Andrea Theouli, Manager, Multi-Asset, Lonsec Research and Ratings
Executive Summary
As Australia’s superannuation system matures, the challenges of sequencing and longevity risk are reshaping how portfolios are designed, assessed and communicated in retirement. Traditional accumulation frameworks, typically built around return and volatility, are not sufficient once members start drawing an income. Instead, portfolio design should be focused on income sustainability, capital resilience and time horizon management.
Regulators are lifting expectations too. ASIC’s Report 818 – From superficial to super engaged calls for clearer, more practical communication on how retirement risks are managed, while the Retirement Income Covenant has pushed trustees to consider income stability, flexibility and duration in tandem.
The expanding multi-asset toolkit – from lifecycle options and income funds to hybrid annuities and investment-linked products – offers more ways to balance growth, defensiveness, liquidity and behavioural comfort. The task is to understand how these solutions interact and where each one fits within a client’s broader retirement strategy. Ultimately, success will be measured not just by returns, but by the portfolio’s ability to sustain income and manage uncertainty over a multi-decade horizon.
Rethinking Portfolio Design Beyond Accumulation
Portfolio construction frameworks are typically designed around the single goal of maximising returns while controlling volatility. That approach works in the accumulation phase, but it starts to break down once an income starts being drawn. In retirement, two risks become far more influential on outcomes: sequencing risk[1] and longevity risk[2].
Neither concept is new, but their interaction is reshaping how multi-asset portfolios are designed and evaluated. As the superannuation system matures and the proportion of retirees grows, the need to manage these risks has become more important. Regulators are also raising the bar. ASIC’s Report 818 urges trustees and product issuers to move beyond generic messaging and provide members with clear, practical information about how retirement risks are being managed. This includes communicating not just “what” a product does but “why” it’s structured that way.
Sequencing Risk
The order in which returns occur can make or break retirement outcomes. Two portfolios with identical average returns can deliver dramatically different results if losses occur early in the drawdown phase. Research from the Conexus Institute (2024) and the Actuaries Institute (2025) shows that even moderate volatility can accelerate capital depletion when withdrawals are constant.
The industry has learned this lesson in real time. Many balanced super options experienced two consecutive negative years in 2022–23 (APRA, 2024), prompting renewed focus on the “retirement risk zone” being roughly five years either side of retirement. Some lifecycle funds have responded by reducing growth exposure earlier, while others use cashflow staging or smoothing overlays to cushion drawdowns.
ASIC’s Report 818 reinforces the need for transparent communication noting that trustees and managers should explain how sequencing risk is addressed in product design, rather than simply warning members it exists. Advisers too can add value by helping clients understand how features like defensive sleeves or staged drawdown strategies protect capital during vulnerable periods.
Longevity Risk
Alongside sequencing, longevity risk is an equally critical and growing challenge. Australians retiring today face a median retirement horizon exceeding 25 years, with joint-life expectancy for couples approaching 30 years according to ABS data from 2024. That longer time frame amplifies the compounding impact of asset allocation decisions.
The Retirement Income Covenant requires trustees to support members in managing longevity risk, alongside income stability and flexibility. Market responses include deferred income streams, annuities, and investment-linked structures that combine growth potential with some capital protection. Investment bonds are also regaining relevance, offering tax efficiency, estate-planning flexibility and behavioural comfort.
ASIC’s findings again highlight the importance of clear explanation. Members and advisers alike need to understand what role these products play, the trade-offs they involve (e.g. reduced liquidity in exchange for certainty), and how they may fit within a broader portfolio context.
A Broader Multi-Asset Toolkit
The retirement investment landscape is becoming more diverse, with solutions designed to blend income, growth, defensiveness and flexibility in new ways. Examples include:
- Lifecycle super options that taper growth exposures as members approach retirement.
- Multi-asset income funds targeting stable distributions.
- Annuity-backed solutions that integrate guaranteed income within market-linked exposure.
- SMA and ETF-based models offering transparency and control.
The focus is not necessarily on creating new products, but on designing portfolios that better reflect the realities of retirement. This involves balancing income needs, capital preservation and liquidity, while also accounting for spending patterns, behavioural factors and regulatory expectations.
