Retirement should be a time of relaxation. You’ve dedicated many years of your life to your career and made your impact on your industry; the last thing you want to be worrying about constantly is money.

The truth is that not everyone can retire without having to draw an income from their retirement savings products such as retirement and living annuities. That’s why independent financial advisers will urge you to start saving for retirement as soon as possible. Having said that, if you need to draw an income, it’s imperative to understand the associated risks which could deplete your savings quicker than you think. The truth is that you may live longer than you initially anticipated; advancements in medicine and technology are contributing to longer lifespans, but inflation continues to erode buying power. So, it’s critical to have risk management measures in place to lessen the likelihood of financial instability.


Risk management measures you can put in place

There are specific measures that you can take to manage risk because, unfortunately, inflation and lifespan can’t be controlled. These include:

 These include:

  • Planning for an extended lifespan.
  • Structuring your portfolio for growth.
  • Ensuring you draw a sustainable income.

Let’s take an in-depth look at how these strategies can be used to mitigate financial risk at retirement.


Planning for an extended lifespan

As mentioned above, many people live longer lives primarily due to continuous advancements in medicine, technology, and lifestyle changes. It’s become more feasible you may live another 30+ years into your retirement and therefore outlive your savings.

In addition, the income on which you draw has to be adjusted for inflation annually so that it can be recognised in real terms. Inflation determines your income level for each of those years and the nominal investment returns you need to achieve a  sustainable income.

Unfortunately, it’s not practical to assume that inflation levels will remain reasonably low and stable. One of the best ways to mitigate this issue is to have a robust portfolio that can generate returns even during an unstable inflation environment.

It’s important to understand what a financial portfolio is before you read any further. A financial portfolio is basically a collection of financial investments (also known as asset classes). The main four asset classes include

  • Equities (stocks)
  • Fixed-income and debt (bonds)
  • Money market and cash equivalents such as closed-end funds and exchange-traded funds (ETFs).
  • Real estate and tangible assets

Diversify your portfolio for growth

You need to have a growth-centric structure for your portfolio. It’s essential to match your investment horizon to suit your needs. E.g. investing in an equity-only fund requires a minimum time horizon of five years. If you require immediate access to your money, it’s best to consider a money market or tax-free investment account.

 It should also be understood that asset classes that have the potential to bring higher returns can be more susceptible to market volatility. If you are unsure if you can withstand the risk, speak to a business consultancy with access to independent financial advisers. They will look at your financial situation from a holistic perspective and advise you what type of investments will allow you to achieve a sustainable income at retirement.


Ensure the level of income you draw is sustainable

Studies have shown that a drawdown of more than approximately 4% can negatively affect your income’s sustainability. Therefore, it’s recommended to draw a maintainable level of income and only increase it by inflation each year.


Alleviate risk by investing intelligently

Ensure you invest for real returns and actively manage risk. The application of these factors involves focusing on the prominence of total returns, keeping levelheaded during tough times and avoiding switching during short-term market fluctuations; this runs the risk of locking in losses if you withdraw from the fund. Studies have shown that portfolios need to allocate a minimum of 50% to growth assets to produce the real returns necessary for retirement.


So, how can you achieve this goal?

Maximise your total return irrespective of whether it’s income or capital return. Ensure that you actively manage downside risk, which is defined as ‘the possibility for an investment to experience a decline in value if market conditions change.’

If this is too unnerving, speak to an IFA. They will assist you in developing a diversified portfolio that manages risk allowing you to achieve a sustainable income at retirement.