How to protect against volatility in retirement

While a volatile market allows investors who are still working and saving to take advantage of dollar cost averaging, it can create problems for retirees, says Richard Dinham, Fidelity International's head of client solutions and retirement.

"If you're taking regular income as markets are falling, you don't get the full benefit of the recovery, so there is a permanent loss of capital," he says.

People nearing retirement, or in the early stages, are highly vulnerable to what is known as sequencing risk, or switching from saving to drawing income at the worst time.

Instead of being able to wait out market falls, they're faced with the prospect of selling investments at low prices to fund their income.

Genene Wilson, principal adviser at Finesse, says many retirees have already been drawing down more of their capital to make up for low returns from interest rates, which increases their sequencing risk.

"It will take time for things to pick up even with interest rates rising," she says. "And we know that the more you draw down in the early years of retirement, the worse off you are in the later years."

Financial planner Renato Manias says if you are nearing retirement, you should still be trying to put any spare savings into super to maximise your chances of a decent income when you stop work.

"Ideally, if you're retired or nearing retirement, you should already have been derisking because you're relying on your super to cover your cost of living,' he says. "If that hasn't happened, I'd suggest slowly derisking rather than selling all your shares now. Do it over the next one, two or three years."

Mano Mohankumar, senior investment research manager at Chant West, says an increasing number of super fund members are now invested in "lifecycle" products where they are progressively "derisked" as they get older and near retirement.

For example, Chant West's figures show members born in the 1970s to 1990s typically have around 90%   of their super invested in growth assets.

That falls to around 76% for people born in the 1960s, 53% for those born in the 1950s and 46% for those born in the 1940s.

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