HomeHealthCOVID-19Nest egg strategies under the microscope

Nest egg strategies under the microscope

It had been more than 10 years since the bottom of the market in the global financial crisis (GFC) and it looked as if the bull market would just keep on going. Share markets around the world were booming to record highs well into February and then, ‘kaboom!’, the coronavirus was recognised as a global pandemic, lockdowns began and share markets plummeted. Australian shares overall dropped 37 per cent from high to low, in less than a month.

For anyone with a substantial share market investment or a growth-oriented super fund, the decline in value was fast and deep.

Were Australian retirees’ portfolios positioned too aggressively going into the pandemic? Did we get too greedy thinking good times would roll on and so position our portfolios too heavily in growth assets for retirement income? 

What has been the impact of COVID-19 on Australian retirees? And what do we learn about setting up our retirement portfolios for anything that might happen in future? How worried should retirees be? Does a 37 per cent drop in share markets mean a 37 per cent drop in retirement income?

Retirement Essentials’ research shows that retirement incomes are usually much more stable than investment markets. Forecasts based on thousands of simulations revealed that if you receive the Age Pension, your sustainable level of retirement income is really quite steady. Furthermore, even if you weren’t on the Age Pension and were 100 per cent invested in shares, your retirement spending doesn’t have to fluctuate as much as the market.

Case study: The Bears and the Goldilocks
To illustrate, let’s look at two retired couples and examine their choices. See how they did during the pandemic – but also before and after.

We’ll start with the Bears, Ben and Belinda. They’re both 70, held $500,000 in cash in February, owned their home, and on a part Age Pension. They’d gone conservative five years before, taken their money out of super and put it into a cash account when they retired at 65. They were not too comfortable with the share market and wanted ‘safety’. Between their Age Pension and their assets, they’d hoped for a $50,000 annual income.

The Bears sailed through the pandemic. Their portfolio of deposits didn’t flinch when markets plummeted in March. They breathed easily, barely noticing that their interest income had dropped again as banks cut their deposit rates after the Reserve Bank reduced official interest rates.

By contrast, their friends, Jenny and George Goldilocks, were the same age and had the same $500,000 in assets, but they’d kept their money in superannuation – in a growth portfolio (80 per cent shares). They hadn’t actually looked at it, just left it there, and started to take out the money to supplement their part pension.

The Goldilocks found that their growth portfolio declined by 15 per cent, or about $75,000. Did they have to drop their retirement spending 15 per cent, too? As they, like the Bears, were targeting $50,000 in spending, that would have been a drop of $7500 per year.

No, they didn’t have to do anything quite so drastic. First, the Goldilocks began receiving a higher Age Pension rate. Due to the taper rate that goes with the means test, a $75,000 decline in their portfolio would result in an Age Pension increase of $78 per year per thousand dollars of reduced assets – or $5850 per year. That increase would offset a huge amount of any decline they might expect in drawdowns from their super assets.

Second, the Goldilocks could reasonably expect their super to recover over time – that is to have higher expected returns going forward since the values were reduced so much. As long as they didn’t have to sell large parts of their portfolio to fund their retirement, they could expect to keep drawing good funding from their super and be supported by the Age Pension.

Who had the better strategy?
The Bears looked like the winners – no losses in the pandemic. The Goldilocks took a big hit to their assets. But were the Bears really better positioned? Let’s extend the story to consider before and after.

Five years ago, the Bears actually began their retirement with more money in super than the Goldilocks. But because they put their money in cash and interest rates have been so low (less than 2 per cent), they had to use quite a bit of capital to supplement their Age Pension to fund their target spend. The Goldilocks had less to start with, but had earned considerably more on their growth super investments and were able to catch up to the Bears by February 2020.

When the stock market bit in March, the Goldilocks looked bad on paper (a 15 per cent decline in their portfolio), but the Age Pension really helped buffer their income prospects.

Who will look better five years from now? The Bears’ reliance on cash investments, with interest rates now around 1 per cent, will give them little chance to keep up with inflation. They’ll have to draw down significant amounts of their deposits, while their part Age Pension will rise to offset that somewhat.

The Goldilocks, meanwhile, have a reasonable chance to regain their lost assets and keep earning mid-single digit percentage returns beyond that (i.e. returns well above cash rates). But, as their assets recover, their Age Pension income may decline or not rise as much as the Bears’, who’ll become increasingly dependent on the Age Pension.

Here are some reasonable retirement income forecasts for the Bears and the Goldilocks – both before and after the COVID shock. How much are they likely to be able to spend and not run down to just the Age Pension with a planning horizon till age 100? 


Bears family


Goldilocks family


Likelihood income will last to 100?

Before COVID


Before COVID


Highly likely










Somewhat likely





The results forecast what the couples might be able to spend based on different market results given the two couples’ asset allocations. The ‘highly likely’ result shows the level of spend possible even in poor investment markets. The ‘likely’ shows the results in the worst 25 per cent of market scenarios and the ‘somewhat likely’ the results in the average market.

What is clear is that forecasts before and after the COVID shock aren’t too different for each couple. In very poor markets, the Bears hold up, but in better markets, the Goldilocks, with their higher allocation to growth assets do better by taking more investment risk.

Our two couples took different portfolio paths to target a similar retirement income, reflecting their different attitudes and the Goldilocks’ sheer inattention. The Bears’ approach was probably not the best approach; being all in cash at a time when interest rates were at record lows – below the inflation rate – and typically not a good idea for funding retirement.

The Goldilocks, on the other hand, decided March’s 15 per cent drop was a bit of a shock and beyond their risk tolerance. And they remembered the family motto: always look for the ‘just right’. Jenny and George would now be rethinking their portfolio choices. Is their growth super fund too risky at their age and stage? Should they go a bit more conservative as they get older? Should they consider an investment in a lifetime annuity to lock in some income above and beyond the Age Pension? And should they switch from their accumulation super to an account-based pension with tax-free earnings?

The lesson this example offers is that, for most Australian retirees, the impact of down markets on retirement incomes ends up being much less than initially feared – for several reasons.

1. Most retirees get their income from a number of sources

The foundation layer for 70 per cent of retirees is the Age Pension.
– The Age Pension is rock solid as a source of income with a government guarantee and twice-yearly increases tied to living costs.
– For part pensioners, the Age Pension acts as a ‘buffer’ during bad times. Declines in asset values can translate into increases in the Age Pension due to the taper rate, which gradually decreases/increases your Age Pension benefit the higher/lower your assets are. So, lousy markets have led to higher pensions for many part pensioners.
– The next layer is typically a super account or an account-based pension. Members have choice on what investments to use, but many continue in growth-oriented investments.
– Other investments, including shares, bonds, investment property and cash.

2. Share markets tend to revert back after losses, eventually

As the economy gets over its difficulties, growth begins again, and profits and dividends rise, along with confidence and hopes. So, retirement incomes look better again.

3. Fixed income investments act differently to shares

So holding a mix of bonds and cash along with shares reduces the risk of the overall portfolio.

Most retirees should diversify, ignore the short-term noise of markets as much as they can, and not take more investment risk than they’re comfortable with, while recognising that taking some investment risk can be rewarded over time with higher incomes. 

Jeremy Duffield is a senior executive in the Australian and international financial services sectors. He is the chairman of Retirement Essentials, which assists people to apply for the Age Pension, and of SuperEd, which is focused on helping super fund members plan for their retirement.

Are you a ‘Bear’ or a ‘Goldilocks’? Has your investment strategy stood up to the pandemic test?

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Disclaimer: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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