We design portfolios around the outcome they are meant to support. For people approaching or in retirement, the outcome that matters most is usually a reliable income for as long as it is needed.
Investment results are often reported against an index over periods as short as a quarter or a year. People approaching or in retirement tend to assess their portfolios differently. Their main concerns are whether their savings will last and whether money will be available when they need it.
Those concerns can lead to different portfolio decisions. A benchmark shows how a portfolio performed relative to a market. It does not show whether the portfolio’s income will meet a person’s expenses, how the portfolio would be affected by a large fall in the year after they stop work, or how many years it needs to last.
The length of retirement is often underestimated. The Australian Government Actuary’s most recent life tables put the life expectancy of a 65-year-old man at a little over 20 more years and of a 65-year-old woman at almost 23. Allowing for continued improvements in mortality, the Actuary projects that a 65-year-old man can expect to reach about 86 and a woman almost 89.¹ These are averages, and many people will live considerably longer. In our view, a retirement portfolio should be designed with that possibility in mind.
The Retirement Income Review, delivered to the Treasurer in 2020, found that “most people die with the bulk of the wealth they had at retirement intact”.² It identified complexity, limited guidance and concerns about outliving savings as reasons retirees are reluctant to draw down, and found that more efficient use of savings in retirement could do more to improve retirement income than increasing the superannuation guarantee.² The Review’s findings suggest that many retirees are cautious for understandable reasons, and that without a clear plan this caution can reduce the income they could otherwise have had.
Since 1 July 2022, superannuation trustees have been required to have a retirement income strategy that balances three objectives: “maximising expected retirement income”, “managing expected risks to the sustainability and stability of retirement income” and “having flexible access to expected funds during retirement”.³ When APRA and ASIC reviewed how trustees were implementing that requirement in 2023, they reported “a lack of progress and insufficient urgency”.³ The requirement applies to superannuation trustees and not to investment managers, but its three objectives are a useful framework for any portfolio designed to support retirement.
Sequencing risk
Sequencing risk is one of the main differences between a retirement portfolio and one used to build savings. Writing in the Actuaries Institute’s Actuaries Digital, Colin Grenfell describes it as the risk that savings “receive the worst returns at the worst possible time”, the years around retirement and just after, “when account balances are highest and cash flow is usually negative”.⁴ For someone drawing an income, two portfolios with the same average return over twenty years can produce very different results, depending on whether the weaker years occur early or late.
Comparing a portfolio with a benchmark does not address this risk. A portfolio can match its index through a sharp fall and still leave someone who is drawing an income in a much weaker position. For that reason, the pattern of withdrawals needs to be considered as carefully as the pattern of returns.
When we design a model portfolio, we start with questions about the group of investors it is built for. What does the portfolio need to fund, and over what period? How much variation in value can it absorb without forcing assets to be sold at a poor time? How should income be balanced against growth that may be needed ten or twenty years later? And what is left after fees?
The answers will differ from one person to another, which is why these questions belong in a conversation with a licensed financial adviser who can take account of an individual’s circumstances. An investment manager can support that conversation by building portfolios with a clear purpose and stated ranges, and by assessing them on their outcomes after fees.
A benchmark remains useful for checking whether a manager is adding or subtracting value. For people who rely on their savings for income, the more important measure is whether the portfolio continues to meet their needs throughout their retirement.
Sources
1. Australian Government Actuary, Australian Life Tables 2020–22, December 2024, pp. 26–29 (period life expectancy at 65: males 20.30 years, females 22.90 years) and p. 21 (projected cohort expectation of life at 65 in 2021 under the 125-year improvement scenario: males 86.1, females 88.8). https://aga.gov.au/sites/aga.gov.au/files/sites/aga.gov.au/files/publications/2024-12/australian-life-tables-2020-22_1.pdf
2. The Treasury, Retirement Income Review: Final Report, July 2020 (released 20 November 2020), Key observations, pp. 19, 21 and 23. https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-00bkey-observations_0.pdf
3. APRA and ASIC, Implementation of the retirement income covenant: Findings from the APRA and ASIC thematic review, July 2023. The covenant and strategy requirements are in ss 52(8A) and 52AA of the Superannuation Industry (Supervision) Act 1993 (Cth). https://www.apra.gov.au/sites/default/files/2023-07/Information%20report%20-%20Implementation%20of%20the%20retirement%20income%20covenant-Findings%20from%20the%20APRA%20and%20ASIC%20thematic%20review%20July%202023.pdf
4. Grenfell, C., “Sequencing Risk and Asset Allocation”, Actuaries Digital (Actuaries Institute), 30 April 2025. https://www.actuaries.digital/2025/04/30/sequencing-risk-and-asset-allocation/