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The big three retirement risks (and how to protect yourself against them)
Does your retirement income plan – or lack of a plan – keep you awake at night? These may be the key flaws.
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isk 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?
market. Your safety net income can also include payments from the Age Pension (if you’re eligible).
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Risk two: The value of your savings will go down over time (inflation risk)
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.
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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 88.1 • People tend to underestimate how long they’ll live.
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 Even small increases to might not seem like a big deal, the cost of living over but over the course of 30 years a $3 loaf of bread could double in time can potentially price. Without the right strategies have a significant in place, increases in inflation over time could mean your savings will impact on how far your no longer cover your living costs.
money will go.
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’ income to 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.
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).
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Income payments from the majority of accountbased 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 10
• Something valued at $1 in 1990 would cost around $2 in 2020.2
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 2021.3
1. Australian Life Tables 2015-2017 with 25-year mortality improvement factors from the Australian Government Actuary. 2. https://www.rba.gov.au/calculator/annualDecimal.html 3. https://www.abc.net.au/news/2021-03-16/covid-crash-markets-asx-wall-street-fomo/13250212
YourLifeChoices Retirement Affordability Index™ August 2021
