When people get close to retirement, their impulse is to put all their super and investments into term deposits. It’s a bit of social conditioning – people think, now that I’m a pensioner, I have to be more careful. Effectively, this is loss aversion in play. We don’t want our balance to drop. But often, our investment strategies leading into retirement are too defensive – there’s too much in cash and not enough in growth assets.
Nobody wants to go through volatility during retirement. But if you move everything into cash, you will eventually run out of money. Considering inflation, you will need more and more money each year, and so you need your capital to keep growing. Once people realise they would run out of money if they were to transfer everything into cash, it’s easier to make the decision to keep their money invested, instead.
You don’t know when you'll die so how can you work out when your money will run out? Life expectancy is getting longer and longer, and it’s something we simply cannot predict. People always underestimate life expectancy, and they never account for the extra time if one spouse is younger.
If you run out of money in your 80s or 90s, you will have to move in with your kids or into an aged care facility. This is how moving everything into cash will cost your kids, rather than yourself.
Instead, it’s good to have a buffer of money left over so that you can have flexibility in your living circumstances. A buffer is also the difference between whether your kids are left with hefty bills or an inheritance. And it all comes down to your desire not to rely on anyone else during your retirement.
Living longer can mean more risk, but it’s also a good thing!
