Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 248

Three major financial goals after retirement

Decumulation is different from accumulation. Accumulation feels as though it has an indefinite time horizon that can be voluntarily stretched out if necessary. In decumulation, the time horizon is beyond your control, and constantly shortens. Also, an individual’s risk tolerance is reasonably constant through most of accumulation, but risk aversion increases through decumulation.

This article is only about decumulation. Bequests are not taken into account.

This is about people without certainty that they can fund their desired lifestyle with their remaining assets. If you can afford to buy a lifetime income annuity at the desired level or if you can live on the dividend stream from your equity portfolio, you don’t fit.

The long-term goals

I’ll illustrate the principles via a story about a fictitious couple with three long-term goals, even though they can’t all be reached with certainty: longevity insurance, asset growth, and safety. They want to know how much of an annual drawdown is likely to be sustainable, if they take some investment risk.

They start with one short-term goal. What if some emergency arises, and they need instant cash? Many financial professionals advocate having six months of spending as an emergency pot. They decide that the first 2% of their assets will be set aside in cash as their emergency pot. Everything else is now based on the remaining 98%.

1. Longevity insurance

Like most retirees, our couple fears outliving their assets. They fear the consequences of their uncertain longevity, particularly as they’re both in reasonable health. But in Australia (assuming they cannot afford enough in lifetime annuities), they can’t buy pure longevity insurance, so they self-insure.

They look at tables of ‘joint and last survivor’ probabilities, understanding that these show the probability that at least one of them will be alive over various time horizons. They feel that the 50% point is too risky a deal for them. They opt for the 25% point, which gives them a time horizon with a 75% chance of having money long enough.

Why not 10%? That would give them greater certainty. If they plan for the 10% horizon, their annual drawdown will be smaller than with the 25% horizon. So, with hope for asset growth in their hearts, they start with 25%, and remind themselves that, if they approach that point and are still in good health, they will need to take action. More on this later.

2. Growing the assets

They could lock in a lifetime income that’s smaller than their desired lifestyle requires, but they prefer to seek asset growth. They recognise that, even if it’s a reasonable long-term expectation, it isn’t guaranteed. In addition, they’re aware of ‘sequence of returns’ risk, meaning that a few years of bad equity returns in the early part of retirement could condemn them to permanent regret and a permanently much-lower-than-desired lifestyle forever after. That’s a serious and difficult issue.

Clearly, not all their assets can be growthy. How much, then, in safe assets? And what are safe assets, in fact?

The couple anticipates that their psychological attitude towards risk will change over time, as their desired lifestyle settles down. They’re looking forward to the immediate go-go years, when they’re finally able to do so many things they’ve dreamed about. But that stage, that attitude, that degree of robust physical and mental health, won’t last forever.

Most retirements settle down, in time, to a slow-go sequel, in which the lifestyle is downsized – not necessarily any less busy and involved, but more localised. The value of further growth, in terms of what benefit it secures for them, is reduced. Why take the risk if the reward means little? So they decide that they want as much safety as possible in their investments by the time the older one’s age reaches 85.

In addition, they don't want their far-flung adult children to worry about their finances. That suggests a target of 100% in safety-oriented investments, kicking in after the couple’s ‘autumn crescendo’ is over, as Dr Laura Carstensen beautifully describes the early stage of life after work.

That’s the long-term perspective. Back to the short-term sequence-of-returns risk.

3. The ladder of safety

To enable them to focus on growth (before the slow-go), they want a sort of ‘ladder of safety’, a tranche of safe investments from which they’ll make their drawdowns in the early years. This is important psychologically, even though it makes no financial difference to divide their pot conceptually into drawdown and growth segments.

They decide on a ladder that gives them five years of spending. Why five years?

One reason was our couple saw some (admittedly American) numbers that showed that, historically, equities had positive real returns over 5-year periods 75% of the time. That’s in satisfying concordance with their longevity probability stance. Going to a safer 10-year ladder took the percentage up to 88%.

The other was that putting 10 years of spending into their safety ladder reduced the amount in growth so five years was as long as they could afford, if they genuinely wanted growth.

At 80, hoping that they’ll still have a 5-year ladder, they’ll gradually start to cash out of growth, so that they’ll be totally in safe assets by 85.

They hope they can re-extend the ladder every year, so that it’ll always be available as a safety measure. What they’re betting on is mean reversion, the notion that governments or central banks will manage to intervene and prevent a prolonged equity market downturn.

Set the three choices, with annual appraisals

They now have three choices (a specific overall horizon, a specific time at which all assets should decline to safety, and a specific length of ladder) to determine a customised glide path for the growth/safety exposures as well as an estimate of sustainable annual drawdown.

But what if things don’t work out?

The couple plans two sets of nudges to their position, each year.

One is whether to extend the safety ladder. They will if equities have a positive real return. They won’t if it’s negative, but they know there’s deep trouble if five years pass that way.

The second is to reassess their sustainable drawdown each year. They won’t transition to the new number but will spread the difference over their remaining horizon. If there are five lean years in a row, they will have made five adjustments gradually.

Oh, back to one other thing not working out: their longevity estimate! If they’re still in reasonable health at 85, they’ll be entirely in safe assets anyway, not looking for further growth, so they consider an immediate annuity at that point and do away with longevity risk.

All their geeky friends tell them that something like that, with arbitrarily chosen numbers, can’t possibly be optimal. But all they want is a shot at growth combined with sleeping easily at night.


Don Ezra has an extensive background in investing and consulting and is also a widely-published author. His current writing project, blog posts at, is focussed on helping people prepare for a happy, financially secure life after they finish full-time work.


Can your SMSF buy a retirement home for you now?

The future of retirement is already here

Is this your biggest retirement worry?


Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.