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The harsh reality of funding your retirement

December 3, 2019

This article was originally published July 2017


This could be a long article with lots of tables and graphs, complex data analysis explanations, and long-winded statements on the economic conditions which we currently face. But it won’t be.

Let me just lay out some basic return figures and avoid the “noise” of the day-to-day machinations we are constantly bombarded with in this age of instant communication.



Historic and Projected Returns

The following table (Figure 1) shows the 20 year total returns for the major asset classes available to Australian investors. It also includes a reference to the average inflation rate over the same period. For example, Australian Shares returned an average of 9% p.a. but after accounting for inflation, the return was 6.5%. But let us just focus on the nominal returns as that’s what everyone looks at when they consider how their investments have done.


Figure 1: 20 Year Historical Returns

Source: Lonsec



Any investor would have been happy with these returns, whether it be via a portfolio holding only Australian shares, or a diversified portfolio with exposure to all the asset classes. Of course, these average returns don’t show or provide insight into the volatility of returns. There were many “bad years” over the last 20 years, but this discussion is about longer-term numbers.

The next table (Figure 2) shows 10-year projected returns for the same assets. And, as if almost to script, the growth assets (shares and property) are projected to return similar numbers. But defensive assets (cash and fixed interest) are projected to return substantially less.


Figures 2: 10 Year Projected Asset Class Returns

Source: Farrelly’s


There is absolutely no guarantee with any predicted returns. The only guaranteed return possible is a term deposit (or a guaranteed annuity which offers a similar return). But, history has shown long-term predictions tend to be more accurate than short-term ones, so I am happy to work on these numbers to provide some level of guidance to clients.


The problem is obvious

If the above projections play out, any investor with a diversified portfolio holding a decent amount of defensive assets (which is always wise) can expect portfolio returns to be lower than they have been for the last 20 years.


This is where the harsh reality starts to kick in.

This fundamental shift to a lower interest, and hence lower-return world, will dramatically alter how retirees need to consider funding their lifestyle.


Reality Bites

Lower returns mean two things:

  1. If you are already retired, you will most likely be spending more than your portfolio can earn, no matter how much risk you take. This means you will draw down on your capital quicker than originally planned.
  2. If you are still working, it will be harder, and will take longer to achieve whatever “magic number” has been set for a comfortable retirement.


After working with retired clients for over 15 years, I am now starting to see the above dawning on them. As their spending has gradually increased, portfolio values are declining. Hence, each year the return needed to match the drawings is getting higher, and in most cases will simply not be achievable.



This article is the opinion of the writer and does not consider the circumstances of any individual. This document has been prepared by Peter Keogh (Authorised Representative No. 253538 of Paragem Pty Ltd AFSL 297276) and is intended to be a general overview of the subject matter. The document is not intended to be comprehensive and should not be relied upon as such. We have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained in this document. No responsibility is accepted by Peter Keogh, Paragem or its officers.





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