During your working years, market volatility is frustrating but manageable. You continue receiving income, making super contributions, and investing regularly. A downturn may temporarily reduce your balance, but time and continued contributions often allow recovery. Retirement changes this dynamic entirely. Once you stop working, your super transitions from a growth vehicle to an income source. Instead of contributing, you begin withdrawing.
If a significant market downturn occurs in the early years of retirement, the effect can be substantial. Withdrawals during market falls lock in losses and reduce the capital available to participate in future recoveries. This phenomenon, known as sequence risk, can permanently impact long-term sustainability, even if average returns over time appear reasonable.
For example, two retirees might achieve the same average return over 20 years. However, if one experiences negative returns in the early years and the other experiences them later, the outcomes can be dramatically different. Early losses combined with ongoing withdrawals create a compounding effect that is difficult to reverse.
At the same time, shifting entirely to conservative assets is not a solution. While cash and term deposits reduce volatility, they rarely generate returns sufficient to outpace inflation over decades. A retirement that lasts 25 to 30 years requires growth as well as stability. Without it, purchasing power gradually declines.
A structured approach to retirement investing often involves segmenting assets into different functional purposes. Short-term income needs may be covered by more defensive holdings, while longer-term capital can remain invested in growth assets. This allows retirees to draw income with confidence during market fluctuations without being forced to sell growth assets at depressed prices.
Retirement planning should also consider tax positioning, withdrawal sequencing, and pension structuring. These elements interact with investment strategy and can materially influence outcomes.
The objective in retirement is not simply to avoid risk. It is to manage risk intelligently. By understanding volatility, planning for downturns, and structuring withdrawals carefully, retirees can significantly increase the probability that their capital will support them throughout their lifetime.
Disclaimer: This information is general in nature and does not consider your personal objectives, financial situation or needs. You should consider seeking professional advice before making any financial decisions. Past performance is not a reliable indicator of future performance.
