Making your super last in retirement
Superannuation is often a key source of income when you retire so it’s important to ensure your investment strategy makes your retirement savings last for as long as possible.
Shifting investment strategy objectives
As you approach retirement, your investment strategy objectives may start to shift. In your younger years, the main aim of superannuation is generally accumulation-focused, which is all about growing as big a balance as possible, making regular contributions and investing for growth over the long-term.
As you enter retirement, investing for growth is still important however you will likely need to start drawing a pension or taking regular benefit payments to meet your living expenses. As you will have cashflows coming out of your fund and you will be drawing down on your assets, you’ll need to ensure you have enough liquidity in your fund to make those payments.
You also need to ensure you’re protected against drawing down on your assets at times of poor investment markets where you could end up locking in those losses. This timing impact is also known as ‘sequencing risk’. As such, the liquidity and sequencing risk impact on your fund’s investment strategy must be considered.
What investment strategy should I consider?
It is important that your superannuation portfolio has adequate exposure to growth assets. By the time most individuals reach 65 years of age, they are now expected to live for another two decades. This means a person retiring at say age 60 must stretch their finances for, on average, another 30+ years. It’s important to note this is merely an average; many will live far longer than two decades from their 65th birthday.
But assuming you aren’t drawing down excessive amounts and you will retain your funds in superannuation throughout your retirement, then taking a slightly more aggressive approach should result in you obtaining higher long-term returns and an increase in your portfolio value overtime.
That said, it does come down to your risk profile. The key message here is leaving all your retirement savings in a 100% conservative strategy (ie, cash and term deposits only) may mean that your nest egg may not last you very long.
How long will my super last?
Although investment market returns and inflation are uncertain and we don’t know how long we are going to live, retirement modelling can factor in these future uncertainties to help you determine the likelihood of achieving your objectives, which will also test whether your investment strategy is likely to be successful.
A financial adviser has access to such sophisticated financial modelling systems, however other simpler retirement calculators which can be found online (such as from the Moneysmart.gov.au website) can also give you an idea of how long your savings may last and how investment returns may affect your superannuation and/or pension balance.
The last word
There will be periods where the markets will be volatile which will see your retirement savings increase and decrease in value. During these times if you panic and switch back to a more conservative option, such as cash, you may do more harm to your superannuation balance. So, if you’re approaching retirement and need help with your retirement investment strategy, it may be worthwhile obtaining advice from a financial adviser who can help you stress test your risk profile and help choose appropriate investments for your superannuation to make your savings last in retirement.