Solving the Retirement Riddle

06 Sep 2021

The risk of running out of money in retirement is one of our greatest investment concerns. While starting early is an important step to managing this risk, it’s not enough. Embracing equities and fortitude are also key.
In this paper we seek to address the challenge facing individuals in achieving a comfortable retirement, by considering contemporary Australian data on employment income, longevity and superannuation rules, and testing the outcomes of a lifelong investment strategy against 150 years of real US market data, to provide a range of possible scenarios.

The paper concludes that investors must start investing early. It considers a working career spanning 40 years, starting at age 23 – highlighting the importance of embracing equities and staying the course. It recommends that an allocation of around 80% to equities, annually rebalanced over a lifetime, reduces the risk of failure to achieve a comfortable retirement to close to zero, based on the scenario testing applied.

Following the recommended approach removes both sequencing risk and longevity risk. The author acknowledges that this does not solve these problems for those later in life, who may not be ‘on track’ due to any number of reasons including, but not restricted to, starting late, under saving, lower allocation to equities, or previous poor investment outcomes. It is also noted that the Australian superannuation system is not too far away from the recommended position.

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