Rethinking retirement - why playing it too safe could cost you: Nick Stewart

Many conservative retirement investors are barely keeping pace with rising costs, writes Nick Stewart.

Nick Stewart is a financial adviser and CEO at Stewart Group, a Hawke’s Bay-based financial planning and advisory firm.

OPINION

Retirement investing in New Zealand has always favoured playing it safe. The conventional wisdom was clear: At 65, switch to conservative investments to protect your nest egg.

But when it comes to applying this traditional view to today’s reality, there’s a sticking point - we’re living significantly longer than before, gaining roughly two years of life expectancy every decade. For a healthy 65-year-old Kiwi today, living into their 90s isn’t only possible; it’s increasingly probable.

This dramatic shift in longevity demands a complete rethink of retirement investing. We’re no longer planning for 10-15 years of retirement. We’re looking at 25-30 years, or more.

This ‘third age’ of life (as my late friend and retirement guru Barry LaValley called it) requires a fundamentally different investment approach than what might have worked for our parents’ generation.

Consider this scenario: A 65-year-old Kiwi couple retires with $500,000 in savings, plus their mortgage-free home and NZ Superannuation. Following traditional advice, they move most investments into term deposits and conservative funds.

It seems prudent – until you factor in inflation, increasing living costs, and the reality of a 30-year retirement horizon.

Even with today’s improved term deposit rates around 5% ... after tax and inflation, many conservative investors are barely keeping pace with rising costs. This means your purchasing power could be slowly eroding, right when you need it most.

The past decade has delivered a masterclass in why conservative strategies might not be as “safe” as they seem. Despite multiple market downturns (including a 31% drop in 2020), high inflation rates, and significant interest rate fluctuations, well-diversified and growth-oriented portfolios not only survived but thrived. Research shows that investors who maintained a higher allocation to growth assets generally ended up with significantly more wealth than those who played it “safe”.

Kiwi retirees have a unique advantage that could allow them to take a more growth-oriented approach: NZ Superannuation. This universal pension provides a reliable income base that many other countries don’t offer. Think of it as your “conservative” allocation – it’s essentially a government-backed bond, paying you fortnightly for life.

This system means you may be able to take more investment risk with your savings than you initially thought. The Super payments can help cover basic living expenses, while your investment portfolio can focus on growing to fund your lifestyle goals and protect against inflation.

Rather than going all-in on conservative investments, consider this three-part approach:

1. Create a Cash Buffer

Keep 1-2 years of expected withdrawals in cash and short-term fixed interest. This provides security and means you won’t be forced to sell growth assets during market downturns.

2. Include Growth for the Long Game

Consider keeping a significant portion of your remaining portfolio in growth assets. This might feel uncomfortable but remember – you’re not just investing for the day you retire, but for potentially decades beyond.

3. Choose Smart Diversification

Spread your growth investments across NZ shares, international shares, listed commercial property, and a mix of small, value and growth companies.

For example, let’s say you have $500k in retirement savings. Instead of the traditional conservative split, you might consider:

· $75,000 (15%) in cash instruments for immediate needs

· $125,000 (25%) in high-quality bonds for medium-term stability

· $300,000 (60%) in a diversified mix of growth assets

This exposes you to more risk than the traditional approach but has a higher growth potential, and with smart diversification, won’t be as subject to the whims of local or global markets.

There’s another angle to getting your ducks in a row that people don’t often like to think about: The impact of cognitive decline.

An overlooked aspect of retirement planning is preparing for how our decision-making abilities might change as we age. Research shows that financial decision-making capability typically peaks in our 50s - yet many of us will need to manage our retirement portfolios well into our 80s or 90s.

This presents a critical challenge. The longer we live, the more complex our financial decisions become. Yet, our ability to make these decisions may decline just when we need it most.

Conditions like dementia, which affects around 10% of Kiwis over 65 and nearly one-third of those over 85, can severely impact our financial judgment long before we (or our families, in many cases) notice other symptoms.

It’s not just Kiwis at risk. For a global comparison, Britain has 2.38 million citizens with a cognitive impairment. We aren’t an outlier by any means.

This vulnerability makes independent financial advice crucial. A qualified adviser serves as a cognitive backup system, providing clear-headed analysis when our own judgment might be compromised. They can help protect against financial exploitation, and maintain investment discipline during market volatility.

The retirement landscape is changing dramatically. The real risk isn’t just that your portfolio might fall 20% in a market downturn – it’s that being too conservative might mean running out of money in your later years, or that cognitive decline might impact your decision-making when you’re most vulnerable.

For many Kiwi retirees, the path to a more secure retirement involves embracing appropriate levels of growth investment, building a robust yet flexible financial plan, and establishing a trusted relationship with an independent financial adviser early.

With NZ Super providing a stable base, a well-thought-out portfolio strategy, and professional guidance, you can build a retirement plan that doesn’t just preserve your wealth – but gives it the best chance to grow and support you throughout your retirement years.

Remember, retirement planning isn’t about eliminating all risk – it’s about managing the right risks, in the right way. Sometimes playing it too safe is the riskiest strategy of all - especially when you consider the decades of life (and the twists and turns it brings) that may lie ahead.