Retirement Planning Risks (part I).

When planning for retirement, everyone can agree that it makes sense to minimise risk. 

It sounds like one of those things that no one can possibly disagree with.

However, ‘risk’ is one of those words that can mean many different things.  So, in this series of articles, I want to break down the various types of risk that can affect retirement planning. 

As you will see, some of these ‘risks’ are more like decisions or trade-offs to be made.
 
Market risk

• What it is - This refers to the price of an overall asset class falling (e.g. property or shares)
• What people say - ‘my super balance dropped from $400,000 to $250,000’. 
• Example - The most recent extreme case of market risk was the global financial crisis. 

This is the risk that concerns people the most, especially when getting close to retirement. 

Most people’s worst nightmare is the value of their retirement savings dropping substantially close to retirement, or once they are retired.
 
Purchasing power risk

• What it is - This refers to the fact that over time, most things get nominally more expensive. 
• What people say - ‘$50 doesn’t go far anymore’. 
• Example - The cost of living in Australia has more than doubled over the last 30 years. 

This is one of the more underrated, yet important, risks that needs to be taken into account when planning for retirement. 
Think about what it ‘used to cost’ to go to the movies or do the weekly shopping.

The reason this risk is so insidious is that it’s a slow burn.  We don’t notice the effects of inflation week to week in the same way that we can very easily check our super balance on a weekly basis.

This is especially important when we consider at least one member of the average couple is likely to live for over 30 years in retirement.
 
Both risks need to be deliberated when planning for retirement, especially when making decisions about what percentage of retirement savings should be invested in ‘growth’ versus ‘defensive’ assets. 

The hard part is that these tend to be linked so reducing risk in one area may cause an increase in another area. 
What this means is a portfolio which is overweight to growth assets is likely to minimise purchasing power risk over the long term but will maximise market risk. 

Getting this decision right is one of the most important things we discuss with our clients.

​Written by Dallas Davison.