The 3 biggest challenges facing retirees (and how to manage them) (2024)

The boomer generation cop a lot of blame. Cost of living pressures? Those retirees on their European cruises. Skyrocketing house prices? Boomers outbidding up-and-comers. The truth, as always, is much more complicated and retirees have their own challenges to contend with at this point in their lives.

Just as with younger generations, inflation is one of the biggest challenges facing retirees. When you have a fixed income, the price of bread suddenly becomes a lot more important. It’s not the only challenge, with a significant concern – and increasingly, the desire to support younger family members financially.

That’s all before you factor in longevity risk – that is the risk you outlive your finances. None of us likes to project how long we might live, but the thought of having nothing left for the final years can be a terrifying concern.

While this all sounds a bit gloomy, it all comes back to how you manage these concerns. I spoke to Pitcher Partners’ Charlie Viola and BT’s Sarah Conte for insights into the challenges of retirement.

Inflation, inflation, inflation

While concerns over inflation may ease off for the working population, it’s an ongoing pressure for retirees who are more restricted in their income – and that’s before we consider those who are drawing a government pension.

Conte points to research from National Seniors Australia and Challenger that states around 80% of older Australians nominate costs of health, energy prices and groceries as top concerns at the moment.

“When we look at the year-on-year change in the ASFA retirement standard, retirees need an additional 3.5% of income to achieve the comfortable retirement income level due to rising costs,” says Conte.

Here in lies the challenge for retirees – in order to keep up with inflation, you need growth, but you still need to draw an income to live on. There’s also the sense of less time to recover.

Viola notes that investors need to think more long-term in retirement, or as he puts it “Remember, you are a long time alive.” You could be spending 30+ years in retirement, you should be thinking about long term investment patterns.

How do you manage high inflation periods?

One strategy for periods of high inflation – or particularly volatile markets relates to drawdowns.

“Retirees can assess how much they draw from their income stream. We’ve seen some retirees just take the default minimum pension. It’s important to sit down and think about the right level of drawdown to support your income needs,” says Conte.

It doesn’t need to be about deprivation, but rather adjusting to allow funds to stay invested and recovered in certain environments and then taking advantage of better climes. Financial advice can be invaluable on this front.

Conte also reminds investors to look back to their expenses – are different energy providers offering better value? Could you be entitled to discounts or concessions?

Beyond budgeting though, retirees should be positioning their investment portfolios to manage for different environments and taking advantage of any opportunities that arise.

“I’m a big believer in diversity, active management and not investing like you’re retired… rather, invest like you are managing a pot that has to last 30+ years and every year it needs to generate more income than the year before,” says Viola, with an emphasis on taking an active approach.

“In the current market, new money has been skewed to either interest rate sensitive investments like private debt and private credit, real assets producing good income and operating assets producing good income,” he says, highlighting the need for retirees to consider alternatives which can have both growth and defensive qualities.

Equities still feature too, with Viola emphasising high-quality companies held over the long term. Any companies that pay out fully franked dividends will obviously also be helpful.

Supporting younger family members

Increasingly, Viola is having conversations with clients who want to financially help their children or other family members, be it with simply dealing with cost-of-living pressures or on the more substantial end, buying a house.

“Once upon a time, we all saw inheritance as a bonus, but now it seems that intergenerational wealth handover is both expected – and expected earlier. How it is structured, how retirees are protected and how it impacts investment earnings will become a bigger and bigger issue,” says Viola.

Conte has similarly seen increasing enquiries on this front and she notes there are a lot of technicalities to consider.

“For the retiree, they need to think about the impact this potentially has on their living standard or ability to receive the age pension. Will it be considered a gift or are they going guarantor on a loan? If they are guarantor, can they manage in the event their child can’t repay it and they become obligated to,” she says.

The point is that helping can put your own financial security at risk, even more so in the circ*mstance that you don’t own your own property but aim to help your child.

Manage yours (and their) expectations

Seeking appropriate financial and legal advice is important when it comes to this concern.

Viola acknowledges this is a sensitive issue – people want to help their family where they can.

“We do need to ensure we have liquidity in portfolios for when or if this issue comes up,” he says.

From a retiree perspective, it’s hard to take emotion out of the situation but this is a “fit your own oxygen mask first” situation – you still need to have funds to support your own life. It doesn’t necessarily mean you can’t help your family members, but rather, you have to be careful and analytical about what you can and can’t afford.

Longevity risk

One of the biggest fears in retirement is that you’ll outlive your money. It’s such a prevalent concern that Conte says some retirees go too far to deprive themselves.

“Many retirees will seek to self-insure that fear and they’ll manage longevity risk by only drawing down the minimum pension payment from their income stream. This is a generic setting that doesn’t consider the specifics of a person’s situation. Just taking that minimum drawdown amount often leads to retirees living more frugally than they need to and having larger balances at death,” she says.

How to manage longevity in your portfolio

Conte notes that we are conditioned across our lives to only have a single source of income, but Australia’s retirement system actually has three pillars.

“There’s voluntary savings, compulsory super and age pension,” she says, adding that it can be complicated to manage using these, particularly when you balance your own needs and that of a partner too.

Conte points out that only 25% of Australians seek advice as they approach retirement and those who obtain good quality financial advice typically have better retirement outcomes.

Further to that though, investors need to take a much longer-term view of their finances according to Viola.

“Anyone who doesn’t take a 30-year investment view will pay the price over time in retirement savings falling. We must seek to preserve the buying power of money, which is only done via high-quality assets that present long-term earnings growth,” he says.

The concept of growth is critical to longevity – some investors may veer too defensive in their profiles once in retirement, but you need a level of growth to help your finances support you as you age.

“The best way to generate a growing revenue stream is to have growth assets. Growth relates to capital value but also earnings,” Viola says.

Retired investors should consider that growth doesn’t necessarily just mean direct equities – there are a broad range of alternative strategies that can offer growth with varying risk profiles which may be suitable in a retirement portfolio.

Final things to note

Investors will always face a variety of challenges across their portfolios depending on the fluctuations in markets and their own life circ*mstances, but the key is to think long-term and ensure a well-balanced and diverse portfolio.

“Diversity and timing are important, and taking advantage of market opportunities, such as higher rates currently is key to good management. Growth assets should always form a majority part of all long-term portfolios,” says Viola.

Finally – seek expert advice if you need it and take a leaf from Benjamin Franklin: “Know how much is enough, build assets and cultivate passions.” And of course, have fun!