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Video transcript - Managing investment risk in retirement
Welcome back to BUSSQ's Retire Happy series.
Let's talk about managing financial risk during retirement.
Most people don't like to think about risk and risks can take on all shapes and sizes, but they all start with one unavoidable fact. The future is unknown.
Some risk is objective and can be measured in money. Some risk is emotional and can manifest in stress and uncertainty. Let's look at four key risks you may face in retirement.
The first two risks are often seen when you have too many defensive assets in your fund.
Defensive assets are more stable investments but do not grow compared to inflation, such as cash.
The first risk is inflation which we'll all experience recently. Your income doesn't go as far over time. For example, milk and petrol will be much more expensive towards the end of your retirement.
The second is longevity risk, which is the possibility of outliving your savings.
As you live longer, your retirement income must stretch out over a greater time period.
Longevity risk can be managed to a certain degree by using growth assets.
The next two risks are particularly aimed at investments with exposure to growth assets.
Growth assets are investments that grow well over the long term, say 10 years, but can be volatile in the short term and experience negative returns.
The third risk is volatility, or timing risk, which is a risk of having to withdraw funds from your investment when there is a drop in the value of your funds due to market falls. This is just like selling your house. If you have to sell the house when the property market is down, you may make a loss. And with the property gone, you have no chance of recovering your funds when the property market increases again.
The fourth risk is market risk, where volatility is caused from shorter term political instability, economic or asset issues, and other global events like pandemic or a war.
Not having all your eggs in one basket can assist in mitigating market risk by diversifying across different baskets which may include shares, infrastructure, and various industries. The world's share markets have had a long-term upward trend, but volatility is normal and expected.
For those members invested in growth assets such as shares, they will likely experience periods of negative returns during retirement. There are downturns, but there is always an upturn. The impact of the downturn on your investment is usually determined by the time it takes your funds to recover versus the time before you need to access your funds.
Managing the time frames of how long funds are invested can be critical. We will talk more about this later on.
The market's immediate response to good and bad news is almost always exaggerated. Many investors sometimes believe the entire future is wrapped up in the day's headlines. But the best response to short-term problems and uncertainties is usually to ignore them.
Remember, don't take too much risk. When you regularly withdraw funds, you may need to manage the appropriate level of growth assets compared to the stability of defensive assets.
It's also important you don't take too little risk. If all your money is in cash, inflation will erode your buying power overtime. Many in retirement prefer to manage the risk of losing funds rather than trying to maximise returns. It depends on what you are most comfortable with.
Putting in place a retirement plan and checking in on that plan every couple of years or so is the best way to manage your retirement savings and avoid making any wrong decisions.
As a BUSSQ member, whether you need general guidance or personal advice, we have teams that can give you some comfort by helping you with your investment selection.
Join us in the next clip about using a common strategy to help manage the impact of market volatility.