A wider range of solutions gives advisers and trustees more tools to work with. It allows them to target sequencing and longevity risk more precisely; design portfolios suited to different retirement timeframes and adjust as circumstances change. Understanding how these components work together and using them effectively is key to delivering sustainable income and meeting the expectations of retirees and regulators.
Trade-offs and Practical Considerations
Designing retirement portfolios is ultimately an exercise in balancing trade-offs. Strategies that aim to reduce sequencing risk can help protect capital in the early years of drawdown, but they may also dampen long-term returns. Efforts to address longevity risk, including deferred income streams and annuities, provide valuable stability but can come at the cost of flexibility and liquidity.
Liquidity itself is another consideration. Layered portfolios that combine cash, income and growth exposures can offer accessible capital while preserving diversification but getting that balance right requires careful calibration. Transparency is often a key differentiator too: listed or SMA-based income models are easier for advisers and clients to monitor, though they typically rely on more liquid assets and therefore limit the role of illiquid assets (where suitable).
Recognising and clearly communicating these trade-offs is essential to ensuring members and clients understand how their portfolio is constructed to manage retirement risks — and where compromises have been made.
Measuring Success Beyond Return
Performance measurement in retirement is shifting. Traditional metrics like total return and volatility become less meaningful once members begin drawing an income. Instead, success is increasingly assessed through outcome-based measures that better reflect the realities of the decumulation phase. Commonly referenced in industry research and regulatory guidance, these include:
- Sustainability of income – the likelihood that withdrawals can be maintained over the desired horizon.
- Drawdown consistency – the frequency and scale of income adjustments over time.
- Liquidity coverage – the number of years of expected withdrawals that can be met without selling growth assets.
- Longevity alignment – how far income streams extend beyond average life expectancy.
While benchmarks remain inconsistent, the direction of travel is clear: retirement success is defined less by headline returns and more by the portfolio’s ability to deliver sustainable income, capital resilience and confidence over time.
Conclusion: From Accumulation to Income Sustainability
As Australia’s retirement system matures, sequencing and longevity risk are moving to the centre of product design and advice conversations. Multi-asset portfolios are evolving from growth engines into income sustainability frameworks, combining liquidity, diversification and behavioural comfort within regulatory expectations for transparency and member understanding.
Rather than a single “right” solution, the market now offers a continuum, from diversified income funds to longevity-linked annuities. The challenge for advisers is to understand how each building block interacts, and where it best fits on the spectrum of retiree needs. In that context, as ASIC’s Report 818 makes clear, more transparent and practical communication is not only good practice, but also fundamental to delivering better retirement outcomes.
Key Takeaways
- Known risks, greater impact: Sequencing and longevity have long been understood, but they now play a more decisive role in shaping retirement outcomes.
- Regulators are raising the bar: Clearer communication and better member outcomes are core expectations.
- More tools, more flexibility: Lifecycle funds, income solutions and annuities expand portfolio design options.
- Trade-offs matter: Balancing income, liquidity, risk and cost requires careful judgement and clear explanation.
- Redefining success: Sustainable income, consistent drawdowns and longevity alignment are the key performance benchmarks.
[1] Sequencing risk is the danger that the timing of withdrawals from a retirement account will negatively impact the overall rate of return available to the investor – Investopedia
[2] Longevity risk is the risk that people live longer than expected, meaning retirement savings or income streams need to last for more years than originally planned. – Investopedia
References
- Conexus Institute (2024) – Retirement Explainer Series Sequencing Risk Edition 10
- Actuaries Institute (2025) – Sequencing Risk and Asset Allocation
- ASIC (2025) – Report 818: From superficial to super engaged: Better practices for trustee retirement communications
- ASIC (2024) – Report 784: Industry Update Pulse check on retirement income covenant Implementation
- APRA (2025) – 2025 superannuation performance test results, Previous performance test results
- Treasury (2021) – Retirement Income Covenant Position Paper
- Australian Bureau of Statistics (ABS) – Life Tables
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