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Spending phase calls for retiree risk rethink

Australia’s superannuation market is rapidly maturing, with 65% of Australia’s $2.8 trillion super assets sitting in the hands of fund members aged 50 years and older.

Balances on average are also increasing and, with Australia having one of the longest life expectancies in the developed world, people will be spending a lot of time – 30 years or more – in retirement. The cash rate is also sitting at an unprecedented low, offering those approaching retirement little comfort.

It is obvious that a fundamental shift in the investment strategies offered to Australians will be required to meet the needs of future retirees.

Low rates increase need for sensible risk-taking

Investing in low-risk investments such as cash in today’s low interest rate environment is likely to result in mediocre outcomes. Those approaching retirement and retirees themselves need to consider taking sensible investment risk but this also requires the ability to adequately manage these risks at a time when wealth preservation is vital.

When people are saving for retirement, the focus tends to be solely on performance. While that may be appropriate during the so-called ‘accumulation phase’, it fails to address the complex needs of those people approaching retirement or in retirement, the ‘decumulation phase’.

When approaching retirement, an investor’s risk appetite instinctively decreases. The tolerance for risk is much lower than in the many years of accumulation where workers, via their superannuation contributions and longer-term outlook, cultivate a pot of money to retire on comfortably.

So, how do retirees and those approaching retirement marry wealth preservation and a sufficient amount of investment risk together?

Common assumptions may not work in decumulation

Retirees still need to take appropriate investment risk to address inflation and longevity risk, but there also needs to be a focus on the impact of market volatility on retirement outcomes, known as sequencing risk.

While the effects of compounding and dollar cost averaging are positive for savings and accumulation, the opposite is true during decumulation. In fact, limiting losses in retirement has a more powerful effect on long-term growth than capturing the full upside of market gains.

For instance, a 10% investment loss requires an 11% gain to simply return to the original point before the loss occurred. A 20% investment loss requires a 25% gain, and so on, to the point where a 50% loss needs a 100% gain to return to the original balance.

Compounding is not well understood

What positive returns are required to break-even after market losses?

The following examples provide a stark illustration of the impact of losses on a retiree’s portfolio during drawdown (decumulation).

Assuming a starting balance of $500,000 and a drawdown of $3,000 per month, the corresponding performance of four different investing options over the 20 years between August 1999 and August 2019 (20 years) are as follows:

  • An investment in the MSCI World Index would see the investor run out of money by May 2014.
  • An investment in a fund capturing 80% downside and 100% upside has a final balance of $402,000 in August 2019.
  • An investment in a fund capturing 80% of the downside and 110% of the upside has a balance of $1,102,000 in August 2019.
  • But, an investment in a fund capturing 40% of the downside and only 80% of the upside, has a balance of $1,600,000 at the end of the 20 years.

Reduce risk during retirement

Clearly, while taking some risk in retirement is needed to avoid unpalatable outcomes, limiting downward movements in retirement portfolios is even more important than capturing the full upside in markets.

While products with a guarantee attached can offer comfort, the cost of that guarantee can be high. The challenge for retirees is to find an investment that provides high participation in equity up markets but consistently limits the downside impact of markets at a sensible overall cost.

One option is a low volatility equity fund which offers access to equity markets but aims to lower risk through careful stock selection. By choosing a diversified portfolio of high quality stocks that are expected to fall less than the market, the portfolio manager's focus is on limiting the impact of falls.

Another approach used by financial advisers and superannuation funds is the bucketing framework.

Bucketing allocates part of the portfolio to cash and other income for the next two to three years of income needs, while taking market risk on other assets. If there is a period of volatility, retirees don’t need to draw down on the growth assets and can better ride out the volatility. At the same time, if markets are prosperous, then they can top up the income bucket. This approach is becoming increasingly common, with most advisers having at least two buckets at their disposal, sometimes more.

In summary, investors in retirement still need to take on equity risk, but the compounding effect of investment losses can have a devastating effect on retirement portfolios. The right kind of equity exposure in retirement should come with downside protection and a capture spread that enables sufficient participation in the market upswings.


Richard Dinham is Head of Client Solutions and Retirement at Fidelity International, a sponsor of Firstlinks. This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International. This document is intended as general information only. You should consider the relevant Product Disclosure Statement available on our website

For more articles and papers from Fidelity, please click here.

© 2019 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity International and the Fidelity International logo and F symbol are trademarks of FIL Limited. FD18634.



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January 25, 2020

The way l see it, as long as retirees own their own home, they should be fine. Super returns down... get a part- pension. Super reduces... qualify for a full pension. No Super... full indexed pension. Helps to be part of a couple and share costs.

January 23, 2020

Hi Richard,

Thanks for this - good article.
You are correct that as one approaches retirement, risk appetite decreases.
I am in a industry MySuper fund and will at some stage soon look to retire and move to pension drawdown.

Given a 10 bull run in the stockmarket, a correction could happen sooner rather than later. A correction in the early stages of drawdown could easily have a massive impact on long term super funds available.

An article on hedged funds which limit downside and upside return would be very informative.
Do you have suggestions in this regard as to who to consider as possible options?

January 23, 2020

Size matters a lot
Obviously buckets do not help people with little wealth/savings
And people with large super - may be forced to withdraw at a rate of the legislated rate - in excess of earnings but that does not need to be spent; it can be reinvested into another private trust (rather than their super fund in deccumulation mode). And this does not take into account, for many their private savings locked up in the rising value of the home. The CSIRO research shows that most Australians die with 90% of their wealth - mainly locked up in their home;...and rich one's also have plenty in the other private trust and super fund/trust

January 23, 2020

I'd agree with the comment from RobG that "many" Australian retirees are not "decumulating" - and on the horror of that word coinage used by the industry - BUT many are very definitely spending in excess of that they get in returns, because they have to.

Average super balances in the retired demographic are low - and another, different, "many" set of retirees, are very timid with markets and have long flown to the "safety" of TDs and other low returning assets.

I can see a market for a product that did as suggested by the author, but am not sure how it could be constructed - after all, if it was that easy, we'd all be doing it already.

Personally I hope to be one of RobG's "many", die much richer than I was when I left the workforce, after a long and happy retirement, and leave it all to some worthy cause or other.

You do need a substantial asset base to start with, however, and "many" retirees simply do not.

January 23, 2020

"It is obvious that a fundamental shift in the investment strategies offered to Australians will be required to meet the needs of future retirees."

Really? It is not actually obvious at all. Many Australian Retirees are not "decumulating", whoever thought up that word, they are actually "accumulating" for the very simple mathematical reason that they are drawing down the minimum 5% up to 75 years of age and earning more than 5%, sometimes substantially more and on a reasonably consistent basis! Their Super in retirement is actually growing, in the most benign tax environment in the world.

Only when [if] they get to 85 do they "have to" draw down 9% - roughly about long term equity returns and their Super will be depleted...

Your conclusion - "The right kind of equity exposure in retirement should come with downside protection and a capture spread that enables sufficient participation in the market upswings." is non specific jargon... Of course retirees need to keep an eye on the downside and volatility but academic thought pieces do not help.

January 23, 2020

Your comment is only true for those retirees who can manage to live on the minimum pension withdrawal. If my super balance is small, I may need to draw 10% to pay the bills rather than the minimum. In that case I need to sell assets and my fund shrinks as i “eat” the capital. How long that takes to reach zero depends on the return my fund achieves, and people with smaller retirement savings balances tend to have more conservative portfolios.

It is easy to forget how important fund size is to investment decisions.

January 25, 2020

"Only when [if] they get to 85 do they "have to" draw down":

Unless 'The Market' draws down their capital before they do.


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