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Goals-Based Investing

How to manage money differently in retirement - Part 1

By Darren Beesley
BCom FIAA Co Portfolio Manager - Multi Asset Group Sydney, Australia

Irrespective of their financial status, retirees have significantly different investment needs than they did in their working life.

Some are retiring with significant wealth and their primary retirement need is a stable income stream. They need investment solutions that deliver regular and sustainable income that rises with the cost of living.

 Others are underfunded. Not all of this cohort had compulsory superannuation for their entire working life; and many self-employed and contract workers may not have contributed enough to their super. With lower levels of wealth these retirees will be focussed on making their super last while withdrawing funds from their retirement accounts.

Yet despite these differences, all retirees face common challenges and risks.

Unfortunately, it is difficult for portfolio managers to be sensitive to these unique needs and challenges of investors in post-retirement because most funds are offered indiscriminately across all investor types (both accumulators and retirees) rather than being targeted. They focus simply on a total return outcome and attempt to beat their respective benchmarks, rather than tailoring risk management for the bespoke needs of a specific cohort of investors such as retirees.

But the shift to define investment strategies by their goal and purpose, rather than their benchmark, provides an opportunity for portfolio managers to have a deeper understanding of the unique needs of their investor type – in this case, retirees – and to tune their investment strategies accordingly.

If we can more clearly align investment goals and strategies to the needs of retirement, retirees will be able to stick to their investment strategy during difficult times with greater confidence. They will also have the confidence to spend wisely, which will help ensure they have the retirement they desire and deserve.

There are seven key strategies, three of which we explore in greater depth below, that are particularly vital in order to shift the focus of the investment approach from accumulation, to a decumulation approach more suitable for retirees.

1. Limiting large losses

The first strategy is to limit the risk of large capital losses. Young people in accumulation can weather steep falls in markets because markets eventually bounce back. Indeed, young accumulators can take advantage of lower prices to buy at cheap valuations.

But for those in retirement, or on the cusp of retirement, a market downturn is a potentially devastating event.

Retirees have no future contributions to use in order to benefit from buying in at lower prices; instead they would be forced to sell assets at low prices to fund retirement and they don’t have the luxury of time to wait for markets to recover. The risk of a large loss just before or after a client retires is known as sequencing risk and can lead to a significant drop in a retiree’s standard of living.

The portfolio manager of a retirement fund, therefore, needs to be aware of the potential size of negative returns in any single stress event. And they need to be actively managing that downside risk, particularly at the start of retirement.

It is a common belief that purchasing portfolio protection (typically in the form of equity put options), which can help to mitigate the risk of a large loss by smoothing returns, is a money-losing strategy over the long term and it is rarely used in superannuation funds built for accumulators.

But the same logic does not apply to retirees drawing down on capital. As we have explained, retirees suffer more from large selloffs than accumulators, so the case to dampen downside risk with a protection strategy is stronger for retirees. 

This is an example of how traditional portfolio management rules of thumb that have evolved for investors who are accumulating wealth should not necessarily be carried over to post-retirement investors who are decumulating wealth.

2. Managing behavioural risk

Human instincts can be our own worst enemy in investments. The feeling of fear and the natural response of flight to safety was necessary for us to survive in primitive times yet can destroy significant wealth if applied to financial markets.

Non-advised investors can more easily access and change their investment mix than advised investors via super fund online portals or directly via SMSF structures. This means that nonprofessional investors left to manage their own strategy can more easily fall victim to their primal instincts and this can be even more detrimental in retirement than at other times since investors are far more engaged with their retirement nest egg and potentially more likely to intervene.

In our experience, the investor is much less likely to be reactive if a clear goal is established, and there is clear communication in advance around acceptable levels of drawdown and levers available in these stressed circumstances (such as adjusting consumption or potentially increasing risk).

Explicit targets around stress test losses and holding hedges to mitigate losses in stressed environments are also measures that build investor confidence and reduce behavioural biases.

3. Managing liquidity

A strategy to manage liquidity in retirement is also important. 

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset’s price. For investors, liquidity is the ease with which, should they need their funds immediately for reasons such as health, they can exit an investment at a favourable price, with reasonable fees and in a timely manner.

Liquidity trade offs

An investment strategy for retirement should consider these elements of liquidity. Given the illiquid nature of property and some annuities, the retiree’s financial assets (usually within an account-based pension) is typically the first point of call for emergency funding. If investing in a managed fund, the retiree should check that it:

  • Offers daily liquidity,     
  • Can be sold at a reasonable ‘sell spread’ and
  • Holds mostly liquid assets (>90%) – as even funds that offer daily liquidity can be closed to redemptions in stressed environments if the underlying assets are illiquid (known as ‘gating’).

If retirees hold direct investments, they should be aware of theirportfolio’s combined liquidity profile across the following liquidity spectrum: 

Investment Liquidity Spectrum

In research AMP Capital conducted to understand the preferences of retirees, having ready access to their investments was one of their key requirements because for most retired Australians there is little desire or  capacity to liquidate their other largest asset (their home).

For more information

In the next edition of Goals-based investing update, we will consider the remaining four strategies that differentiate an accumulation investment approach to an approach more suitable for those in decumulation, such as retirees. 

 If you would like to know more about AMP Capital's goals-based approach to investing, you can find it here Goals-based Investing.


  • Goals-Based Investing
  • Retirement
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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