advice. We recommend seeking professional legal advice to assist with the probate and distribution processes of an estate.

A specialist Inheritance Tax and Wills lawyer works with us to provide this service.

For an introduction to the lawyer, please email:
barry.davys@spectrum-ifa.com

Two roads to the same destination

One of the most important questions I ask when planning client’s investment/retirement strategies is: What investment journey do you want to go on? This is so important, as it will dictate their emotional tolerance to their investments over time.

The chart above tells a remarkable story. Both paths start at 100 and end well above 350 — but the experience of getting there couldn’t be more different. Your life stage, not just your returns, should determine which road you take.

• Simulated MSCI (global stock market benchmark-like, volatile) — blue line
• Smooth 5% p.a. — orange line

Both lines begin at exactly the same place in January 2000 and travel across 25 years. The blue line — representing a globally diversified equity portfolio similar to the MSCI World Index — ends the period around 490. The orange line, a smooth 5% per annum return, ends near 350. On paper, the blue line wins handsomely.

But focus on the journey, not just the destination. The blue line plunges nearly 50% between 2000 and 2003. It crashes again in 2008–09. It lurches and jolts throughout, sometimes spending years below where the orange line sits. If your financial life depends on the value of that portfolio at a specific moment — to fund retirement, pay school fees, or cover care costs — that volatility is not an abstraction. It is a real and serious risk.

“The best investment is the one you can live with — through the crashes, the recoveries, and everything in between.”

A principle that shapes every recommendation we make

What the orange line actually represents

The smooth 5% line is not a fantasy. It is representative of a broad class of investments — smoothed funds, multi-asset income strategies, certain structured products, and with-profits vehicles — designed to deliver steady, predictable growth by dampening day-to-day market noise. The trade-off is explicit: you sacrifice the ceiling in exchange for raising the floor. You will rarely see a 40% gain in a year. You will also rarely see a 40% loss.

Over the full 25-year window in the chart, the volatile blue path generates significantly more wealth — roughly 40% more in absolute terms. But that outperformance is overwhelmingly concentrated in the later years, when the blue line breaks free of the orange and accelerates. An investor who needed to access their money in 2003, 2009, or 2012 would have fared far worse on the blue path than the orange.

+490 Blue line final value (start = 100)
+350 Orange line final value (start = 100)
2003 & 2009 — years the blue line fell far below the orange

Matching your journey to your life stage

Good financial planning is understanding what is right for your client, by probing and asking pertinent questions. This in essence is the heart of good financial planning: not chasing the highest number, but choosing the path that fits where your clients are and want to be in life. Here is how I think about it – although many people now want to retire early (Financial Independence Retire Early) so this can be adjusted.

Early career (20s–30s)

Blue line — Volatile growth
Time is your greatest asset. Short-term crashes matter little when retirement is 30 years away. Riding out the dips and compounding the recoveries is exactly what long time horizons are designed for.

Mid-career accumulation (40s)

Blue line — Volatile growth
You still have a long runway. Regular contributions during market dips mean you are buying cheaply. Volatility, paradoxically, works in your favour when you are still saving rather than drawing down.

Approaching retirement (50s–early 60s)

Orange line — Smooth growth
The risk calculus shifts sharply. A severe market fall five years before you retire can permanently impair your income in retirement. Sequence-of-returns risk is real — and the orange line protects against it.

Retirement & drawdown (65+)

Orange line — Smooth growth
When you are drawing an income from your portfolio, you are selling units. Selling in a crash locks in losses permanently. Smoothed, predictable growth lets you plan withdrawals with confidence.

The case for blending both

For many clients, the right answer is not one line or the other — it is both. A classic approach is to hold the orange-line strategy for near-term income needs (the next 3–5 years of retirement spending, for example) while maintaining a blue-line allocation for longer-term capital that has time to recover from any drawdown.

This is sometimes called a “bucket” or “liability-matching” approach. It provides the psychological security of the smooth line for money you will need soon, while preserving the growth engine of equities for money with a longer horizon. The exact blend depends on your income requirements, your existing assets, your state pension, and — critically — your personal tolerance for seeing your wealth fall temporarily on a statement.

“Volatility is not risk in itself. Risk is being forced to sell at the wrong moment. Proper planning ensures you never are.”

The distinction that changes everything

A word on behaviour-

There is one final factor the chart cannot show: human behaviour. The blue line’s superior long-run return is only realised by investors who stay invested through every crash. Research consistently shows that the average investor underperforms the average fund because they sell in panic and re-enter too late. If the volatility of the blue line would cause you to make emotional decisions — to cash out in March 2009, say, just before the extraordinary recovery — then the orange line would have made you richer, not poorer.

The right portfolio is not just the one with the best theoretical return. It is the one you will hold through the worst days. Understanding your own temperament is as important as understanding your time horizon.

Ready to map your own investment journey? Every client’s path is different. We’ll help you find the right blend of growth and stability — and build a plan you can stay with through every market cycle.

Book a conversation here.
You can also read independent reviews of my advice and service here.

This article is for informational purposes only and does not constitute personalised financial advice. Past performance is not a reliable indicator of future results. The chart shown uses simulated data for illustrative purposes.