Retirement Risk: The SMILE Framework
As a Senior Financial Adviser, I recently came across a concept that I believe is worth sharing with our community of clients. Retirement planning is not just about accumulating wealth; it is about understanding the risks that can impact your lifestyle and confidence in later years. Australia is entering its largest wave of retirees, and the strategies we adopt today will determine whether those years are lived with security and enjoyment.
Despite headlines suggesting that $1.4 million is necessary for comfort, the Association of Superannuation Funds of Australia (ASFA) reports that 94% of retirees leave the workforce with less than $1 million in superannuation. For these individuals, the Age Pension and innovative income products are critical. John Manserra, director at Apex Advice, explains:
“I watch the finance shows and read the press which talks about how you need $1.4 million for a comfortable retirement… Yes, that might be the level for a self-funded retiree, but the reality is that not many people achieve that.”
This is why understanding the SMILE framework is so important. It identifies five key risks—Sequencing, Market, Inflation, Longevity, and Emotional.
The SMILE Framework: Five Key Risks
Ben Hillier, director of retirement at AMP, introduces the SMILE acronym as the foundation for retirement planning:
“Yes, it’s a cute acronym but we actually think it’s possible for more people to be happy in retirement.”
Sequencing Risk
This risk refers to the order of investment returns. Two retirees with identical balances can experience vastly different outcomes depending on market timing. Hillier warns:
“How can one ever know if they will retire in a bear or bull market? The outcomes of being on the wrong side of market sequencing can be cruel.”
Strategies such as diversification and a “bucketing approach” can help mitigate this risk by ensuring retirees do not sell assets during downturns.
Market Risk
Market volatility remains a concern, particularly in the “retirement risk zone”—the decade before and 15 years after retirement. Jason Teh, CIO at Vertium Asset Management, notes:
“Hope is not a strategy… Nobody likes to pay insurance for their house, and maybe you can get away with not paying insurance for 10 years but in that 11th year you get a cyclone coming through.”
Teh advocates for low-beta strategies to reduce exposure during market downturns.
Inflation Risk
While inflation has been subdued for decades, recent spikes remind retirees of its impact. Hillier highlights:
“Australian CPI inflation hit 7.8% in the December quarter of 2022… One ‘asset class’ which is inflation protected is the Age Pension, so increasing one’s eligibility for that is rolled gold inflation protection.”
Allocating to commodities and inflation-linked products can also help.
Longevity Risk
Australians are living longer, creating uncertainty about how long savings must last. Jennifer McSpadden from Brighter Super reports:
“Longevity risk is the number one risk for our members… The fear of running out of money is impacting member retirement confidence.”
Lifetime income streams and flexible spending strategies can help retirees enjoy peak years without eroding capital too quickly.
Emotional Risk
Retirement can be an emotional rollercoaster, leading to irrational decisions. Hillier observes:
“Some people are checking their account balances every second day, and they try and switch investments after market movements have already happened. That’s not healthy for their finances or their happiness.”
Education and guaranteed income products can provide peace of mind.
Innovative Solutions: Making Retirement Income Work Harder
One of the most powerful developments in retirement planning has been the introduction of retirement income stream (IRIS) products following legislative changes in 2017. These products are designed to do more than just provide a steady income—they can also improve Age Pension eligibility by reducing assessable assets. This dual benefit means retirees can stretch their savings further while securing additional government support. As Ben Hillier explains:
“This is a strategy which could potentially increase a person’s Age Pension by $10,000 a year.”
For many clients, this is a game-changer. It is not simply about adding another product to the mix; it is about creating a structure that balances guaranteed income with flexibility. Aaron Minney, head of retirement income research at Challenger, reinforces this point:
“Guaranteed income takes the longevity risk out of it and the market risk and the cost-of-living risk because it adjusts for inflation.”
These solutions provide confidence that essential expenses will always be covered, regardless of market conditions or lifespan. They also allow retirees to plan discretionary spending—such as travel or family support—without fear of running out of money.
Beyond the Super Balance: Why Income Matters More
A common misconception among retirees is that their superannuation balance alone determines their financial security. In reality, what matters most is the income that balance can generate when combined with other sources such as the Age Pension. Aaron Minney explains:
“Don’t worry about the number that you’ve got. You might have $500,000, and then you might get $25,000 with the Age Pension, so that is in the ballpark income of $50,000 a year.”
This shift in thinking—from lump sums to income streams—can dramatically improve confidence and decision-making. When clients understand how their assets translate into a reliable income, they are less likely to hoard capital unnecessarily and more likely to enjoy the lifestyle they have worked hard to achieve.
As advisers, our role is to help clients see the bigger picture: that retirement planning is not about preserving a static number, but about creating a dynamic income strategy that supports both security and enjoyment throughout life.
My Perspective on Regret Risk
From my experience as a Senior Financial Adviser, regret risk is one of the most underestimated aspects of retirement planning. Too often, I see retirees who have spent decades accumulating wealth only to leave most of it untouched. Ben Hillier’s observation that “around 90% of super balances are left unspent” should make us pause and reflect on what that means for quality of life. Those unspent funds could have supported more holidays, earlier retirement, better health care, or meaningful gifts to family when they needed it most.
Regret risk is not about reckless spending; it is about intentional enjoyment of the resources you have worked hard to build. Many clients fear consuming capital because they see their superannuation as a tank that must never run dry. This mindset often leads to missed opportunities and, ultimately, a sense of “I wish I had done more.” Early engagement with advice can change this narrative. By understanding income streams, leveraging relevant products, and planning for longevity, clients can spend 'confidently' without jeopardising their future security.
As advisers, our role is to help clients strike the right balance—preserving enough for later years while enabling them to live fully today. Australia’s retirement system, combined with professional advice and modern solutions, offers the tools to achieve this. The key is starting the conversation early and reframing retirement from fear of depletion to a life well lived.