Produced in partnership with Generation Life.
One of the biggest buzzwords of the past few years is resilience, according to ChatGPT.
Commonly used in the context of adolescent mental health and wellness, resilience is the capacity to withstand or recover quickly from difficulties.
But it isn’t only important for children and individuals. Businesses, financial institutions, and economies also need resilience.
When it comes to financial markets, the focus on resilience has intensified in recent years, sparked by the Covid-19 pandemic and fanned by rising inflation, ongoing global conflicts and geopolitical tensions.
In April, following the US Administration’s Liberation Day announcements and tariffs, the Reserve Bank of Australia issued a statement emphasising the “high level of resilience” of Australia’s financial system while urging financial institutions “to display ongoing vigilance, including with regard to operational risk”.
In addition to operational resilience, which is the ability to continue delivering critical products and services during shocks like cyberattacks, natural disasters and system outages, the RBA heralded the importance of financial resilience through actions like buying quality assets, diversification, prudent lending standards, and adequate liquidity buffers.
While the RBA’s statement is directed at financial institutions, including superannuation and pension funds, there are many messages for individual investors too, particularly wealth accumulators and pre-retirees.
Over the next decade, more than 2.5 million Australians –equivalent to about 685 people per day – are expected to retire, according to Treasury.
Between now and then, their focus may be on paying off debt and tipping as much into superannuation as possible but that alone may not be enough to create financial resilience, given the long list of factors beyond anyone’s control including markets, interest rates, inflation, longevity and legislative and regulatory changes.
As highlighted by the RBA’s letter, resilience is multi-faceted. For financial institutions, it encompasses planning, investment, risk management, reserves, and trusted third-party relationships.
For individuals, there are a number of things that can be done to proactively build financial resilience, starting with seeking professional advice.
Advisers can assist clients to navigate Australia’s complex, progressively changing super environment, manage financial risks, and develop income strategies that align with their expenditure needs.
Research conducted by Generation Life in 2024 found that advised pre-retirees are more assured in their understanding of the impact of inflation and certain envisioned superannuation concession reforms (46 per cent of the advised understand inflation well compared to 23 per cent of the unadvised, and 24 per cent versus 13 per cent for the envisioned superannuation concession reforms). They are also three times more likely to view saving for a happy retirement as a very achievable goal, according to research from Generation Life.
Individuals should also try and build assets and income outside super to reinforce their retirement plans.
After all, superannuation is just one of five major tax structures for building wealth, alongside personal investments, investment bonds, discretionary family trusts, and investment companies.
Life insurance, including income protection, trauma and total and permanent disability (TPD), can also play a role by providing financial protection to individuals and their loved ones. Even the most robust, well-thought-out plans can be derailed by the unexpected death of a partner or a health set back, which is why a common advice strategy is to hold life insurance both inside and outside superannuation for adequate cover.
Yet, there’s often less attention on growing non-super assets, despite evidence that alternative structures can be valuable for building wealth.
Furthermore, investments outside super, like investment bonds, can be accessed anytime and easily transferred, enhancing the ability of advisers and their clients to plan for the future, including for intergenerational transfers of wealth.
No silver bullet
While super remains the most tax-effective way to save for retirement, 80 per cent of men and 90 per cent of women have none left by the time they approach life expectancy age, according to the research from the Super Members Council.
Conflicting research by the Financial Services Council, conducted by NMG Consulting, claims that retirees are withdrawing 17 per cent less of their capital than optimal and many die with sizeable superannuation balances.
A key reason for this, according to the FSC, is because superannuation has been seen as a savings pool that is not meant to be exhausted. They also lack the confidence to spend in retirement, highlighting the potential need for policy reform to “encourage higher consumption of capital”.
Whichever view you subscribe to, it is clear that superannuation is not necessarily the silver bullet for building wealth, income and confidence in retirement.
To enhance the probability of more Australians achieving their retirement dreams, there must be a stronger focus and more education around the alternative structures available.
Investment bonds offer liquidity, tax effectiveness, and behavioural resilience. These are qualities that can complement super in helping Australians stay invested through uncertainty. These qualities are highly valued by investors seeking simplicity and clarity in an unpredictable economic, geopolitical and policy environment. With investment bonds, there are no contribution caps, no preservation rules and no shifting tax thresholds.
Not only do they potentially meet the needs of retirees, but they may also be suitable for wealth accumulators including high-income earners and beneficiaries of intergenerational wealth. The strength and appeal of building wealth outside super is that it can serve many different purposes, giving investors greater choice, flexibility, and control.
True financial resilience isn’t about avoiding volatility; it’s about building a wealth plan that uses structures that withstands change.
Financial advisers can play a vital role in helping investors identify and access the best solutions, and the combination of structures for their current and future needs.
Felipe Araujo is chief executive of Generation Life.
