Planning for retirement sounds straightforward, but many Australians are still unsure how to prepare for it, leaving those in their 50s very little time to adjust their plans once they realise they have been doing it wrong. According to Mike Sikar, the founder and principal financial adviser of Delta Financial Group, most of the people he talks to are still confused between retirement income planning and retirement fund accumulation planning.
The tools, the strategies, and the investments that you use to get you to retirement are very different from the ones you need at retirement to get you through the retirement years.
In fact, in retirement, you face many new challenges and risks that you did not face in the
accumulation years. There are risks around;
- Execution
- Sequencing market risk
- Longevity of life
- Inflation
- Consumption
- Withdrawal rate risk
- Declining cognitive skills
Getting all of these things to work together is complicated and there’s a risk of execution taking place inappropriately, which is why you really need the help of a financial adviser to work through these different challenges, to build the right plan for you, so that you minimise the execution risk.
Sikar explains that developing a financial strategy that will allow a person to have enough income to support their preferred lifestyle in retirement is known as retirement income planning. Making judgments on how much money one will need in retirement, where it will come from, and how to make sure the retirement income will be enough to pay costs are all part of this process.
On the other hand, retirement fund accumulation planning focuses on saving and investing money to meet retirement objectives. This process includes analysing various investing techniques, comprehending the many investment options, and creating a plan to save and invest money to meet retirement goals.
Sikar shares some of the retirement risks that Australians need to be mindful of.
Execution risk
Investors have a profound effect on portfolio performance. They may be influenced by their emotions, such as fear, excitement, greed, euphoria, or panic, which could interfere with their long-term investment strategies. Additionally, many investors have an aversion to loss, which could affect their ability to remain in the market. Many tools and resources are available for those who wish to manage their own finances, but without basic knowledge of money or having limited time and lack of discipline, it can be challenging to stay on top of things.
Sequencing Risk
When someone is in retirement and spending money, the economy is much more essential than they may realise. Although they may not be actively participating in the labour market, looking for a job, or working, the economy is still crucial in determining how long their savings will last. Specifically, financial markets have a more substantial influence on the sustainability of the nest egg during retirement than before retirement. Sequencing risk happens when the timing and frequency of withdrawals are not checked and managed.
It is crucial to consider ways to protect one’s portfolio from sequencing risk. During the working years, a person can save as much as they want and be flexible regarding work. When in retirement, all the work is done by the nest egg, and it is important to guard it against sequencing risk. Withdrawals taken during a bear market could deplete retirement savings, resulting in a lack of lifetime income. During the accumulation phase of retirement planning, the sequence of returns is not significant; instead, the average rate of return is the priority. However, during the income phase, the sequence of returns is of great importance.
Positive market performance at the beginning of retirement increases the chances of retirement savings lasting a lifetime. On the other hand, negative market returns at the start of retirement could cause the retiree to liquidate more investments, thus increasing the likelihood of their retirement savings depleting sooner. Unfortunately, no one can predict whether they will retire into a rising, flat, or negative sequence of market performance.
Longevity Risk
Longevity risk is the risk that you will outlive your money. When creating a strategy for transitioning savings to retirement income, the issue of longevity must be addressed. A 65-year-old married couple has nearly a 50-percent chance that one member will live to age 92 and 25 percent chance to age 97. Of course the challenge is how to generate income that will last 30 years or more.
Sikar says the two questions to keep in mind are, “When can I afford to retire?” and “How long will I be spending in retirement?” He answers that people shouldn’t focus on a fixed duration, as it is always a cuDelta Financial GDelta Financial GroDelta Financial Group offers financial planning sDelta Financial Group offers financial planning services, including retirement planning and superannuation. services, including retirement planning and superannuation. up offers financial planning services, including retirement planning and superannuation.the group offers financial planning services, including retirement planning and superannuation.rve. On average, individuals are expected to spend 20 to 25 years in retirement. However, there is a 50% chance of living beyond life expectancy. In fact, there is a 20% chance that retirement could last up to 30 years or even longer.
Inflation Risk
With current high inflation rates this creates additional pressure for the average retiree
to create the income they need to live comfortably in retirement. Now inflation is never good. In fact, that’s the mandate of central banks, the Reserve Bank in Australia, to try to keep inflation between 2-3%. Nobody wants high inflation rates.
But when you’re in retirement, inflation has a much more devastating effect than when you’re
accumulating wealth and saving for retirement. You have to understand that inflation is a number that’s an average of many different goods and services.
In summary, one must plan for the future with more than just research into funds and staying abreast of the markets. Securing income and having a successful and content retirement is no small feat. Australians have been saving and planning for retirement throughout their working life, and as they transition into the longest vacation of their life, they need to make sure that their retirement income plan is structured to resist the risks.
Investing in proper financial guidance is an investment in one’s own happiness. It reduces the risk of making a potentially irreparable mistake by missing a crucial step or not keeping on top of economic and market developments and other important but often overlooked factors, such as unexpected life changes or events. Managing money is serious business, and Delta Financial Group’s clients understand this. Most of them are living busy lives, and rather than wasting their valuable time trying to sort out their financial affairs, they decide to work with the experts at Delta Financial, so they can focus on the fun stuff and plan a more comfortable life.
Delta Financial Group
Delta Financial Group offers financial planning services, including retirement planning and superannuation. The company applies relevant financial insights to its clients’ overall situation and finds opportunities to improve it.
They help busy professionals 5 to 15 years away from retirement to create an income for life. They act as a sounding board, helping clients evaluate their options and make smart financial decisions to enjoy a better quality of life.
