The Pension Phase: Why Risk Doesn’t Disappear When Tax Does

Reaching retirement age is a significant shift socially, emotionally and financially. A welcome change for many is that earnings in the retirement phase are tax free (subject to the transfer balance cap and your age being 60 or over), and you do not pay tax on your pension withdrawals.

While it might feel like you are home and hosed at retirement in terms of your finances and super balance, your risks are far from over. Now is not necessarily the time to be making big shifts in your investment strategy or removing risk entirely from your investments. Tax free is not the same as risk free.

Retirement comes with four specific challenges, which means balancing your investments for both growth and income. You may find in the early stages of retirement that your investments maintain similar levels of risk to how you were investing pre-retirement, when your super was in the accumulation phase.

In this article, I explore the unique challenges your portfolio need to weather in retirement and why risk may still be necessary, depending on your financial situation.

The Four (Horsemen) Risks of Retirement

1. Market Risk

Retirees often fear market losses in retirement. One large market downturn and your savings feel at risk, without employment income to rebuild them. On the flip side, avoiding higher-risk assets altogether can also prevent you from participating in market recoveries.

This fear can lead retirees to become overly conservative, prioritising capital preservation and income above all else. While your level of risk should shift as you age and your circumstances change, your investment decisions need to account for more than just market risk.

You can still manage market risk by considering your overall asset mix and taking a thoughtful approach to the types of growth assets you hold. For example, if you invest in equities, you may tilt towards companies known for consistent compounding rather than more speculative holdings with a higher risk of permanent capital loss. Smaller companies, in particular, tend to be more volatile than larger, established businesses.

2. Sequencing Risk

Closely related to market risk, sequencing risk refers to the timing of investment returns relative to your withdrawals. Ideally, your investment returns are strongest in the early years of retirement (the first five to ten years), when your balance is at its highest and has the greatest capacity to generate growth. Strong early returns can help offset pension withdrawals and leave a larger balance to absorb losses later.

If you experience poor returns early in retirement, rebuilding your balance can be difficult, as losses may be crystallised to fund withdrawals. This risk is another reason retirees are often drawn towards conservative investment options, although this approach does not necessarily solve the problem. In reality, the timing of retirement and market performance can be largely a matter of luck.

Some strategies retirees may consider to reduce sequencing risk include diversifying across asset classes and risk types, limiting spending to minimum pension payments during market downturns, delaying retirement, or re-entering the workforce on a part-time basis. These approaches can help smooth income and, in some cases, allow for additional contributions to superannuation during the accumulation phase.

3. Inflation Risk

No one is immune to inflation. In the past, retirees facing rising living costs have been forced to look for alternative ways to boost their income. For nearly two decades, interest rates sat at global lows, meaning traditional retiree favourites such as term deposits and other fixed income assets often failed to provide sufficient income.

From an income perspective, retirees have increasingly needed to consider assets with higher levels of risk, such as franked dividend-paying equities, or alternative strategies like private credit funds, which may offer higher yields in exchange for greater risk.

Looking at the broader impact on your balance can also be confronting. Even if inflation remains within the Reserve Bank of Australia’s target range of 2–3%, your super balance needs to grow by at least that amount simply to maintain its real value and sustain pension payments.

For a real-world example, Australian annual inflation, as measured by the Consumer Price Index, rose by 22.8% over the five years to 2025, equating to an average annual inflation rate of 4.2%.

Over the same period, an investment held purely in cash (using the S&P/ASX Bank Bill Index as a proxy) delivered an annualised return of 2.77%. A portfolio invested in government bonds (using the Bloomberg AusBond Government 0+ Year Index as a proxy) produced a negative return of –0.82% p.a.

By contrast, diversifying part of a portfolio into higher-risk assets such as equities may have helped mitigate the effects of inflation. The S&P/ASX 300 Index returned 9.80% p.a. over the five years to 31 December 2025, while the MSCI World ex-Australia Index returned 15.57% p.a. over the same period.

4. Longevity Risk

When reviewing your savings at the start of retirement, it can be easy to overlook the risk of running out of money. You don’t know how long you’ll live, and you could be retired a long time. After all, based on the average Australian life expectancy, a 60-year retiring today might expect to spend up to 27 years in retirement (depending on their gender). Remember too, that’s an average – with constant advances in medical care, you could find yourself healthy well into your 90s.

This uncertainty means your investment strategy must consider long-term growth alongside income and capital preservation. For some retirees, this results in a portfolio at the start of retirement that looks similar to their accumulation-phase investments, with a comparable mix of growth and defensive assets. This mix can then be adjusted gradually as they age.

Some retirees might also consider comprehensive income products for retirement (CIPRs) to help manage this risk, such as lifetime annuities or investment-linked annuities.

Investing in Retirement

Your superannuation does not automatically move from the accumulation phase into the pension phase. To access pension-phase benefits, you must establish an account-based pension with your chosen super fund and transfer superannuation into it. You do not need to transfer your entire balance at once, although many retirees choose to move most of their super to take advantage of the tax-free environment.

It is important to remember that earnings on investments retained in the accumulation phase remain taxable.

There is a transfer balance cap on the total balance you can hold in the pension phase. This is currently $2 million.

Depending on your super fund, investment options in the pension phase are often similar to those available during accumulation, including options such as High Growth, Balanced, or Conservative or Stable.

A high-growth option typically holds around 80–90% in growth assets, such as Australian and international shares, private equity, property and infrastructure, with the remaining 10–20% in defensive assets such as fixed interest, corporate and private credit, or cash. A balanced option may hold closer to 75% growth assets and 25% defensive assets.

Some super funds also adopt a retirement-specific approach to growth, focusing on higher-quality and less volatile assets. For example, equity exposure may favour infrastructure businesses with stable income streams rather than smaller, more speculative mining companies. Funds may also prioritise income-producing assets, including franked dividends, to better support retirees.

Your investment strategy may need to evolve over time to reflect your changing circumstances. While a reasonable level of growth may be appropriate in your 60s, by your 80s your focus may shift more towards capital preservation, depending on your balance, income needs and personal situation.

Risk is not always your Retirement Enemy

Retirement presents unique challenges. While tax-free earnings are attractive, they do not eliminate investment risk, nor do they mean your portfolio should only focus on the lowest-risk options.

Superannuation is often the longest-held investment Australians own, and the pension phase can span several decades. Balancing growth assets with defensive investments can help address inflation and longevity risks, while managing market volatility and sequencing risk.

As with the accumulation phase, retirement investing is not a set-and-forget exercise. As you age, it is important to regularly review and, where necessary, adjust both your investment strategy and pension withdrawals. Seeking advice from a financial adviser can help ensure your approach remains aligned with your financial needs and circumstances.

Disclaimer: This article is prepared by Sara Allen. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.