The big three retirement risks (and how to protect yourself against them)

Risk versus reward is a concept that’s all too familiar when approaching retirement. For example, should you risk retiring early, or continue to work (if possible) to boost the coffers for later in life?

There are three key risks tied to retirement income. These can often be underplayed, to the detriment of the security of your retirement income plan. And in 2021, in particular, it pays to have a plan that protects against these risks. Here’s how.

Risk one: You don’t know how long you’ll live (longevity risk)

  • A 65-year-old male has a 50 per cent chance of reaching 88.
  • People tend to underestimate how long they’ll live.

Without the certainty of knowing how many years to plan for, it’s much safer to assume you’ll live well into your 90s. Doing this will give you a greater chance of ensuring you have enough income to last throughout retirement without having to rely solely on the Age Pension, which is unlikely to cover your basic living costs let alone such things as medical bills, aged care or in-home assistance.

How to protect yourself against this risk
With potentially up to three decades and longer to plan for, retirement requires a greater focus on ‘safety net’ incometo help you cover the essential costs of living. Income from investments such as shares usually isn’t guaranteed, and income from account-based pensions usually isn’t either.

Income payments from the majority of account-based pensions will stop once your initial investment runs out. Whereas ‘safety net’ income from a lifetime income stream will be paid to you however long you live, regardless of what happens in the share market. Your safety net income can also include payments from the Age Pension (if you’re eligible).

Risk two: The value of your savings will go down over time (inflation risk)

Even small increases to the cost of living over time can potentially have a significant impact on how far your money will go. An average annual inflation rate of 2.4 per cent might not seem like a big deal, but over the course of 30 years a $3 loaf of bread could double in price. Without the right strategies in place, increases in inflation over time could mean your savings will no longer cover your living costs.

How to protect yourself against this risk
Many retirement income products give you the choice to have your payments indexed to some measure of inflation. That means your payments will go up (or sometimes down) to keep pace with living costs.

For example, Challenger lifetime annuities offer payments that keep pace with inflation or can be linked to the Reserve Bank of Australia (RBA) cash rate (whether it be an increase or decrease).

Risk three: Poor returns on investments can eat away at your savings (share market risk)

  • The ASX200 dropped 37 per cent in early 2020, only to increase by 49 per cent by March 2021.
  • The share market volatility seen in the past 18 months can happen again.

Exposure to investments such as shares comes with the risk of share market volatility. When investment returns are negative, your retirement savings are falling in value. If you need to make withdrawals from your savings or investments to pay for living expenses, it has a double blow for your overall financial position in retirement. It’s important to consider how best to minimise the impact on your savings from market volatility during a 20 to 30-plus year retirement period.

How to protect yourself against this risk
Diversification is the golden rule of investing. Spreading investments across different asset classes can strike a balance between security (defensive assets) and higher investment returns (growth assets).

This can reduce your overall investment risk and the impact of significant market downturns, or poor returns from a particular business or sector.

Is your retirement income diversified?
Ensuring your retirement income is diversified can help manage the financial risks you face in retirement. Answering the five questions below will give you some idea as to whether you need to take another look at your retirement income plan:

1. Does your retirement income come from a range of different income sources?

2. If there’s a significant downturn in the markets, will your income still cover day-to-day expenses?

3. Does your retirement income portfolio bring you income certainty, balanced with greater returns?

4. Does your retirement income include both low risk and higher risk investments?

5. Do you have income that is guaranteed, no matter what happens?

How did you go? As a general rule, the more questions you answered ‘yes’ to, the more diversified your retirement income is likely to be.

Securing your retirement income
As we’ve seen in the past 18 months, things can change quickly and unexpectedly. Getting your retirement income sorted can help support a positive outlook in retirement.

A Challenger lifetime annuity gives you a guaranteed monthly income, no matter how long you live, or how share markets perform.

Find out more about Challenger lifetime annuities at and use the Challenger Retire with confidence tool to discover how a comprehensive retirement income plan can support a positive outlook in retirement.

Have you fallen foul of any of these risks? Why not share your experience in the comments section below?

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Disclaimer: The information in this article is general only and has been prepared without taking into account any person’s objectives, financial situation or needs. Because of that, each person should, before acting on any such information, consider its appropriateness, having regard to their objectives, financial situation and needs. Each person should obtain and consider the relevant product’s Product Disclosure Statement (PDS) before making a decision about whether to acquire or continue to hold the relevant product. A copy of the PDS can be obtained from your financial adviser, our Investor Services team on 13 35 66, or at

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