At large: Ross Greenwood

Retirees face a balancing act in managing risk and keeping up their income

One of the things that really irks me is when so-called “experts” suggest that people who stop work should become more defensive with their investments. Now I get the idea that if income is not regularly coming in you must rely on your own investments – maybe topped up with the age pension.

The traditional thinking is that when you stop work you need to reduce risk in your portfolio so that you limit the chance of significant capital loss. And I get this. Retirees generally should not be punting spec shares unless they have significant disposable assets.

The problem, as I see it, is the time people spend in those non-working retirement years. The Bureau of Statistics publishes a periodical study of Australia’s retirement intentions. It shows that for those aged 45-49, just 5% are retired. That compares with 64% aged 65-69 and 82% aged 70 and over.

Let’s say that typically people retire from the workforce in their late 60s. The issue here is that the latest ABS statistics show that Australian males who are born today have a life expectancy of 80.5 years and women have 84.6 years.

But here’s the complication. If you live to 65 your life expectancy increases – because some have passed away before you. A 65-year-old male might expect to make 84.6 and a woman 87.3, according to 2016 stats from the Australian Institute of Health and Welfare.

So if these people stopped work at, say, 67 they would spend 17.5 years in retirement for a man or more than 20 years for a woman. And the stats show that the older you get, the longer you are expected to live (within limits, of course).

Now ask yourself: “Is 17 years or 20 years a long-term investment horizon or a short-term one?” The answer is obvious. But if people park their cash in term deposits or a cash-based annuity or superannuation fund, then they will limit their ability to have their capital keep up with, or exceed, inflation over time. A person retiring at 67 might expect two or three economic cycles in their retirement years.

With the annuity-style products, I recognise there can be other factors in play, such as tax and social services treatment of the income streams, and these things must be considered as part of the strategy. Some like the idea of a regular income stream (like a pay cheque) in their retirement years, without the lumpy cash flows that come from dividends through the investment cycles.

But because of the investment cycles, one of the most important things to assess is the state of markets when you retire. This is vital, because a mistake at the outset can be especially harmful in terms of future income streams and your lifestyle (ask the many people who have used retirement funds to buy an unsuccessful franchise or small business, and who find themselves back on an age pension). Since compulsory superannuation started, there have been four years of negative performance in growth funds (1994, 2002, 2008 and 2012 calendar years). You would not have wanted to plonk all your money in just before the 2008 GFC crisis.

Some might say it doesn’t matter, because you are investing for the long term, so eventually it will all even out. That might be true if you’re 20; but if you’re 67 and stop work completely, living off your own wits and the income from your assets is a different matter entirely.

This is why sometimes, when markets are highly volatile or they have been cracking along at all-time records for a period, it might be prudent to keep the cash on hand for a period. (Yes, I know, I started this by saying sitting on cash in retirement is a bad thing … but you have to be strategic.)

To me there are options, always depending on circumstances. If this is new money, playing the averages by dripping in small amounts over a longer period means you should eventually have the money in place at a reasonable entry price.

That said, if your strategy during your working life within your super fund has been successful (15- year returns, which include the GFC, show growth funds with an average return of 7.7%pa after tax and balanced funds at 6.6%) means another option is to use your existing fund and to roll the money into its allocated annuity or pension scheme.

Others will take another course. While the official records show that most people retire in their late 60s, some choose to work much later into their lives, keeping the cash flowing in at a time when others have it flowing out.