Investing During Retirement
Summary: Successful retirement investing in 2026 involves moving away from pure safety (cash) toward a bucketed approach. By keeping 2–3 years of cash for immediate needs and the remainder in growth assets like shares, you can survive market crashes and cost of living fluctuations while ensuring your money outpaces inflation over a 30-year retirement.
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Introduction
For decades, the investment journey for Australians was simple: grow your super as large as possible during your working years, then move it all into a conservative bank account once you retire.
In 2026, that strategy is officially obsolete. With Australians now living into their late 80s and 90s, a retirement finish line at age 60 or 67 often means funding another 30 years of life. Investing during retirement has become just as critical as investing for retirement.
This article explores how to balance the need for immediate income with the long-term growth required to outpace inflation in the Australian economy.
Longevity vs. Volatility
The fundamental challenge of retirement investing is the tug-of-war between two competing risks:
- Volatility Risk: The fear that your balance will drop 20% in a single year because of a market crash.
- Longevity Risk: The fear that you will run out of money because your investments were too safe and didn't grow enough to cover rising costs.
Many retirees are finding that being too safe (holding 100% cash) is the riskier move. With the cost of essential services like healthcare and electricity rising faster than the general Consumer Price Index (CPI), you need a portion of your portfolio in growth assets like shares or property to maintain your purchasing power.
3-Bucket Strategy
To manage the anxiety of market ups and downs, financial advisers like James Hayes now use the Bucket Strategy. This approach separates your money based on when you need to spend it.
| Bucket | Time Horizon | Investment Types | Purpose |
|---|---|---|---|
| Bucket 1: Cash | 0–3 Years | High-interest savings, Term Deposits | Covers immediate bills and ensures you never have to sell shares during a market crash. |
| Bucket 2: Income | 3–7 Years | Bonds, Hybrids, Annuities, High-dividend ETFs | Provides steady returns slightly above inflation to refill Bucket 1. |
| Bucket 3: Growth | 7+ Years | Australian/International Shares, Property | Designed to grow over decades to ensure you don't run out of money at age 90. |
Tip: When the share market performs well (a bull market), you harvest gains from Bucket 3 to refill Buckets 1 and 2. When markets are down (a bear market), you leave Bucket 3 untouched and live off your cash in Bucket 1 until the market recovers.
Beware of Sequence of Returns Risk
One of the most dangerous traps for new retirees is Sequence of Returns Risk. This occurs when the market crashes in the very first few years of your retirement.
If you start with $800,000 and the market drops 15% in Year 1 while you are also withdrawing 5% for living expenses, your balance is hit twice. It is much harder for a portfolio to recover from losses when you are actively taking money out of it.
How to combat this:
- Build a Cash Buffer: Ensure you enter retirement with at least 2 years of living expenses in cash (Bucket 1).
- Flexible Drawdowns: If the market has a bad year, consider reducing your voluntary super withdrawals to the legal minimum for that year to preserve capital.
Tax-Effective Investing
In Australia, the Superannuation Pension Phase remains the most tax-effective place to hold your investments.
- 0% Tax: Once you move your super into an Account-Based Pension (ABP), the investment earnings (interest, dividends, and capital gains) are generally tax-free.
- Franking Credits: For retirees holding Australian shares, franking credits are cash in the bank. Since the pension fund pays 0% tax, the ATO often refunds the full 30% company tax paid on dividends directly into your super account.
Division 296 Update: As of July 1, 2026, a new tax rate of 30% applies to earnings on super balances exceeding $3 million. If you are in this category, it may be worth discussing investment bonds or family trusts with your adviser as alternative tax-effective vehicles.
Asset Classes for Retirees
Retirement investing is not confined to shares and cash Modern retirees are using a wider variety of tools:
- Yield-Maximising ETFs: New covered call ETFs (like UMAX or JEPI) are popular in 2026 for generating higher monthly income from shares with lower volatility.
- Private Credit: With interest rates remaining stable, some retirees are moving a small portion of their defensive assets into private credit for higher yields than traditional bank bonds.
- Lifetime Annuities: These act like a private pension, providing a guaranteed income for life, regardless of how long you live or how the market performs.
The Psychological Component
Investing in retirement is 20% math and 80% temperament. It is easy to say you have a long-term view when markets are green. It is much harder when your $1 million balance becomes $850,000 in a month.
- Avoid the Daily Check: Don't check your super balance daily. In retirement, your focus should be on income (cash flow), not just the capital value of the portfolio.
- Focus on Dividend, Not Price: If a company you own (like CBA or Wesfarmers) continues to pay its dividend, the fact that its share price dropped 5% today doesn't affect your ability to buy groceries.
Conclusion
Investing during retirement in Australia requires a shift from getting rich to staying rich. By using a bucketing strategy, protecting yourself against sequence-of-returns risk, and leveraging the 0% tax environment of the pension phase, you can build a portfolio that provides the income you need. Book a complimentary 15-minute call with James Hayes to get started with your retirement investing strategy.
FAQs
What is a safe withdrawal rate in 2026?
While the 4% rule was the historical benchmark, a flexible rate between 4% and 5% is currently sensible. If your portfolio is performing well, you can take more; if the market dips, dropping back to the government-mandated minimums (e.g., 4% for those aged 65–74) protects your capital.
Should I still hold international shares in retirement?
Yes. While Australian shares offer great franking credits, they are heavily weighted toward banks and mining. International shares (often accessed via ETFs) provide exposure to technology and healthcare sectors that don't exist in Australia, offering vital diversification and growth to combat inflation.
How often should I rebalance my retirement buckets?
Most retirees should rebalance once a year or after a significant market movement (e.g., a 10% gain). If Bucket 3 (Growth) has performed exceptionally well, sell some gains to refill Bucket 1 (Cash). This disciplined sell-high approach ensures you always have a safety net.
Disclaimer
The information in this article is provided as a general guide only. It does not constitute personal financial advice and should not be relied upon as such. Readers should seek advice from a licensed financial adviser before making any financial decisions. James Hayes and his associated entities accept no responsibility or liability for any loss, damage, or action taken in reliance on the information contained in this article. Links to third-party websites are provided for reference purposes only. We do not endorse or guarantee the accuracy of their content.