I am approaching retirement – should I switch my super to a more conservative investment mix?
Updated: Jul 13
There’s no doubt that for most people approaching retirement, the 2008 Global Financial Crisis (GFC) is clearly etched in their memory. A time when share values (and with them retiree’s superannuation savings) halved in value almost overnight, causing many people to convert their shares to cash and in doing so locking in their losses.
It’s no wonder then that the closer we are to retirement (and the better the share market is doing) the more tempted we are to lock in those profits and move most of our super into seemingly safer investments.
However, what the news headlines failed to report was the market recovery that followed the GFC. It took the American share market 5 years to recover to pre GFC levels, and recover it did. And although the Australian share market took twice as long before it reached it’s 2007 peak, it too eventually recovered. Not only did share markets recover, but the GFC presented a great opportunity for those who remained invested, to buy up some great stocks at bargain prices.
What many people tend to forget, is that shares and property are long term investments for a reason – precisely so that you have time to wait out a market recovery should it happen and avoid locking in the paper losses. We also forget that our retirement will likely last decades, meaning that we can afford to take on some of that risk.
While it gets the most headlines, a share market downturn is not the only risk you face during retirement – even if you invest your entire super in the ‘safest’ investment possible. Here are a few other risks to consider when deciding on the best way to manage your hard earned retirement savings.
Interest Rate Risk
Many conservative investment options mean putting your money into fixed interest investments and bonds (both government and corporate). At a time when interest rates are at an all time low, leaving little room for rates to go anywhere but up, having money locked into a low interest rate product can put you at risk of losing money once interest rates start to rise. These investments can also present liquidity risk as well, as not all options are easy to sell out of if you need cash in a hurry.
Speaking of low (or no) interest on your cash. What happens if the cost of living rises at a faster pace than your retirement savings? In the current low rate environment, the larger the portion of your super that is sitting in cash, fixed interest and bonds the greater the inflationary risk. If you consider that you may be in retirement phase for 20 or even 30 years, those small annual losses can quickly start to add up.
Thinking about how long we have to live is not a pleasant topic for any of us, but it is a necessary consideration during retirement. The joy of have a long and happy retirement can easily be ruined by financial stress if we have run out of retirement savings, which is a real possibility given that our money needs to last for 10, 20 or even 30 years. When the retirement age of 65 was first introduced in the 19th Century, the government pension needn’t last long as the average life expectancy for men at the time was 58 years. Fast forward to today, where the retirement age remains largely unchanged, yet medical advances see us often living well into our 90s. In fact, the latest research by the Australian Institute of Health And Welfare puts the life expectancy of a 65 year old male at 85 years and 87.7 for a female. Having a retirement that lasts for decades rather than years, means that our savings need to be carefully managed to make sure they last that long. Returning to work or working longer is one tool for managing longevity risk. The other, is investing a good portion of our super in assets that will grow in value and generate an income.
While many clients we speak to assume that there is a particular point in time when we draw a line in the sand and switch all their super away from growth investments like shares and property, the answer is actually more complicated than that. Ultimately, the closer you are to retirement, the more actively you want to be managing your super. Keeping your retirement funds safe is a delicate balancing act between liquidity, safety and growth, and is not the time for set and forget financial strategies. Given that our quality of life has never been better, the likelihood of us outliving our retirement funds is a real risk that needs to be carefully managed – and we can help.