Building a bigger retirement nest egg

For some investors, the question weighing most heavily on their minds right now is: Will my superannuation be enough to meet my needs in retirement? Or, in more technical terms: Am I exposed to longevity risk?

Longevity risk explained

In the context of superannuation and retirement planning, longevity risk is essentially the risk that you will outlive your retirement capital.

The impact of longevity risk

For many people, outlasting their retirement savings would leave them with some less-than-easy choices to make, such as:

• going on the age pension and possibly having a much lower standard of living in later years than previously imagined
• selling their home and buying in a cheaper area, possibly well away from family and friends, and investing the capital released to support their living costs
• selling their home and either renting locally or living with friends/family.

Which would you choose if you had to?

Will your superannuation be enough?

There are three inputs required to determine if your superannuation nest egg is going to be large enough.

1. The level of income you need each year in retirement. The longer you live, the greater the likelihood that you will incur care costs at an aged care facility. This can be very expensive, especially when the extra service fees are considered.
2. The number of years you need to draw an income. This will depend largely on your current health status, but genetics also can sway things. If your family members are long-lived, chances are that you will be too!
3. The average expected investment return during your retirement years. While market movements play a part here, as well as overall investment selection, your risk profile will also have an influence.
   
   Generally speaking, the more aggressive your risk profile (i.e. the greater the exposure you have to shares and property as opposed to cash and fixed interest) the higher your average investment return will be.

Strategies to counteract superannuation shortfall

All is not lost if your superannuation nest egg is leaning towards petite rather than oversized. For example, you could consider these three strategies.

1. Postpone your retirement date, with your employer’s approval.
2. Revise your budget with a view to making additional superannuation contributions.
3. Examine your asset allocation strategy to see if you’re able to accept more risky investments in your portfolio, if it means you’d have a better chance of meeting your goal.

If you have any concerns about your preparedness for retirement, speak to us today for further advice that is tailored to your circumstances and needs.