Understanding the key risks in retirement

The three retirement risks all Australians need to address.

The main concerns most Australians face when entering retirement is whether they have saved enough and, how long this money will last. But when faced with the questions ‘how much is enough?’ and ‘how long will you live?’ finding the right answer isn't straightforward. And to compound the issue, there are other key risks that need to be considered when planning for retirement.

Here are three retirement risks all Australians need to address.

Risk 1: How long will you live?
Australians are living longer than ever, ranking seventh in the world for life expectancy. Taking into account improved mortality rates, a 65 year old male today can expect to live an additional 22 years, to the age of 87, according to the Australian Government Actuary. Women typically live longer with the average age of death of 89 years for a 65 year old female today. With many over-60s expecting to live well into their late 80s in a retirement lasting over 25 years, the question being asked is ‘how do you make your retirement savings last the distance?’ Living longer is highly desirable if you’re fit and healthy, but if you’re not prepared financially, those extra years could actually become a burden and there’s a real risk you could outlive your savings.

Life expectancy for retirees in 2017

life expectancy for retirees

Source: Australian life tables with 25-year mortality improvement factors from the Australian Government Actuary. Calculation by Challenger, 2017.


Risk 2: How the market can influence how long your money lasts
While successfully saving for retirement is best done over several decades, making assumptions based on long-term average returns is a risk. There is no certainty that average returns calculated over a set period of time will be reflected in the actual returns that your investments receive. A period of lower-than-average returns can negatively affect your superannuation savings; diminishing the income you have at your disposal to fund your retirement.

Volatility in the market, especially just before, or in the first few years of retirement, when your nest egg is at its greatest, can have an extremely negative effect on your retirement plans. This is often referred to as sequencing risk, the risk that the order and timing of your investment returns is unfavourable. This sequence of investment returns is a concern for retirees who will be relying upon both their capital and income from investments to cover their living expenses. Just ask anyone who had planned to retire around the time of the Global Financial Crisis in 2007/08 about the effect a market drop at the wrong time can have on retirement investments in the long run. 

Risk 3: How inflation can diminish your spending power
Most people can expect to spend 20 years or more in retirement. Not only is that a long time for your savings to last, but the inflationary pressure on prices can, over time, also have a significant effect.

Simply put, the purchasing power of a dollar when you start your retirement will be significantly different to when you’re approaching the end. In fact, with an annual rate of inflation at 2.5 per cent, the purchasing power of a dollar will almost halve over the course of a 25 year retirement span meaning that the loaf of bread that today costs $3.43, could cost $6.36 in 25 years’ time. 

What, if anything, can you do to counteract these risks?
The good news is that you don’t necessarily need to work longer or limit your spending to negate the effect these risks may have on your cash flow in retirement. 

Your first step should be to speak to a qualified financial planner. They can help you assess your exposure to these risks and put in place the correct mix of investments to ensure that you can cover your retirement needs. Some of the investment options you may wish to discuss could include:

  • secure investments, such as lifetime or fixed-term annuities, which deliver guaranteed, regular income  (over a fixed term or for the rest of your life)
  • market-linked investments, such as shares and managed funds which can grow over time but carry some risk
  • other retirement income products, such as account based pensions, term deposits and investment property


Don't forget the Age Pension
Despite tightening of eligibility criteria, the Age Pension remains one of the three pillars of Australia’s retirement income system, along with superannuation and private savings. As this payment is subject to means testing through assets and income, structuring your finances to ensure you receive even a part Age Pension may help minimise the above retirement risks.

If you don’t have a financial planner, visit your bank or call your super fund. Alternately, you can search for a financial planner in your area by visiting the Financial Planning Association of Australia’s website: fpa.com.au


    To make a comment, please register or login
    Ted Wards
    8th Jun 2017
    All good points but one that is never discussed is what on earth are you going to do with all that time once the traveling and you've got the family bug out of your system? On a daily basis I deal with retired people looking for things to do as they never thought about it. There should be lifestyle planning available to look at the money and the time!
    8th Jun 2017
    Goodness! Do people really have a problem finding ways to use their time? I never have enough. My mother was far busier in retirement than ever before. I had to make appointments to visit her! There is so much to do, and so little time to do it. Finally, in retirement, people have time for the hobbies they could never indulge in, crafts and DIY projects, cooking, spoiling grandchildren or great-grandchildren, charity and social work, spending quality time with friends, and just enjoying nature walks and our beautiful surroundings.

    Financing retirement is a worry, though, given the current very low and falling investment returns, the obvious lack of respect of the current government for older Australians, and the increasing selfishness of younger Australians. Faced with the prospect of decades of inflation and high investment risks, none of us can be confident savings will last long enough to ensure comfort in old age. That's a sad state of affairs, and one that reflects badly on our society.
    8th Jun 2017
    I always laughed at my Dad, when he retired he said he is busier in retirement than when he worked. He is just as active & positive now as he ever was.
    I suppose if you work your heart out & don't have any interests it would hit you like a ton of bricks all that spare time.
    8th Jun 2017
    "There should be lifestyle planning available". Instead of waiting for someone else to do it, why not start up something? It's a worthwhile project for someone who has exhausted the pleasures of travelling etc.
    8th Jun 2017
    What I can't understand is how I ever found the time to go to work.

    Today I find it so hard to find time for a hair cut, or to mow the lawn.

    One thing I'd suggest, take up any sport requiring physical skills & dexterity. I have started flying remote control planes, & am having trouble developing enough skill to fly the faster ones, unlike my 9 year old grand son.
    8th Jun 2017
    WE took up old time new vogue dancing. It is a great easy physical exercise, learning the sequence dances keeps our minds occupied, and we have made so many friends. We dance at Bathurst, Lithgow, Canberra, Coffs Harbour, Port Macquarie, numerous places on the Gold Coast, Corowa and of course Sydney Hornsby Pennant Hills to name just a few. Those fortunate enough to indulge just love it, but unfortunately our numbers are diminishing as the younger retirees don't seem to know about dancing as a pastime. It is one of the best retiree hobby around, healthwise and social and enjoyment.
    8th Jun 2017
    Dont forget the biggest risk of all !! The performance of the Investment manager. Typically most of the Industry Funds outperform most of the Retail funds or other funds !! Also whilst the country has to support the politicians, CEOs etc in their obscene salaries, pensions, perks, travel entitlements etc etc. Then there is nothing left almost for anyone else !!
    9th Jun 2017
    Yes. The article promotes financial advisers but in many cases THEY ARE THE RISK!
    8th Jun 2017
    I also consider government policy risk.

    A prime example is the use of the CPI for income increases. While inflation has been 2.5%, and much higher for insurance, energy, rents etc the CPI comes in at 0.9%. That's just one big disconnect.

    Continual government changes to superannuation also appears a huge risk. Especially retrospective changes that occur after a decision has been locked in and is unchangeable.
    9th Jun 2017
    Probably the biggest risk of all!
    9th Jun 2017
    Yes Rainey. While I lost considerable promised income due to government super changes, all investments outside a super fund have had no government policy interference at all.

    Few rules and fewer regulations and far fewer fees and charges in % terms.

    Surprisingly all financial advisers in the media seem fixated on using superannuation and never give advice on hedging bets in investments held outside super.

    With the bonus of no tax until earnings reach $52000 for a retired couple.

    Now I assume the government austerity measures are due to budget constraints and so savers have been told to use their own funds. What I can't figure out is why spenders aren't being asked to pull in their belts and assist the cause as well.

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