When people discuss superannuation and/or retirement planning, the topic of risk is often brought up in conversation.
Generally, the type of risk this conversation covers is market risk (volatility), and they forget to even think about purchasing power risk.The assumption is that you can move out of “risky” (less volatile) investments and you will lose all your risk. However, there is a trade-off to be made which is that you’ll increase the risk of running out money when you retire (purchasing power risk).This is a real conversation you need to have with yourself and with your financial adviser. Volatility might seem scary to you and it’s normal for you to prefer to avoid it completely, but you NEED to understand the costs of making this decision.Most Australians can’t expect to live the same lifestyle in retirement as they would have been invested in a higher volatile / higher return investment strategy. It just doesn’t work like that.The “cost” of the short-term volatility of investing in companies is a small price to pay for the better long-term results.It’s important that you make these decisions informed, and not block out the reality of the types of risks on both sides.Choose your side:
- Put up with the short-term pressures of volatility and generate the return you need for your desired retirement lifestyle.
- Avoid the short-term pressures of volatility and plan to spend less throughout your retirement.
There are obviously many more options and variables involved, but these main two decisions can form the basis of your investment strategies.