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Three underrated investment risks in retirement

Investment returns in super are a big focus – the media never fail to report on them. But the chance of a comfortable retirement is not just about investment returns. Outliving your savings, inflation, and not sticking to the plan are three risks that can make a big difference to your golden years and should be tracked closely.

Risk 1: the risk of outliving your savings

What is the risk of outliving your savings?

Either living longer than anticipated (it happens) or simply not having enough money to live comfortably to an ‘average’ life expectancy. According to the 2023 Intergenerational Report, living longer is a reality. Currently life expectancies at birth are around 81 years for men and 85 years for women. This is expected to rise to about 87 years for men and 90 years for women by 2063.

How to manage the risk of outliving your savings?

  1. Know your timeframe: when are you going to die? A macabre question. No-one knows, but over half of us haven’t even thought about it1. Estimating life expectancy is key to managing this risk. A 40-year-old female is expected to live to about 85 years old2 – round up to at least 90 to be on the safe side. That’s an “investment time horizon” of over 50 years!
  2. Know your spending levels: How much do you need and want to spend in retirement? Forecasting this is not a precise science, but there are rules of thumb to help you estimate your desired “retirement income”.
  3. Know your starting point: What’s your superannuation account balance? How much do you earn? Have you got any savings or debt? When do expect to retire? What’s your current ‘investment mix’?

Now use an online tool to project your super account balance in retirement and how long your desired ‘retirement income’ will last. These tools can be found on super fund or government websites. It feels complex, but rough estimates are fine and the tools often pre-fill some information to assist you.

Exhibit 1: Will I outlive my savings?

*This represents over 80% of the current annual salary. Note: annual salary is before tax; desired retirement income is after tax.

Sample result: Asset levels – Assets grow to over $600,000 and last past 90 years old

Source: UniSuper Retirement Savings Calculator

Results: Income levels – Retirement income goal is exceeded

Source: UniSuper Retirement Savings Calculator

Risk 2: the risk of inflation

What is inflation risk?

Inflation reduces the value of your savings over time. That is, the $100 you save today won’t buy as much in the future. Post COVID-19, inflation (or CPI) has increased. If a loaf of bread cost $3.50 in 2019, it now costs $4.50. So, the $100 you saved bought you 29 loaves of bread in 2019, but it only buys 22 loaves today. This diminished buying power is inflation risk.

How to manage the risk of inflation?

  • Invest to outpace inflation: you’ll notice many superannuation funds set objectives at CPI (inflation) plus 2%, 3% or 4% per annum. This is because inflation is a real risk over long periods, and it is important to outpace it if you want to maintain your buying power over time.
  • Cash is not king long-term: while investing in cash might feel ‘safe’, over the long-term it likely means buying less bread. Cash might be fine to fund shorter term goals, but time horizons in super are measured in decades, not years.

Risk 3: the risk of not sticking to the plan

What is the risk of not sticking to the plan?

Changing your investment mix based on market moves. That is, selling your investments when markets are falling or chasing higher investment returns when markets are rising. This switching activity can reduce your account balance in retirement.

Cast your mind back to early 2020 – it was a very uncertain time and markets were falling sharply. Let’s look at Exhibit 2: there are three scenarios laid out for an investor who put $10,000 in Australian shares at the end of 2018:

  • Stick to the plan: the investor who rides out the COVID market volatility. Investment return generated = 10.5% p.a.
  • Switch back: the investor who switches out of shares and into cash in March 2020 at peak uncertainty. At the end of 2020, once vaccines are approved, the investor switches back into shares. Cost of switching? $4,500 worse-off (relative to ‘Stick to the plan’). Investment return generated = 5.4% p.a.
  • No switch back: the investor who switches into cash in March 2020, but can’t decide when to switch back to shares. Cost of switching? $7,900 worse-off (relative to ‘Stick to the plan’). Investment return generated = 0.5% p.a.

Exhibit 2: Cost of switching during COVID-19: Australian Shares and Australian Cash

Source: Bloomberg, UniSuper. Australian Shares is the S&P/ASX 200 Total Return Index3 and Australian Cash is Bloomberg AusBond Bank Bill Index4. Daily return series applied. *Assumes income is reinvested and no fees, costs, taxes are incurred. Dollar figures are rounded to the nearest 100 for simplicity. Past performance is not an indicator of future performance.

How to manage the risk of not sticking to the plan?

