The biggest risks to your super and how to manage them
Written and accurate as at: Dec 13, 2024 Current Stats & Facts
It’s common for older Australians to feel anxious about running out of money. After all, you’re particularly vulnerable to shocks as a retiree because the pool of money you’re drawing from isn’t benefiting from regular top ups by an employer. Below, we outline some of the biggest threats to your retirement savings, as well as what you might be able to do to keep your finances safe.
Inflation risk
As far as threats to your savings go, inflation is one of the more obvious and pressing. Even a modest increase in the cost of goods can cause the value of your retirement funds to drop over time.
And if recent history has taught us anything, it’s that inflation can persist for long stretches despite efforts by central banks to bring it under control.
When your retirement savings are finite and you’re no longer earning, it’s more important than ever to use smart strategies to manage inflation risk and protect your savings from being eroded.
Tips to help manage inflation risk:
- If high inflation strikes, try to be flexible with your spending habits and try to identify any non-essentials that you can do without.
- Don’t let your panic guide your investment decisions. Seeking out risky assets or industries in the hope they’ll allow you to beat inflation might not be the wisest decision.
- Top up your retirement savings if you can with extra contributions to super.
- Consider delaying your retirement plans or supplementing your income with part-time or casual work.
Market downturns and sequencing risk
Anyone with shares they actively monitor will know that volatility is a feature of the market that’s next to impossible to avoid. But if your only exposure to investing is through your super, you might not have built up a tolerance for the large market swings that many individual traders have.
Often people are so rattled by a downturn that they switch over their portfolios to more conservative options and unwittingly wind up crystallising their losses. Then when the market recovers, their super balances are worse off than if they had done nothing instead.
The stakes are especially high as you approach or enter retirement thanks to something known as sequencing risk. If you retire in a down market, you’ll be drawing down on your capital at a time when its value has fallen. This deprives your investments of the chance to recover, erases any future compound returns, and can potentially impact your super balance over time.
Tips to help deal with market downturns:
- Try to avoid making any hasty decisions in the face of market downturns.
- Take care not to mistime any big purchases. Many new retirees withdraw part of their super as a lump sum to pay off their mortgage or buy a new car. If this coincides with a market downturn, it could put a major dent in your super balance over time.
- Review the investment option your super is currently invested in to make sure you’re comfortable with the level of risk.
- If you have investments outside super, ask yourself if your portfolio is sufficiently diversified and suited to your risk profile.
Longevity risk
Thanks to better quality medical care and a general improvement in living conditions, life expectancy in Australia is much higher than it used to be. While this is certainly welcome news, it means you’ll have to stretch your savings over a retirement that could last as long as 30 years. Combined with the impact of inflation, you’ll really need to consider whether your retirement savings can go the distance.
Tips to avoid outliving your retirement savings:
- During your working years, try to make extra contributions to your super where possible. You can even claim a tax deduction if you submit a Notice of Intent form to your fund in time.
- Consider delaying retirement or returning to the workforce on a part-time basis so you have a chance to boost your savings further.
- Create a retirement budget to see how you can cut back on your living expenses before and after retirement
- Check if you're eligible for other sources of income in retirement, such as the Age Pension.
- If you planned on giving your children an early inheritance, be mindful of how it might impact your lifestyle in retirement.
Medical costs
As you age, the amount of money you devote to medical costs tends to go up. Along with the regular expenses (such as medication and visits to the dentist), you might also experience health problems that require visits to specialists, surgery or overnight hospital stays. There’s also the matter of aged care (whether a residential aged care facility or in-home care), which can be a major blow to your budget.
Tips to help keep your medical costs low:
- Remember that the best cure is often prevention — try to live a healthy lifestyle and make sure to visit your GP regularly to get preventative screening tests done.
- Maintain an emergency fund to help cover any unforeseen medical expenses.
- Use the government’s Medical Costs Finder to get a clearer idea of the typical out-of-pocket costs for any surgeries or visits to specialists.
Scams
For many scammers, cashed up retirees represent the ultimate target, and fooling just one person can result in a massive payday. It’s important to remember that scammers don’t have to rely on digital hacks — sometimes all it takes is a message that’s just friendly or urgent-sounding enough to get you to lower your guard.
Tips to stay safe from scams:
- Be sceptical of any messages you receive that try to rush you into doing something — like changing your password or moving money from one account to another — even if they purport to be from your bank or another trusted institution
- Be wary of people who contact you out of the blue to strike up a conversation, especially if they start asking for money to get out of a bind or spruiking investment opportunities.
- Keep in mind that there are strict rules around accessing your super before you’re eligible, so don’t trust strangers who claim to be able to help you withdraw it early.
- Often scammers impersonate well known organisations, such as your super fund, the ATO or a utilities provider. The safest way to check whether a communication you receive is authentic is to contact the organisation using the published phone number on their website and ask them whether they have contacted you.