“I’m getting close to retirement and have a mix of investments like stocks, bonds, and a bit of property. I want to make sure my portfolio is ready for when I stop working. How should I tweak my investments to make sure I’ve got a good balance and a steady income once I retire?"
-Question from Ethan in Armidale, NSW
Top answer provided by:
Jacky Ng
Hi Ethan
Thank you for your question.
Firstly, I'd like to extend my congratulations as you near your retirement. Approaching retirement age often entails adopting a balanced investment strategy that emphasises both growth (to combat inflation and manage longevity risks) and capital preservation.
From what you've mentioned, it seems you've already established a well-diversified portfolio that are invested across various asset classes. Here are some additional considerations you might find beneficial:
Assess your risk appetite. As retirement is just around the corner, it's prudent to consider scaling back your exposure to high-risk assets such as shares and property. This precautionary measure helps safeguard your portfolio against unforeseen events that may trigger substantial declines in equity markets.
-While adopting a more conservative investment strategy is commonly advised for retirees, it's crucial to evaluate whether this approach, characterised by lower growth potential, will still generate adequate income to sustain your ongoing living expenses. Balancing the need for capital preservation with the requirement for sufficient income is essential in crafting a retirement investment strategy that aligns with your financial goals and lifestyle needs.
Review the asset allocation of your funds. Adjust your asset allocation to reflect your changing investment goals and risk tolerance. As you approach retirement, you might consider shifting towards a more conservative asset allocation with a higher percentage of cash and bonds.
-You should consider allocating enough cash to cover 12 months' worth of living expenses without relying on liquidating your investments. This approach offers a buffer for unforeseen circumstances while allowing you to replenish the cash reserve through income generated from other investment options.
-In addition to the above, you should also consider establishing a short-term reserve or defensive portfolio predominantly composed of bonds or credit investments, spanning three to four years' worth of living expenses. Reflecting on events like the Global Financial Crisis of 2008, where the U.S. share market experienced a two-year decline, from top to bottom, followed by a three-year recovery, underscores the importance of having a robust financial cushion. Maintaining 3-5 years' worth of living expenses in your cash reserve and defensive portfolio can provide added security during market downturns.
-Consider allocating the remaining funds into a diversified portfolio of growth assets such as Australian shares, international shares, property, and/or infrastructure funds. Additionally, you can contemplate including unlisted private market funds like private equity or private debt to enhance performance of your portfolio. This diversified approach optimises the potential for long-term growth while spreading risk across different asset classes and investment opportunities.
Consider potential tax implications. Whilst tax considerations shouldn't hinder informed investment decisions, it's essential to be mindful of the tax implications, particularly as retirement nears. For instance, assess the tax implications of selling assets with significant capital gains after transitioning your superannuation from accumulation to pension phase upon retirement. It is worth noting that earnings and capital gains are tax-free in pension phase. Please note that this may not be applicable if your funds are held within a Master Trust structure.
Review your portfolio regularly. Regularly review and rebalance your portfolio to ensure it remains aligned with your investment objectives and risk tolerance. Rebalancing involves selling investments that have performed well and buying more of those that have underperformed and/or topping up your defensive assets to maintain your target asset allocation.
Lastly, I suggest that you consider consulting with a financial adviser who specialises in retirement planning. They can help you develop a customised investment strategy (as well as meeting your other needs) based on your individual financial situation, goals, and risk tolerance. Seeking professional advice can significantly safeguard your financial security, allowing you to prioritise the most important aspects of retirement, such as enjoying a comfortable lifestyle without the constant worry of your financial wellbeing!
Kind regards,
Jacky
While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.
Article by:
Comments0