  • Know your why: if you’re clear on your retirement goals, it can be easier to stick to the plan. In retirement, your super may be your main source of income, so feeling ‘comfortable’ investing in cash is tempting. But investing in cash likely reduces the chance of achieving your retirement goals and outpacing inflation over time.
  • Know your risk tolerance: what’s your willingness to take risk and how do you behave? Everyone reacts to risk differently – it’s influenced by gender, past experiences and financial literacy5. Sometimes an investment mix is set purely based on risk tolerance - risk averse investors may prefer investments that fall less in a downturn. But this comes with the likelihood of lower returns. Prioritise selecting an investment mix that best supports your retirement goals and manage your emotions in a downturn.
  • Know the costs: Exhibit 2 shows there are two decisions to make when switching – the point to sell and the point to buy. Timing these decisions consistently well is nearly impossible. The “no switch back” investor cost themselves almost $8,000. It can be expensive to react emotionally to market up and downs.
  • Know what to expect: past performance is no guarantee of future performance, but it provides perspective. Exhibit 3 shows the peak to trough drawdown during the Global Financial Crisis was -50%! Yet, over average, the share market has delivered over 8% each year - well ahead of cash.

Exhibit 3: Australian Shares and Australian Cash Over 25 Years: Market Falls During The Global Financial Crisis and COVID-19

Source: Bloomberg, UniSuper. Australian Shares is the S&P/ASX 200 Total Return Index3 and Australian Cash is Bloomberg AusBond Bank Bill Index4. Daily return series applied. *Assumes income is reinvested and no fees, costs, taxes are incurred. Dollar figures are rounded to the nearest 100 for simplicity. Past performance is not an indicator of future performance.

  • Don’t look!: if sharemarkets are making the headlines, one great strategy is not to look at your account balance. ‘Engagement’ with your super is understanding how it works, not constantly logging in to check your account balance.

Add three risks to your scorecard

A successful retirement investment strategy goes well beyond investment performance. Ultimately each investor’s scorecard of success is personal, but consider adding these questions:

Exhibit 4: Retirement success scorecard

This scorecard is for illustrative purposes only

These risks might be underrated, but they are key to comfort in your golden years. So, add them to your scorecard and revisit every few years to make sure you’re on track for a comfortable retirement.

 

Annika Bradley is an Investment Specialist at UniSuper, a sponsor of Firstlinks. In previous roles Annika worked with Morningstar and QSuper. The information in this article is of a general nature and may include general advice. It doesn’t take into account your personal financial situation, needs or objectives. Before making any investment decision, you should consider your circumstances, the PDS and TMD relevant to the financial product, and whether to consult a qualified financial adviser.

 

1 Vanguard: How Australia Retires, 2024
2 Australian Bureau of Statistics, 2024: https://www.abs.gov.au/statistics/people/population/life-expectancy/latest-release
3 The S&P/ASX 200 Total Return Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by UniSuper Management Pty Ltd.  S&P®, S&P 500®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by UniSuper Management Pty Ltd. UniSuper’s products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P/ASX 200 Total Return Index.
4 Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) are not affiliated with UniSuper Management Pty Ltd and do not approve, endorse, review, or recommend this report or any information included herein. BLOOMBERG and the Bloomberg AusBond Bank Bill Index are trademarks or service marks of Bloomberg and have been licensed to UniSuper Management Pty Ltd. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to the Bloomberg AusBond Bank Bill Index.
5 CFA Institute: Risk Profiling and Tolerance: Insights for the Private Wealth Manager

 

13 Comments
Richard
March 17, 2025

Small point, "Life expectancies" is where 50% of people are expected to live to (statistically!). So in the example of a 40 year old female, with "Life expectancy" of 85, then 50% of females will live longer! Longevity Risk is a difficult issue, maybe better to assume Females live to say 93-95 and then look at other family members and adjust. And say 90 for males (plus or minus).

Disgruntled
March 18, 2025

Incorrect, life expectancy is the age a person is expected to live based on mortality rates.

Average age of death is exactly that.

Dudley
March 16, 2025

'UniSuper Retirement Savings Calculator' has a flaw.

It assumes that:
. all withdrawals from super and returns from 'non-super investments' are spent, or otherwise unaccountably disappear, immediately on receipt.
. 'non-super investments' remain constant; no withdrawals, no deposits.

More realistically, super withdrawals and personal returns minus personal expense changes the amount of 'non-super investments'.

The remedy is to:
. add all the super withdrawals and personal returns to 'non-super investments' immediately on receipt,
. withdraw retirement income from 'non-super investments',
as happens in reality for every retiree.

This is a common failing of many retirement calculators.

Disgruntled
March 16, 2025

Retirement calculators are generic in nature.

Everyone is different and no 2 people are going to have the exact same ideals when it comes to savings, investments spending and bequests of their money. Even couples argue about said issues.

Dudley
March 16, 2025

"Everyone is different": That's why calculators with variable parameters are created and used.

Perpetuating the calculator common fault 'everything spent when received' results in unnecessary and unrealistic inaccuracy.

Shows that calculator creators have not though much about what happens after start of retirement.

Kevin
March 14, 2025

No such thing. Something dreamt up by the industry to keep you frightened.Give your money to us,we are experts. Vested interest are the important words.

