Balancing retiree objectives and risks
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.
Frequently Asked Questions about this Article…
Retiree objectives tend to focus on generating reliable income and protecting capital rather than growing the super balance. While working members typically prioritise saving as much as possible and can tolerate more investment risk, retirees often want lower risk because they no longer have a salary or compulsory super contributions to rebuild savings after a market fall.
In retirement, market risk and longevity risk become much more relevant. A big market downturn—especially early in retirement—can severely affect retirement income, and many retirees may live longer than expected. Alongside lifestyle goals or leaving money for heirs, these factors make investment choices more complex than when simply accumulating savings.
Key risks highlighted include market risk (large downturns that reduce capital and income), longevity risk (outliving savings), and the danger of taking on too much investment risk to try to meet lifestyle goals. These risks can undermine retirement income if not managed carefully.
According to Lonsec’s Lukasz de Pourbaix, high‑quality financial advice can tailor investments to a retiree’s financial position, objectives and risk tolerance. An adviser can assess how much risk a retiree needs to take to reach goals, provide a reality check on what’s possible, and help reprioritise or lower expectations when savings are limited.
The article notes that Lonsec’s head of investment consulting, Lukasz de Pourbaix, believes many large funds use a one‑size‑fits‑all approach and are not addressing retiree risks as well as they could. This suggests retirees may need tailored solutions or advice beyond default fund options.
The article cautions that without good advice, retirees may take on too much investment risk in an attempt to afford lifestyle goals. That can leave them exposed to large or sustained market downturns, so it’s important to balance goals with realistic risk tolerance and financial capacity.
A market downturn is particularly harmful early in retirement because retirees don’t have future wages or compulsory contributions to rebuild their savings. Early losses can therefore have a lasting impact on the income they can generate from their super.
The article recommends getting good financial advice to reassess objectives. An adviser can help reprioritise goals, dampen expectations if necessary, and design an investment approach aligned with the retiree’s realistic financial position and acceptable level of risk.
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