Should I Continue To Invest During Retirement?
Written by: Jayden Scott l Canny Advisory
As retirement approaches, many people face a crucial decision:
“Should they continue investing throughout their retirement or should they sell all their investments down to cash to protect their wealth?”
Investment risk is a common concern among new retirees and pre-retirees where they have spent their whole life working hard and growing their wealth, and the thought of losing some of their wealth at the hands of a market downturn is enough to leave people with many sleepless nights. Unfortunately, there is no easy fix solution such as selling all investments and keeping these funds in cash to protect people against any market downturns in the future and to help preserve their wealth. This can open people up to another form of risk, longevity risk.
Therefore, the answer to the question “should you continue investing in retirement” isn’t a simple yes or no.
What Should I Be Investing In If I’m Retired?
Typically, it is wise to continue investing in retirement, but the more important question is what you should be investing in.
There are many factors to consider, and the answer can differ significantly depending on each person’s individual circumstances, goals, objectives, and tolerance to investment risk. I will delve into some key considerations in this blog to give you an understanding of what needs to be considered when we are talking about someone’s approach to investing during retirement.
What Is Longevity Risk + Why Is This Important To Consider?
In Summary, longevity risk is the risk that a retiree will outlive their money by drawing down on the full balance of their superannuation and all other assets that they own before they pass away.
Longevity risk has never been a more important consideration given the rise in average life expectancy figures and the development of modern medicine. Based on the latest release, The Australian Bureau of Statistics (ABS) estimates that the following life expectancy:
- An Australian male is 81.2 years; and
- An Australian female is 85.3 years.
While correct, these figures are estimates of life expectancies from birth, so they include the deaths of people who might pass at a young age from accidents or illness. For that reason, they can be misleading to use for a retiree’s life expectancy.
Furthermore, if you have reached age 66, your life expectancy will increase again. The life expectancy of a 66-year-old female today, for example, is age 88. In practice, approximately two-thirds of females of that age will live to somewhere between 80 and 96. The purpose of showing this is to demonstrate that life expectancy can be uncertain and difficult to predict, just like the uncertainty of equity markets.
It is important to be aware of the uncertainty around longevity so that retirees can better mitigate this risk, rather than turning a blind eye to it.
How Can We Mitigate Longevity Risk?
This is where we go back to the original question of whether we should invest during retirement.
Investing during retirement is one of the primary ways that we can increase the longevity of people’s superannuation balance during retirement, but there is no definitive answer on how to invest during retirement for everybody. For every client we serve, we will ask questions to get a better understanding of what their tolerance to investment risk is, depending on how the client answers our questions. From this, we will develop what we call their risk profile, which is ultimately what we deem to be the most appropriate method of investing to ensure they are in line with their tolerance to risk.
To give an example, a person who we deem to have a balanced risk profile would likely be investing in roughly 60% growth assets (such as shares and property), and 40% in defensive assets (such as fixed interested, bonds, annuities, or cash). The growth assets are typically much more volatile than the defensive assets, but they typically produce greater average long-term returns. On the other hand, the defensive assets help to reduce the short-term volatility of the portfolio while providing lowers, but more stable long-term returns.
The portion of assets that should be in growth and defensive assets help to reduce the short-term volatility of the portfolio while providing lower, but more stable long-term returns. The portion of assets that should be in growth and defensive assets depends on your risk profile. However, a discussion may have to be had around potentially varying from a client’s recommended risk profile so that a better balance of longevity and investment risk can be maintain based on their current position. There are also products available, such as lifetime annuities, that can help mitigate longevity risk.
Want to know more about risk profiles and why they’re a key component of our advice? Check out this blog we previously put together: Risk Profile: What You Need To Know Before Investing.
What typically happens with a lifetime annuity is you will pay a lump-sum amount up front of, say $500,000. This will then guarantee you a lifetime pension payment that’s indexed to CPI for the rest of your life. Therefore, you are essentially passing your longevity risk as risk on to the provider of that lifetime annuity. You are also taking no investment risk as your payment each fortnight/month/year will be guaranteed and indexed to CPI for the remainder of your life, no matter what the markets are doing.
There are many approaches that can be taken when talking about someone’s investing during retirement but as you can see, there is no one size fits all answer, and it can change from person to person depending on an individual’s current situation, their goals and needs.
Different Investment Approaches Exemplify The Balancing of Various Risks:
- Person 1
This person may have high living expenses in the initial years of retirement while they are doing lots of travel. They may also have a below average balance in superannuation and not many assets outside of super other than their home.
If this person had a conservative risk profile, and therefore had a lot of their super sitting in cash their super balance would likely decrease quite quickly in those initial years of retirement because their living expenses would be high than the investment returns and income generated inside super, which then increases their longevity risk.
If this person understood the risks and why they were taking this risk, they could look at increasing their investment exposure to more growth assets to try and increase their long-term returns and hence reduce the longevity risk of depleting their super balance significantly in the early years of retirement. This could help them achieve an appropriate balance between investment risk and longevity risk.
- Person 2
Another example is for someone who has a very healthy balance in superannuation and doesn’t have many living expenses as they have paid their home off and have no plans to travel. Therefore, their longevity risk is quite low.
They might have been risk takers during their working life while they were building their wealth, but now that they are retiring and have enough money to support their lifestyle for the rest of their life compatibility, their need to take investment risk is also quite low, even if they typically have a higher risk profile. Therefore, they might decide to invest more of their super in defensive assets and less in growth assets to reduce their overall investment risk.
- Person 3
This person is worried about their longevity risk but is also worried about the share market and this anxiety is affecting their overall happiness and ability to enjoy retirement.
To help mitigate these risks as best as possible, they might give up a portion of their superannuation and place this money into a lifetime pension product. The remaining balance in their super will then be invested conservatively and will therefore have lower volatility but will provide steady enough returns to ensure their super balance can last as long as possible. If this person lives longer than expected and their super unfortunately runs out, they will still receive their lifetime pension payment, and they might also receive the Age Pension on top of this.
Canny Advisory + How Our Financial Advisers Can Help!
Generally speaking, it is appropriate to continue investing during retirement to ensure that your assets are generating returns on your capital, plus extra income, to support your lifestyle during retirement. However, what you should be investing in during retirement is a complex question that doesn’t have a simple answer.
At Canny Advisory, our financial advisers work in retirement planning every day, and are experts at listening to you, understanding your needs and concerns, and tailoring a unique solution to you to ensure that your retirement is taken care of.
Get in touch with our team to have a chat about how we can help you through your retirement years.