Play the live game,you retired end of January this year.Bank shares at highs, three of them at the same price roughly where they were in 2007,when you may have retired at record highs. You have a fairly stable and reliable income,see if that continues during the turmoil.

The choice is buy more ,when to go is the problem,or do nothing and relax with that reliable income plus super . Super will take a bit of a hit. Reduce the income from that,or carry on regardless .Shall we say you have 5000 shares in each of the 4 big banks..See how it goes,see how it looks in 3 to 5 years.

For me/us in retirement that peak around 2015 just meant that more shares in those banks were picked up using the DRP, using excess income.Ten years of picking them up cheap.Ten years of increasing income by owning more shares in them More shares were bought in pull backs,using cash. Further increasing income . More shares were bought in that bonanza of capital raisings,using cash and increasing income again.

The obvious,keep some cash for a rainy day,this comes from a large and increasing income .Where is this cost of living crisis? Would you think any of that has been difficult since 1990.The fun of having everybody say you can't do that,the laughter of hearing what about this list of 100 things you have to worry about.

Play the live game and see how it goes for the next 10 years,that should see the end of me. Another 10 years of,you can't do that .You'll pay tax. You'll not get any pension.Fortunately not getting a pension and paying a good chunk of tax means ,haven't got any financial worries either,do whatever,whenever. See how it goes when you play the live game and think for yourself.

Kevin
March 14, 2025

Don't know why that came up out of sequence.That was an answer to Jack and sequencing risk

Peter Care
March 16, 2025

You may be good finavially, but the facts are most retirees are not.
I grew up in a low socio-economic environment and was lucky enough to study economics and work in the finance field for part of my life. Most of my friends growing up didn’t. Now that they are close to, or at retirement age, they are struggling with the complexities. Some need help with even filling out the application for the age pension.
The financial literacy of a fair chunk of Australians is quite poor.

I have one friend on the age pension, who has some super but still has not converted it to an account based pension, thus needlessly paying 15% on earnings. I sat him down and tried to explain that he was losing money but it was as if I was speaking in Farsi. A financial advisor won’t take him on because he does not have enough assets. Luckily he owns his own home.

In 2017, I went to a few free seminars conducted by Centrelinks FIS officers. The presenter was excellent and the material was well thought out and logical.
Yet about half the people at the seminars struggled with the concepts.
This is the real situation in ageing Australia, and explains why most people are not self directed, and rely on experts.




As an aside, why would anybody own all 4 banks? It does nothing to diversify or spread your risk. In fact it concentrates your risk,

Kevin
March 17, 2025

Well Peter,as simple and obvious as it is you can deny it. 35 years of you can't do that .Go for another 10 years to make it 45 years of saying you can't that.

35 years of sequencing risk,and 35 years of. concentration risk go for another 10 years and make it 45 years.Why stop there,why not spend an entire lifetime planning for things that will probably never happen. In they event they do happen then say they are worth $8 million,a huge crash occurs,I sell and manage to escape with 3 million to last for what is left of life. The applause and praise that the clever people come out with will be amazing . They've been predicting this every day for the last 45 years. there's genius for you.

The really really clever people not only predicted that,but they were clever enough to get the full pension. I was the fool trying to work out what the hell do we spend all this money on . How did I get it so wrong,they still get the full pension and I am still wondering,what the hell do we spend all this money on

Kevin
March 17, 2025

In short Peter you cannot help people that refuse to help themselves.You've asked the wrong question to the wrong person.The correct question to the correct person is to ask yourself,why would you not do that.

CBA is the main driver of that,you need to ask yourself why you have avoided doing something simple and obvious .Start with a number ($5,400 )and compound that for a period of 30,40,50 or 100 years. Compound at average growth rates and you are wealthy.Compound it at 2 or 3 % above average growth rates you are rich.That wonderful advice from C Munger,invert always invert. If it isn't working sell them .

You need to ask yourself why you are prepared to deny that for a lifetime.You need to ask yourself what reasons you have to deny that.You need to ask yourself does the person teaching you about concentration risk,sequencing risk and the long list of things to worry about make any money by getting you to believe that.

Wasting my time to continue,you cannot help people that refuse to help themselves

Russell
March 14, 2025

Agree with Jack. The risks outlined above are 'pre-retirement', not 'in retirement'

Jack
March 14, 2025

I reckon sequencing is one of the biggest risks as well.

VonBlake
March 15, 2025

The "retirement danger zone" is a Kevin suggested an industry constructure. Whilst there is some merit in discussing consequences of each of the key risks, the realty usually sits outside spreadsheet models. Approx 70% of the income generated in retirement will come from investment earnings. The kneecap yourself with a low vol investments on the pretext it manages sequence risk or assists even longevity risk requires monte carlo simulators to do their worst. Guarantees equate to giving away all the upside.

 

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