Balancing retiree objectives and risks
The objectives of retiree members of super funds are much more diverse than those of members still working.
While fund members are working, the objective is to save as much as possible before retirement, limited by how much investment risk they can live with. The five or six diversified options of the typical large fund are adequate for most people who are still accumulating their retirement savings. Once in retirement, the decision of where to invest is much more difficult.
Most retirees are looking to generate income rather than grow their super balance. And they certainly want to reduce the risk of losing capital when they no longer have the pay and compulsory super to help replenish savings after a market downturn.
In retirement, market risk becomes much more relevant. A big downturn in markets, particularly early in retirement, has a big impact on retirement income. And there is the longevity risk, where many retirees will be living longer than they anticipate. There is a host of other objectives, including lifestyle goals such as travel, or to leave some money to their children.
Lonsec head of investment consulting Lukasz de Pourbaix says large funds are not addressing the risks as well as they could for their retiree members.
"It is a one-size-fits-all approach," he says. Good-quality financial advice can play an important role in tailoring how retirement savings are invested to match the financial position, objectives and risk tolerance of retirees, de Pourbaix says.
That may include assessing how much risk the retiree has to take to reach his or her objectives. It could also mean a reality check on what is possible and, in some cases, lowering expectations. "The reality is that if you have limited retirement savings, some goals may be unrealistic and they will need to be re-prioritised or dampened down," de Pourbaix says.
Without good advice, they may take on too much investment risk in their desire to be able to afford their lifestyle goals. That leaves them exposed, of course, to a large and sustained market downturn.
Most people do not respond to abstract concepts such as numbers and probabilities. For most, what is important is whether or not they will be able to meet their objectives in retirement, de Pourbaix says. And that is what a good adviser should be able to help with.