Although many Australians do well in saving for retirement, much more needs to be done to help retirees spend their savings well, so they enjoy the present and not spend their retirement worrying about the future.
With so much focus on accumulating savings for retirement, it’s easy to lose focus on how to spend that money. As noted in the RBA’s Retirement Income Review, “…the system focuses on the accumulation of savings for retirement, but insufficient attention is given to how people can best use their savings to support their living standards in retirement.”
Several factors unnecessarily cause anxiety and unnecessarily constrain spending in retirement. These include regret risk, investment risk, longevity risk and inflation risk.
Here we’ll examine each of these and the strategies to help retirees enjoy the living standards they are used to and stop worrying.
Regret risk
This comes from worrying about uncertainty – such as a rise in the cost of living and a reduction in the value of their investments – and not spending money to avoid running out in retirement. Many retirees only draw down minimum amounts because they lack the confidence that their funds will last long enough. Later, they look back and regret they were too frugal and didn’t spend more (time and money) enjoying their earlier retirement years.
Having the right plan and investment solutions can give you confidence in retirement and avoid feeling regret later. A financial adviser will look at your situation and goals and recommend ways to avoid regret risk. For example, some investment products provide more income in the early years of retirement when the retiree is more active and able to enjoy it.
Investment risk
This is the risk that retirement investments can quickly decrease in value, leaving less for retirement. For example, between 2008 and 2009, the S&P ASX 200 fell around 40%. Many retirees and people approaching retirement age suddenly found themselves with a lot less money in their portfolios.
While such steep declines in share prices are rare, having the right asset allocation can help you reach your retirement goals. A financial adviser can customise a financial plan to meet your specific needs and goals. They will also run your portfolio through many hypothetical market scenarios to ensure you are ready for future market conditions.
Longevity risk
Everyone wants to be healthy and live a long life, but there’s the risk of outliving your assets. The average life expectancy has increased over the years due to better lifestyle choices and medical care. In 1960, the average life expectancy was 70 years, and now it’s just under 84 years (81 years for males and 85 years for females). So, on average, people now retiring at 65 will need nearly 19 years of retirement income as opposed to 5 years of income in 1960. Of course, many retirees live beyond the average life expectancy. Over the past ten years, the number of people reaching their 90s has grown by 67%, making this the fastest-growing group among seniors.
Like the other risks, longevity risk can be managed by having the right plan and products in place. For example, account-based pensions are income stream products for retirement years. However, these are not guaranteed for life.
Another option is a lifetime annuity or pension, which provides income guaranteed for life and is not exposed to market fluctuations.
Inflation risk
Inflation chips away at the value of retirement savings year by year. While inflation was relatively low in Australia for many years – below 3% for all years except one between 2002 and 2021 – it grew to over 7% in 2022.
The current rate of inflation will quickly reduce any retirement savings. For example, if you invested $1 million for 15 years and didn’t see any growth, it would be worth around $349,000 at the current inflation rate of 7.3%. If the inflation rate is 7.3% and you get 4% annually from a savings account, that $1 million investment would be worth $626,000 after 15 years.
Staying ahead of inflation can be a challenge in retirement. While you will probably want to avoid investment volatility in retirement, you will still want to stay ahead of inflation.
A financial adviser can help you create a retirement plan with the most suitable investment products to mitigate inflation risk and counteract the effect of inflation on your retirement assets.
When is the best time to consider the risks?
While no one has a crystal ball to see what will happen with inflation, investment returns and lifespan, having the right strategies in place as early as possible will help you reduce these risks, keep your desired living standard and experience the retirement you have dreamed about.
At Finextra Wealth, we specialise in developing tailored retirement strategies based on your financial situation and goals to achieve a comfortable and affordable retirement.
Get in touch with us today to get ready for tomorrow.
Book a free call with Finextra Wealth to find out more.
Retire with Confidence by Minimising the Risks! Get the expert advice you need to both save and spend well by contacting Finextra Wealth.
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