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.
Need more retirement planning advice? Call FinCare on 02 9542 4655 or email firstname.lastname@example.org today!
The information provided in this article does not constitute specific advice. For further information, you should contact your professional adviser.