While saving for retirement is important, so is your plan of action once you start drawing down your investments. Here are five post-retirement challenges to consider.

You’ve spent much of your career accumulating enough assets for retirement. You’ve contributed to super and perhaps you’ve even established a self-managed super fund or accumulated other assets specifically earmarked for retirement.

But now, as retirement approaches, your focus must change. No matter how well you saved during the accumulation phase, it’s critical to plan how you convert those assets to income.

Although the Government’s Age Pension provides a safety net, it’s unlikely to be sufficient to fund the lifestyle you’re hoping for in retirement and you may not qualify. Chances are you’re going to have to rely on your own efforts to overcome the following five challenges:

Challenge #1: Longevity

According to figures from the Australian Bureau of Statistics, a 55-year old man can expect, on average, to live another 28 years, while a woman of the same age can expect to reach 86 years old.

What this means is that you may very well spend many years in retirement. As a result you will need to generate enough income to meet day-to-day expenses for 20 years or more—an especially daunting challenge in an environment where reliable investment income is increasingly difficult to come by.

Challenge #2: Volatility

While we can't predict or prevent market swings, we know they will occur and more extreme market events are always a possibility.  These types of events often defy our ability to predict them.

When they do occur, they can have a profound impact on financial markets. These days, trading is often conducted electronically at lightning fast speeds among numerous participants around the world. In addition, trading doesn’t stop when the market closes and the advent of social media has accelerated the speed at which decisions are made. Put it all together and the climate is conducive to greater volatility than we’ve experienced in the past.

Challenge #3: Inflation

Inflation is the rate at which the prices of goods increase on an annual basis. For much of the 1970s and 80s, inflation in Australia routinely exceeded 10%. Fortunately, in recent years it’s been hovering between 1% and 3% but even today’s relatively low rate can have a harmful effect on your purchasing power over time.

For example, $1,000 today will only be able to purchase $552 in goods 30 years from now with a 2% annual inflation rate. With a 3% rate, that $1,000 will only buy you $412 worth of goods. And if inflation goes up to 5% or 6%, the results could be far more drastic.

For many retired people, higher inflation is especially difficult because they may be living on a fixed income that can’t support rising costs of living. In addition, many of the goods and services most often used by retirees – such as healthcare – are already experiencing greater-than-average price inflation.

Challenge #4: Taxation

It’s important to be aware of the tax implications of how your assets are invested. Managed funds seek to generate returns through either income or capital growth (although typically end up with a combination of both). Shares can exhibit similar characteristics, with some companies distributing their earnings as dividends while others reinvesting earnings in order to drive capital growth. Your personal circumstances will determine whether income or capital growth is a more attractive source of return given the differences in the way they’re taxed.  

Challenge #5: Leaving a Legacy to Loved Ones

For many retirees, even if they have enough income to comfortably meet their expenses, leaving a legacy is still an important concern. Ensuring your loved ones benefit by properly structuring your estate requires careful planning.

What to Do in Retirement

Not so long ago, the typical retirement strategy was to simply reallocate your portfolio from equities to fixed income and live on a steady stream of interest generated by your holdings. With today’s interest rates near record lows and life expectancies expanding, this strategy may no longer be viable.

Navigating this new world of lower returns and increased volatility requires careful planning and expert assistance. Your Morgan Stanley Financial Adviser can work with you to design an investment portfolio around your changing circumstances. They can help you decide whether you want to pursue a slightly more aggressive asset allocation – one aimed at increasing income while maintaining enough stability to provide you with the comfort you need.

Working with a Morgan Stanley Financial Planner can also assist.  Financial Planners can explain some other investment categories, such as annuities, which you may not have previously considered and could play a role in your retirement income. And they can talk you through estate planning options to ensure your loved ones are looked after and your wishes are carried out.

For more guidance on retirement planning, speak to your Morgan Stanley Financial Adviser today.