For many, the long-held promise of the Australian superannuation system as the deliverer of sustainable retirement income is fading from view in an era of low-interest rates and rising risk.

But the problem could be that many investors are looking in the wrong places.


Beyond the end of the road:

Without a doubt, superannuation has taken more Australians further down the road to a comfortable retirement that most would have achieved alone.

However, the contribution-and-investment mindset that has been so successful in accumulating super assets (now about A$3 trillion) could prove counterproductive as retiring members look to transform those savings into income for life.

Faced with a finite pool of assets, uncertain investment returns, and an unknown number of years to fund, retirees often take a conservative approach to ward off their greatest worry: running out of money.

In fact, research has shown that 61% of retirees fear running out of money more than death itself.

The bucket strategy:

The ‘bucket strategy’ has been a common way to help deal with this risk. It works by managing the selling of assets at retirement, balancing the need for steady income and capital growth.

A typical bucket strategy allocated a certain proportion of savings to cover short, medium, and long-term needs. Investments are apportioned to cash, fixed income, and equities, according to your individual risk tolerance and time horizon.

Your financial advisor might suggest this strategy as a proven tool to take the focus away from market volatility and leave you feeling comfortable about your retirement plans.

Enhancing the ‘bucket strategy’:

But when it comes to delivering sound retirement outcomes, the current low-interest rate environment (compounded by the COVID-19 crisis) presents some challenges to the bucket strategy. Effectively, the short-term bucket may struggle to deliver the returns needed to fund retirees’ short-term cashflow requirements.

The ‘holy grail’ or retirement income, or at least an enhanced outcome in the current environment, is likely to be found in a fourth bucket that increases your growth allocation. It also serves to mitigate unique retirement risk – including longevity, sequencing, and behavioral risk – through a protected equity strategy.

As an example, a protected equity strategy may provide you with exposure to growth via, market-linked returns (such as an index) – with in-built protection from losses (floor), providing exposure to market growth up to a selected cap.


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The information provided in this article does not constitute specific advice. For further information, you should contact your professional adviser.