The top four retirement planning risks in Australia

Understand the four key risks that can impact your retirement outcomes and learn how to build a resilient retirement strategy. 

Ask most people how their retirement planning is tracking and they’ll immediately tell you a number: “We’ve got around $500,000 in super…”

The figures might be comforting, but they don’t really answer the question.

Anyone who watches free-to-air television will have seen that ad with the line, "Same age. Same   income. Same starting balance…”  and so on.

The point is that your retirement planning runs a lot deeper than just your fund choice, your balance and returns. These only tell you a small portion of the tale of what retirement could look like for you.

A complete answer to any questions about your retirement planning will address  
the following four risks and considerations. These risks must be understood and accounted for to ensure you get the most out of retirement. Failing to plan could mean being forced back into work just a few years into your retirement. 

Sequencing risk: Structure your super correctly

Sequencing risk is one of the most powerful forces in retirement, and one of the least understood. Put simply, the order in which you receive your investment returns matters enormously once you start drawing an income. This holds true even if your average return over time is identical.

While you're still working and adding to super, a market downturn is almost a gift; your contributions buy assets cheaply. But flip it around and retire just as markets tumble, and you're selling assets to fund your lifestyle at exactly the moment prices are depressed. Every dollar withdrawn in a downturn is a dollar that can never recover when markets bounce back.

The counter for sequencing risk is structure. Holding a cash and defensive buffer of two to three years' living expenses means you're never forced to sell growth assets in a downturn. You simply draw on the buffer and let the market recover. Structuring your super correctly, before you retire, is what turns sequencing risk from a threat into a manageable bump. 

Longevity risk: how long you'll live past retirement 

The second risk is more significant than most realise: the risk of living longer than your money lasts.

There is a growing gap between when people want to retire and how long they'll actually need their money to last. Many Australians dream of finishing at 60, yet according to the Australian Institute of Health and Welfare, a 65-year-old man today can expect to live another 20 years on average, and a 65-year-old woman another 23 years. And those are just averages; many will reach their mid-90s.  

Do the maths. If you retire at 60 rather than 67, you've added seven years of spending and removed.

 seven years of saving. And you’re potentially funding a retirement of 30 years or more. The earlier you stop, the longer your money has to stretch. That doesn't mean you can't retire early, but if that’s your goal, you will need a robust plan to achieve it.  

Planning for these years in advance and having a goal to work towards will prevent longevity risk. Of course, your financial adviser can also provide some modelling and projections around this which should be revisited annually to discuss how you’re tracking.

Investment risk: How much market risk are you taking? 

The third question is about your investment strategy when growing your retirement fund. How much market risk are you actually carrying? Get the balance wrong in either direction and you're exposed.

If your investment strategy is too aggressive, you amplify your sequencing risk. A heavy allocation to shares can be devastating if markets fall in your first few years of drawing an income.  

However, if your strategy is too conservative, you could starve the portfolio of the growth it needs to outlast a 30-year retirement. You wind up surrendering to longevity and inflation risk instead.

The drawdown phase after you retire demands a different balance than your wealth-building years. Bear in mind that the right growth-to-defensive mix isn't about chasing the highest return. Rather, you want to take just enough risk to keep your money growing, without exposing yourself to a shock you can't recover from.

Any risk that you take within your superannuation investments needs to be tailored to your own individual feelings towards market risk. If you’re the sort of person that can’t stomach a 5% decline, then you’re the wrong person to have a growth-style portfolio.  

We often tell clients, “if there’s a bump in markets and you’re losing sleep at night, your level of investment risk might need to be revisited.” 

Inflation risk: How much will your purchasing power decline? 

Finally, the quietest threat of all. Inflation may feel modest year to year, but over a three-decade retirement it steadily erodes your purchasing power. At just 3% a year, the cost of living roughly doubles every 24 years. That means the same weekly shop could cost twice as much by the time you're 90.

This is why holding too much in cash can be a risk in itself. I often meet clients who feel far more comfortable keeping their money in the bank than in super, and there's nothing inherently wrong with that instinct. However, you need to understand what inflation does to that money.  

With 3% inflation, the $100 in your account today is worth only about $97 in real terms a year from now. If your bank interest rate is sitting at roughly the same level as inflation, your cash isn't holding its ground at all. After tax, it's going backwards, faster than you'd think.

Money that isn't growing ahead of inflation is losing value by standing still. A retirement plan needs enough growth exposure to stay in front of rising prices, decade after decade. Sticking to cash might feel like the safest option, but without that growth, it becomes one of the riskiest.