Super to pension transition: Navigating the Bumpy Road Ahead

Super to Pension Journey Not Without Its Hiccups

Introduction

In a recent article by financial expert Paul Benson, he provides valuable advice to retirees who have converted their superannuation into a pension. Benson explains that while there is nothing inherently wrong with keeping your savings in a balanced investment option, there are considerations to be made when drawing money out on a monthly basis. He introduces the concept of sequencing risk, which emphasizes the importance of the order in which investment returns are earned. Benson advises retirees to structure their investments differently during the pension phase to mitigate this risk.

Sequencing Risk and Retirement Savings

According to Benson, sequencing risk becomes particularly crucial when retirees start drawing a pension from their superannuation. If the retiree experiences a few negative years of returns at the beginning of their draw-down phase, it can significantly impact the longevity of their retirement savings. This is because the balance of their superannuation account is usually at its highest point when they begin their pension, making any negative returns have a more profound impact.

The Importance of Cash Holdings

To address sequencing risk and the potential harm it can cause to retirement savings, Benson recommends holding a year’s worth of pension drawings in the cash option within the superannuation fund. This cash can be used for monthly payments, providing stability during potentially volatile market conditions. Additionally, Benson advises retirees to have another 1-3 years’ worth of pension drawings in capital secure options like term deposits or annuities. By replenishing the cash holdings each year, retirees can avoid being forced to sell long-term growth assets during periods of market downturn.

Remaining Financially Confident in Retirement

Benson emphasizes that retirees need to consider their individual goals, ambitions, budget, and financial position when planning for retirement. By taking these factors into account, retirees can ensure they have the necessary financial confidence to enjoy their retirement years. It is important to remember that investment markets have historically recovered from downturns, and holding on to long-term assets during a temporary decline can lead to eventual recovery.

Life Insurance and Super

The Relevance of Life Insurance

Benson responds to a reader’s query about whether life insurance is necessary in their superannuation. He explains that life insurance is primarily designed to cover debts and provide for dependents. If a retiree has neither debts nor dependents, the expense of life insurance becomes unnecessary and can drain retirement savings. However, Benson urges readers to consult with their partners (if applicable) before canceling any life insurance, as they may still be a beneficiary in the event of their passing.

Considering Future Circumstances

Benson advises retirees to have a high level of confidence that their circumstances won’t change in the future, potentially necessitating life insurance coverage. If a retiree cancels their life insurance at the age of 57, it is unlikely they will be able to secure new coverage in the future. Therefore, careful consideration and evaluation of one’s individual circumstances are crucial before making a decision regarding life insurance within superannuation.

Retirement Savings and Goals

Calculating the Amount Needed

A reader inquired about the required amount of superannuation to retire comfortably at the age of 65. Benson highlights that providing an exact answer to this question is impossible without knowing the desired income in retirement. Retirees need to consider their current spending habits and how those might change once they cease working. It’s important to note that superannuation may not be the sole source of retirement provisions, as individuals may have other investments, downsize their homes, or receive inheritances.

Consulting with a Financial Planner

To accurately determine the amount of superannuation needed for a comfortable retirement, retirees should seek the guidance of a certified financial planner. These professionals can consider an individual’s unique circumstances and tailor a retirement plan that aligns with their goals and objectives. By seeking professional advice, retirees can ensure they are on track to achieve their desired level of financial security during retirement.

Conclusion

As retirees navigate the transition from superannuation to a pension, it is crucial to understand the risks associated with sequencing and ensure a well-structured investment approach. By considering the order of investment returns, retirees can protect their retirement savings during potentially challenging market conditions. Additionally, retirees should carefully evaluate the relevance of life insurance within their superannuation, based on their individual circumstances. Seeking professional advice and setting clear retirement goals can help retirees effectively plan for a comfortable and financially secure future.