More sound, less sexy: How to approach investing in retirement

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As someone with a 30th birthday rapidly (too rapidly) approaching, I’ve started to find myself slipping into a few “back in my day” sorts of discussions. You know the type: remember when you could get a bag of lollies for $1, this street used to have a speed limit of 100, how good was MySpace, rabble rabble rabble, etc.

But while change is hard, with age comes wisdom, and what may have seemed exciting when we were young can appear scary or risky as we get older, a perspective that also applies to investing (flawless segue).

If you’re contemplating retirement in the not-too-distant future, it’s important to make sure your finances are in order.Credit: Michael Howard

Common wisdom among investment professionals is that the younger you are, the riskier you can afford your investments to be. New workers with low super balances will often crank their investment allocations to riskier high-growth options, as they have a longer time span to ride out the highs and lows of the market.

What’s the problem?

However, once you approach retirement, perspectives tend to shift. You’re older now, with less life ahead of you (sorry), so your investments need to be more sound and less sexy. However, it’s also a time of life when many people have more money than ever before, so allocating it properly can be daunting.

What you can do about it

If you’re in or nearing retirement, and wondering how to allocate your investments, read on:

• What happens once you retire: Once you hit preservation age (60 for most of us), you can access your superannuation, either as a lump sum or as a regular payment, by moving your nest egg from an accumulation account to a pension account (on which you pay zero tax). At this time, people often opt to re-jig their investments, re-allocating their balance to different assets in an effort to best preserve their balance. Often this is done within your super fund, but you can also withdraw a lump sum and invest it personally as you like. It’s your money!

• Determine your risk profile: When you sit down to nut this out, the first thing you need to work out is how much risk you’re willing to accept, says Lindzi Caputo, wealth management director at HLB Mann Judd. Think about how comfortable you’d be with market volatility, and how long your investment timeframe is likely to be. “With people living longer, the number of years Australians spend in retirement is increasing, meaning the investment portfolio of a super account needs to last at least their lifetime, with many wishing to leave some wealth as a legacy to the next generation,” Caputo says. For example, investing in something like equities requires a time frame of at least five years to absorb any potential volatility.

• Consider your costs: Another important consideration is how much you’ll need for living costs – if you’re not earning an income any more, your nest egg is all you have (perhaps supplemented by the age pension). Caputo says this is a key factor when planning your investment allocations. “For instance, if 5 per cent will be withdrawn each year for the next 20 to 30 years, the portfolio would need to generate an average long-term return of 7-8 per cent per annum if long-term inflation runs at 2-3 per cent, if the aim is to preserve the capital invested,” she says. “Achieving a higher return would require a larger allocation to growth assets than defensive assets.”

• Diversify: There can be a perception that once you get to retirement, you should pile your money into extremely low-risk, defensive assets such as cash, gold or bonds and leave it at that. But diversification is just as important in retirement as it was during your working years, so keeping your assets spread out is key. This is where ETFs can be helpful for those managing their own money.

• Don’t bank on property: Finally, I know as a country we have a love affair with residential property investment, but in retirement it can be a dud option compared to other investments, says Caputo. A $2 million residential property may produce an average rental yield of $60,000, before costs, where a good diversified portfolio could return $90,000 a year, after costs. “While residential property can provide attractive capital growth over the long term, the rental yield is typically low, and it’s not possible to sell down portions to provide cashflow,” Caputo says. “While this may be OK during wealth building years when employment or business income is meeting living costs, it can create cashflow problems in retirement.”

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.