By Liz Maroney, Westlawn Wealth Adviser
20 April 2016

If you’re approaching retirement, or you’ve recently retired, there are 3 retirement risks you need to watch out for as they can have a real impact on your nest egg.

The good news is that you can manage each risk with the right planning. Here’s how.

1.    Sequence of returns risk

This refers to the risk of experiencing a market downturn, (with lower or negative investment returns) at various stages of your retirement.
This risk affects portfolios with cash flows. It applies not only when making regular contributions to your retirement savings, but also when withdrawing from your super to fund retirement.

Sequence of returns risk is typically greatest when you retire. This is because you’re switching from building up your nest egg with super contributions to drawing down income from it. As your retirement savings are generally at their highest at this stage, you will have more money at risk if markets drop and you experience lower, or negative returns.

If you experience a market downturn towards the end of retirement, the value of your assets will be lower and you’ll therefore have less money to provide an income from your super savings.


Let’s take the example of a retiree who had a $100,000 balance at retirement in 1989 and was paid a pension of 7% of the original amount each year. This pensioner would have experienced the GFC 21 years into retirement but would still have $73,000 left in 2012. If you reverse the sequence and the pensioner experiences the GFC shortly after retirement, however, their asset is at its highest level and they therefore feel the full effect of the GFC. The retiree’s asset would run out in 2006 after 17 years.[1]


Sequence of returns risk can be partly reduced by investing in both cash and shares when approaching retirement. But this strategy has its own risks. Investing in cash might be a more defensive approach but it can also mean lower expected returns and a significant impact on future wealth.
Diversification between asset classes can reduce both the volatility of returns and the severity of negative return periods, without significantly impacting total returns. We are able to offer retirement income products that can provide certainty of capital or income for 10, 15 or 20-year terms, or for life.

2.    Longevity risk

According to the Australian Bureau of Statistics, Australian life expectancy is ranked among the highest in the world. Life expectancy at birth for Australian males and females is the joint fourth highest and joint third highest in the world respectively.[2]

Men currently aged 65 can expect to live a further 19 years and women a further 22 years. [3]

Building a nest egg to fund your retirement until average life expectancy may not be enough, however. This is longevity risk.

Considering how long we will live is critical for planning our retirement. But, if we plan based on life expectancy, we’ll be wrong one way or the other almost all the time. Many of us will live longer than average.

Rather than planning to reach your life expectancy, you should instead plan to survive beyond it.

Also, consider that during the final stage of retirement, it’s likely you’ll need to pay for extra support to maintain your home and take care of yourself.

Your health is also likely to need more attention.

It’s possible to plan for a long retirement and manage longevity risk. For instance, if you’re still enjoying your work, you might consider working part time and supplementing your salary with a transition to retirement pension.

There are also retirement income products available that allow you to convert your retirement savings into a regular income for the rest of your life, negating the risk of outliving your savings.

3.    Inflation risk

This is the risk that prices for goods and services you consume will increase faster than your income.

What’s important is the price of goods and services you consume, such as essential household services, not the price of the basket of goods and services used to measure inflation (also known as the Consumer Price Index, or CPI).

For instance, the National Seniors Productive Ageing Centre published a report, A squeeze on spending? An update on household living costs for senior Australians that found:

“Over the five years to March 2013, the price of several essential household goods or services increased by more than double the inflation rate. These included electricity, water and sewerage, gas and other household fuels, insurance, medical and hospital services, and property rates and charges. The biggest price increase was for electricity, which rose by 83% – more than six times the overall rate of inflation.”

Receiving income payments indexed using the CPI, therefore, is not a perfect solution to protect against inflation risk.

Until recently, Australian retirement products consisted of broadly two types: account-based pensions, and annuities. But a third option is now also available that can help alleviate inflation risk.

This option offers a protected retirement income for a fixed period (term), or for life, and is available as a feature on account-based pensions. It allows you to invest your retirement savings in a portfolio with share market exposure to grow your investment, and potentially make your retirement savings last longer; but if markets fall and you run out of money, the protection feature means you continue to receive an income for the rest of the term, or for life.

To find out more about the 3 retirement risks and how you can manage them, contact me today.

Contact Westlawn

For advice on planning your retirement, please contact Liz Maroney:

  • Call 02 6642 0433.
  • Email

Copyright © 2016


General Advice Warning
The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial, tax and/or legal advice prior to acting on this information.
Past performance is not a reliable guide to future returns.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way.
Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
Liz Maroney and Westlawn Wealth Management Pty Ltd ABN 32 124 861 409, Authorised Representatives of GWM Adviser Services Limited ABN 96 002 071 749, Australian Financial Services Licensee, 105 -153 Miller Street North Sydney NSW 2060.

[1] Example sourced from Making sense of sequence of returns risk
[2] Source: Australian Bureau of Statistics, November 2013.
[3] Source: Australian Bureau of Statistics, November 2013.