“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:
Michael Marodi
Hi Ethan,
Thank you for your question. While it is a query that commonly comes up when talking to many pre-retirees, such as yourself, it rarely comes with a common solution. So as always, it is important to seek advice to determine which solution is right for you before deciding.
Most advisers would agree that as we approach and enter retirement, our focus tends to shift from building our wealth and growing our savings, to preserving our wealth and extending the longevity of our assets. Put simply: while you are working, you want your capital to grow. In retirement, you need your capital to last.
Again, this isn’t a hard and fast rule for everyone. Depending on the size and earning power of the investments you already have, your portfolio might be strong enough to produce enough income for your retirement without need any changes at all. For the purpose of this answer, I am going to assume that is not the case.
There are a few issues that I regularly see that cause concerns when we discuss the retirement investment mix. The first of these is liquidity, and it is a problem in many property-heavy portfolios. The message here is that the assets you held while saving for retirement might not work well for you when you are actually in retirement. Remember that when we are building our wealth and saving for retirement, we typically survive on the wages we bring in from our daily endeavours – going to work, running a business or so on. When we enter retirement, we are now relying on our assets to provide this income, and this might require selling or withdrawing from these assets on a regular basis. This is relatively easy when we are selling shares, or accessing cash in a bank account. You can’t sell off the bathroom of an investment property to pay yourself a weekly wage, for example. The same can also be true of term deposits or bonds where there is restricted access to your money. Before entering retirement, you should carefully consider the likelihood of needing to sell these assets to fund your income and possibly consider pulling the trigger on these redemptions sooner rather than later if they need to occur to avoid running into trouble down the track and selling in a panic.
The second (and arguably the biggest) issue facing most retirees is time. Time was your friend while you were working, when you had 20-30 years to earn an income, pay off the mortgage, build up your Superannuation or savings or share portfolio. Time might have also been good to you if your investments suffered while you were working, because you had time to keep working while these recovered. Time is not so friendly when you are in retirement and relying on your capital to survive. Depending on your age and health, you could live just as long in retirement as you worked before retirement! The risk is that if investment markets are not favourable, and your portfolio takes a hit during this journey, you might not have the time to ride out these fluctuations. This could result in needing to sell off some of your growth assets (shares, property etc.) at times when you really don’t want to, or when the value of these assets is the lowest. This can have devastating effects on the sustainability of your savings, so it is important to ensure you have a balance of investments that means if some parts of your portfolio suffer, you have other investments or sources to rely on for long enough to allow these to recover.
Inversely there can also be a risk to being too conservative. If the above worries you and you want to avoid the risk of your savings fluctuating in retirement, your only option is to go defensive. This means higher portions of cash, term deposits and bonds in your portfolio. These assets are generally perceived to be ‘safer’ in their nature, being that they don’t fluctuate or dramatically change in value. There is always a trade-off, and in this case, you will be trading-off the earning potential that growth assets provide for this security. There is a risk in being too conservative in this trade-off where your retirement savings are no longer generating enough income to fund your retirement long-term, and your capital depletes sooner than anticipated.
A wealth of products have been introduced in recent years to help combat these concerns. Some pay a guaranteed income for life for an upfront investment, where others will guarantee the security of part of your investments on approach to retirement so that negative market movements don’t cause your investments to fall. All of these have their own quirks and costs, so most can only be accessed through a financial professional and may or may not suit your needs depending on your scenario.
As you can see, there is a lot to consider when developing a retirement portfolio. There is also no perfect answer that will suit everyone. My best advice to you is to reach out to your local or trusted financial adviser, and have a conversation about your scenario.
In preparation for this meeting, consider this small exercise below:
-Do a budget and be honest about it. The goal isn’t to reduce your expenses but work out what you actually spend on a daily/weekly/monthly basis (e.g. $1,000 per week).
-Annualise this figure – work out what level of non-negotiable income you will need in retirement (e.g. $52,000 p.a.).
-Multiply this number 3-5 times. This will give you a good indication of the amount of defensive, liquid savings you might need if you were unable or unwilling to access your other investments for 3-5 years (e.g. $52,000 x 5 = $260,000).
-Remember that this number could be influenced by a great many things including the Age Pension, so it is important to refine this with your adviser’s oversight.
I hope this helps give you some further insight and some food for thought, and goes at least some of the way to answering your question!
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