When the retirement number has to earn its keep
A retirement target is a useful number but it is also a rather poor substitute for an income plan.
For most of a person’s working life, investment success is measured by how much has been accumulated.
Once retirement begins, the same capital must meet regular expenses while remaining invested for an uncertain number of years.
The objective hasn’t become less ambitious. It has changed.
And that distinction deserves considerably more attention when discussing what it means to retire with confidence.
Reaching the number is only the beginning
Retirement projections tend to concentrate on the amount someone will have accumulated by a particular age. That’s understandable.
A savings target provides direction, and reaching it represents decades of financial discipline.
But the amount available at retirement doesn’t necessarily tell us what income it can reasonably support.
Someone with additional income has different financial requirements from a retiree whose living expenses depend entirely on their investments.
Their withdrawal needs, investment horizons and capacity to accommodate market movements may be very different.
Nor do those requirements remain constant. Living costs rise, circumstances change and what initially seemed a comfortable income may need adjusting.
The important question is therefore not simply whether someone has accumulated enough to retire.
It’s whether their investment strategy is appropriate for providing the income they need throughout retirement.
Retirement changes the investment equation
During the accumulation years, regular contributions continue and investors generally have time to participate in a recovery.
But once that investor starts withdrawing, the relationship between investment performance and capital changes.
Consider what happens when markets fall during the first few years of retirement. Income payments still need to be made, potentially requiring investments to be sold at depressed prices.
When markets eventually recover, there may be less capital available to benefit from that recovery.
This is sequence-of-returns risk. Two investments can deliver the same returns over a period, but the order in which those returns occur can produce significantly different outcomes when regular withdrawals are involved.
That doesn’t make traditional investment principles irrelevant. Growth, diversification and long-term thinking remain essential.
But it does mean that a portfolio designed primarily to accumulate wealth may not be ideally positioned to provide a sustainable retirement income.
Stability gives retirement savings room to work
The answer isn’t necessarily to become more conservative the moment retirement begins.
For someone who could spend another 20 or 30 years in retirement, inflation presents a substantial challenge.
A portfolio that avoids market volatility but fails to generate sufficient growth may gradually lose its ability to support the same standard of living.
Equally, pursuing higher returns without considering the consequences of volatility can place unnecessary pressure on capital when withdrawals coincide with market downturns.
The challenge is to balance growth potential with greater investment stability.
That requires a deliberate approach to portfolio construction, combining assets with different risk and return characteristics to manage unnecessary volatility while preserving opportunities for long-term growth.
Importantly, stability doesn’t mean guaranteeing investment performance or eliminating every market movement.
It means recognising how those movements affect the sustainability of retirement income and structuring investments accordingly.
The small decisions that shape a long retirement
Investment performance receives considerable attention, but the sustainability of retirement income also depends on decisions that can appear relatively minor at the outset.
Take withdrawal rates. An additional percentage point of income might not seem particularly significant in the first year.
Repeated over decades, however, it can materially change the amount of capital remaining to support future withdrawals.
Fees have a similar effect. Every unnecessary cost reduces the money available for continued investment growth, and those reductions compound over time.
Neither consideration can be viewed independently of investment performance, inflation or changing income requirements.
This is why retirement income planning needs to remain an ongoing exercise.
An appropriate withdrawal rate at 65 may need reconsideration at 75.
Investment allocations may also require review as financial circumstances change.
Designing for the years after retirement
There is a broader product design consideration here. Retirement income solutions should reflect the financial realities of people who are already drawing from their investments, rather than simply applying the principles that guided their accumulation years.
Investment growth remains important, but so do the effects of volatility, the cost of managing capital and the flexibility to accommodate changing income needs.
These considerations informed the development of Fedgroup’s Living Annuity, which has three carefully constructed portfolios.
The portfolios offer different balances of return potential and volatility, with a focus on managing unnecessary market fluctuations, keeping fees low and allowing capital to continue growing while income is drawn.
No living annuity can guarantee that capital will last indefinitely. But recognising the particular demands of retirement income when constructing the investment solution is an important part of managing that risk.
After all, retirement planning shouldn’t be considered complete simply because someone has reached their retirement age.
That capital still has a substantial responsibility, potentially for decades to come.
Retiring with confidence isn’t simply about knowing how much money you’ve accumulated.
It’s about understanding what that money can reasonably provide, and having an investment strategy designed to support it.
