The Retirement Investment Paradox.

When 'Playing it Safe' Is Risky

The conventional wisdom that retirees should abandon growth assets at 65 is outdated and potentially dangerous. It’s important to understand that retirement isn’t the finish line, it’s a marathon that often runs three decades.

Staying partially in growth assets in retirement can help sustain wealth. The real question isn’t whether to include growth assets, it’s how much to include.

Maintaining some growth assets in retirement
Australian Bureau of Statistics data shows the average intended retirement age is 65.6 years , while ATO data reveals average super balances of around $430,000 for those aged 65-69 . With potential retirements lasting 25-30 years, abandoning growth entirely means your purchasing power erodes relentlessly as inflation compounds.

In general, it is advantageous for retirees to maintain around 20-40% in equities to help combat inflation and provide capital growth. This isn’t about chasing aggressive returns; it’s about preserving real wealth.

Practical allocation strategies:

• Age-based rules of thumb: The “100 minus your age” formula suggests a 65-year-old holds 35% in growth assets, gradually reducing to 20% by 80.
• Objective-based: If your super and Age Pension comfortably cover fixed expenses, you can afford higher growth exposure in discretionary funds.
• Time-horizon approach: Money needed within 5 years stays defensive; funds not required for 10+ years can remain growth-oriented.

Individual circumstances vary enormously depending on risk tolerance, total assets, and other income sources like the Age Pension.

What is sequencing risk?
Here’s where retirement investing gets genuinely dangerous and where many completely miss the threat until it’s too late.

Sequencing risk is the risk that the order and timing of your investment returns are unfavourable, resulting in less money for retirement . The retirement risk zone, the five years either side of retirement, is when sequencing risk matters most. A 37% market crash in year one of retirement (like 2008’s Global Financial Crisis) forces you to sell assets at depressed prices to meet minimum pension drawdowns, locking in losses permanently. The table below from Challenger shows the difference in impact if the same rates of market returns and inflation from June 1992 to June 2019 are sequenced in reverse chronological order. This reverse chronological sequence delivers wildly different outcomes.