Confidence to spend: why retirement planning is about more than investment performance

The greatest challenge in retirement is not necessarily building wealth. It is having the confidence to spend it. Alongside this is another key measure squarely related to the fact that clients do not spend gross investment returns. They spend what remains after tax and fees.

The Australian financial advice community is adept at modelling pre-tax investment returns, calculating sustainable drawdown rates, and estimating the probability that a client's savings will last throughout retirement. But a much more challenging task is giving retirees confidence that they can spend the wealth they have accumulated without compromising future security.

You may have heard this challenge described by its acronym, FORO - fear of running out. Catchy label, but it is a behavioural reality many advisers see every day. Clients may have accumulated sufficient assets to fund a comfortable retirement yet remain reluctant to draw on their savings because they do not know how long those savings need to last.

The result can be retirement that is unnecessarily constrained, with clients underspending despite having the financial capacity to enjoy the lifestyle they worked hard to build.

From a structural perspective, the account-based pension remains a foundation of many retirement strategies. It provides flexibility, investment choice, access to capital and the ability to adjust income as circumstances change. These are valuable structural or technical features that allow advisers to tailor retirement income to each client's evolving needs.

Yet, structural flexibility alone does not always solve FORO.

Unlike a salary, an account-based pension draws income from a retirement pool of capital. During periods of market volatility, retirees may see that balance fluctuate in real time. Even if a portfolio remains appropriate and the long-term strategy is unchanged, declining account balances can reinforce a perception that the 'money is running out'. For a retiree, that uncertainty translates into reduced spending, even where the financial plan suggests they can afford to spend more.

It is at this point that retirement advice becomes more than just investment performance. It becomes about constructing an income strategy that balances flexibility with certainty. And from certainty, the confidence to spend.

For clients, that may involve combining an account-based pension with an appropriate lifetime-income component. Rather than viewing these approaches as competing alternatives, advisers can use them as complementary parts of a broader retirement income strategy.

An account-based pension can continue to provide liquidity, discretionary spending, and access to capital. A lifetime-income component can help fund essential living expenses and transfer some longevity risk away from retirees by providing an income stream that continues for life. Payment levels may vary according to market performance or product design, but the income stream itself is designed to continue for as long as the client lives.

By supporting core expenditure with lifetime income, clients may feel more comfortable drawing on the flexible portion of their portfolio to fund travel, lifestyle goals, and other discretionary spending. In other words, certainty around essential annual expense amounts being covered can create greater confidence to spend elsewhere and plan for future wealth transfers.

The objective is not necessarily to maximise the amount allocated to any single retirement solution, but to determine the right balance for each client's circumstances, considering upcoming liquidity needs, access to capital, estate-planning preferences, age and life expectancy, other income sources, market exposure, product flexibility terms, and tolerance for income variability.

One practical approach by advisers is to separate retirement spending into four categories: essential recurring expenditure; discretionary lifestyle spending; contingency and healthcare reserves; and capital their clients specifically wants to preserve. The advisers can then consider which expenses require greater income certainty and which should remain supported by flexible capital.

Is after-tax and fees a forgotten element?

Alongside flexibility and certainty, sits a third consideration that demands our greater attention: investment efficiency. The 2026 Federal Budget has put the tax treatment of retirement investments back under the microscope, raising a simple question: which structure leaves clients with the most income after tax?

Clients do not spend gross investment returns. They spend what remains after tax and fees. Retirement is not funded from league tables or performance charts; it is preferably funded from the income clients' capital can sustainably produce.

After-tax outcomes are also an important indicator of practical adviser value. I am not suggesting advisers must become tax specialists, and tax should not override risk, diversification, or suitability. But unnecessary tax leakage must be considered with the same discipline as fees, investment performance, and portfolio risk. Tax efficiency may not displace those considerations, but can sit alongside them as part of a more complete assessment of clients' outcomes.

In retirement planning, it is important to control what can be controlled. And yes, advisers cannot control markets or predict how long a client will live. But they can influence how a portfolio is structured, how unnecessary fees and tax drag are managed, and how capital is converted into income.

For eligible clients, structuring retirement assets in the most appropriate tax environment for them can mean more investment remains available to support future income needs rather than being lost to unnecessary tax. Over a retirement that may span 25 or 30 years, even relatively small improvements in after-tax outcomes can materially increase the income available to fund clients' lifestyles.

Retirement therefore needs a broader scorecard. Asset performance remains important, but success should also be measured by how much of the return clients retain after tax and fees, how effectively those savings are converted into income, and whether the strategy gives clients confidence to spend appropriately.

Advisers are not simply managing investment portfolios; they are helping clients convert accumulated wealth into sustainable lifetime income.

The measure of success is whether a retirement strategy provides sufficient flexibility for changing circumstances, enough certainty to reduce FORO - the fear of running out, and the efficiency for investment returns to reach the clients' pockets efficiently after tax and fees.

Helping retirees achieve spending confidence is one of the most valuable contributions financial advisers can make.