How to navigate lower investment returns before retirement

A period of low investment returns can happen when you least expect it. It can be even more challenging when retirement is approaching.

At this stage of life, you have less time to recover from a market downturn. You may also be preparing to draw money from your investments rather than continuing to add to them.

The good news is that a combination of smart investing, spending flexibility, and careful retirement planning can help reduce the impact of lower returns.

1. Review your investment mix

The years leading up to retirement are a good time to review your investment mix, both inside and outside super.

When markets fall, it can be tempting to move everything into conservative investments. These options usually experience fewer ups and downs. However, they often deliver lower long-term returns.

A better approach may be to keep some exposure to growth assets. Growth investments can help your savings keep pace with inflation and future withdrawals. At the same time, you can reduce overall risk by shifting part of your portfolio into more defensive investments.

2. Build a defensive retirement buffer

Poor investment returns can be particularly damaging when they occur just as you start withdrawing money from your portfolio. This is known as sequence of returns risk.

If you sell shares during a market downturn, you may need to sell more assets at lower prices. That leaves less capital available when markets recover.

One way to manage this risk is to build a separate defensive buffer. This could include cash, term deposits, and government bonds.

If the buffer covers several years of living expenses, you may be able to avoid selling growth assets during a downturn. This gives your investments more time to recover.

3. Consider delaying full retirement

Delaying retirement by just one or two years can make a meaningful difference to your financial position.

Working longer allows you to continue receiving employer super contributions. You may also be able to make personal super contributions, which could reduce your income tax.

Remaining in the workforce can also help you pay down debt, build a larger cash reserve, and delay withdrawals from your super.

Importantly, you do not need to remain in full-time employment. Reducing your hours gradually can provide additional income. It can also reduce the amount you need to draw from your investments.

4. Reassess and reduce your income needs

If investment returns are lower than expected, adjusting your spending may be safer than taking on additional investment risk.

You might consider:

• Temporarily reducing discretionary spending
• Delaying a major purchase, such as a new car or overseas holiday
• Paying off high-interest debt
• Downsizing your home

Even small adjustments can improve the longevity of your retirement savings.

5. Plan your pension type

Once you begin drawing a pension from your superannuation, you have several options.

An account-based pension allows you to choose how much income you receive and how often you receive it. However, your balance may fall more quickly during periods of lower investment returns. Any remaining balance can usually be paid to your nominated beneficiary.

Another option is to use some or all of your super to purchase a guaranteed lifetime income stream. This could be a lifetime pension from a super fund. It could also be a lifetime annuity from an insurance company or friendly society.

This type of income can provide greater certainty and help protect you from running out of money. However, there may be little or no remaining balance available to beneficiaries. This will depend on the product and any guaranteed payment period.

You do not necessarily need to choose one option over the other. Some retirees use part of their super to secure a guaranteed income stream for essential expenses. They then keep the remaining balance invested through an account-based pension for greater flexibility.

A financial adviser can help determine the most appropriate combination for your circumstances.

Your financial adviser is your retirement planning expert

There is no single solution for managing lower investment returns in retirement.

The right strategy depends on several factors. These include your age, super balance, other assets, existing debt, expected retirement income, and lifestyle needs.

A financial adviser can help you build the right mix of investments and establish a defensive buffer. An adviser can also assess the benefits of continuing to work and help you select a suitable retirement income strategy.

With a personalised plan in place, you can approach retirement with greater confidence, even during periods of market uncertainty.