Wednesday, 24 February 2016

Imagine for a moment that on the first day of your very first job you received all the salary you would earn over your working life. That’s right, instead of taking home a pay cheque each fortnight or month you started your career with all of your income as a single lump sum of cash, upfront and in today’s dollars. All you would have to do in return is go to work each day and make your money last until you retire.

In some ways this would be great, right? You could immediately buy that car you always dreamed of. You could buy a house without incurring any interest costs. You could make investments for your children’s futures and go on fantastic holidays.

But for many reasons this also sounds ridiculous, doesn’t it? Who would wish that responsibility onto themselves? There is just too much uncertainty! How can we be sure we’d make the right decisions and trade-offs to meet all our living expenses over the course of our working lives without running out of money? How much can we spend? How much should we set aside for emergencies?

But is this situation really that different to the challenging decisions we face at retirement?

At the end of our working career we all look forward to the retirement benefit from our super fund. One option is to take all or part of it as a cash lump sum. This can be used for example to pay off debt, buy a new car or go on a holiday. Another option would be to open an income account, from which regular retirement income can be drawn.

In making these decisions we have to plan for many uncertainties. This can include how much we’ve saved, how old (or young) we are, the level of our living expenses in retirement, provision for aged care, increasing health costs and access to emergency funds.

We face a long list of risks too, not least of which are linked to investments, like inflation and uncertain market movements, but also the uncertainty of our own life expectancy.

Many of us also want control of our assets, flexibility in our options, growth of our investments, security of our income and we may want to leave some money to the kids.

Combining all these factors means that retirement planning is extremely hard. But how can you be sure you make the right decisions and trade-offs?

Now of course everyone’s situation is different. Arguably a key trade off in deciding how to manage a lump sum of money, either as in the example above or in retirement, is between stability and predictability, and, control and flexibility.

During our working lives we are generally comfortable to pay death and disability insurance premiums to provide certainty around our future earnings. Many of us invest our super in our super fund’s default investment option, effectively entrusting our investment decision making to our fund. We generally accept that we have limited control over our income level (our salary) and little flexibility around it. Yet it seems that when we retire we want something different; we put a higher value on having flexibility and control over our retirement savings, rather than stability and predictability.

Is an insured, stable, predictable, guaranteed, sustainable income in retirement really that much different to how we make ends meet with our salaries before retirement? Here’s something to think about: how much control and flexibility over your income do you really need in retirement? How much control would you trade-off for stability and a greater level of certainty around retirement income?

The views of the author and those who provide the responses to comments posted on this blog are not necessarily the views of the QSuper Board. We’ve put this information together as general information only. You should get professional advice before relying on this information.

Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.