I am yet to see anyone who isn’t daunted by the concept that they will no longer receive a salary and need to rely on income from investments. No matter how much money you have this is always a confronting time.
We specialise in setting up and managing your assets in retirement to ensure you don’t out live your money.
There are a number of key themes we focus on when preparing retirement income each of which is important to structure the correct mix of investments.
1. Sequencing Risk
Sequencing Risk is a fancy way of saying the risk of having to sell your investments in a down market.
To give you an example. Someone who invested their retirement savings just before the GFC would have a different experience to someone who had invested their retirement savings just after the GFC.
It took most markets around 3-4 years to recover from the GFC. When investing our clients in retirement we focus on having sufficient levels of income and cash so that they have 3-4 years worth of income where they will not need to sell assets.
In doing so it provides a buffer and allows the portfolio not to be sold at the bottom of the market.
What is also does is allow you as the investor not to have to open the paper or login every day and worry about what is occurring with your investments. You can relax knowing that the markets will recover and if you need to sell down to fund your income you can do so at a more optimum time.
2. Stepped Income Needs
Most people retire in their 60’s. We are living longer and healthier lives. As such many people retire with a bucket list. What this means is that in the first 5-10 years you might need additional income to tick off the bucket list.
Planning for this is important. As per above you want to make sure your income is mapped out so that you don’t need to sell your assets at the wrong time.
Naturally as you age there is less and less you can do and so your income requirements can reduce. Planning for this makes sure your income matches your expenses.
3. Asset Mix & Risk
One of the key things when you retire is sticking to your plan. Moving your investments based on what is happening at the time rarely works out well.
There are three issues at play here, firstly making sure you are diversified and not relying on one investment. Secondly making sure you have investments that are realisable if needed and thirdly making sure you don’t have to change plan midway through because you have taken more risk than you are comfortable with.
Lets explain each in more detail:
Diversification is important. As an example let’s say you have one investment property as your sole income and the property requires a major repair that year. You will not have the planned income and you can’t sell part of the property.
Or if you have all your investment as shares of the major banks, and there is a credit issue and no dividends are paid. Again you have a shortfall in income, and chances are the banks share price will have softened making it a poor time to sell the shares to generate the income.
Diversifying means investing across different assets such as shares, property, cash, term deposits, bonds, annuities and infrastructure. It also means diversifying across different needs such as income, growth etc. Ideally you want to create a portfolio where you will be able to provide your income and growth from multiple sources which don’t all act the same way to the external environment.
Having realisable assets means choosing investments you can realise if needed. Examples of assets that can be hard to sell include residential property, car parks, private shares, paintings, and others. The reason to be careful with these assets in retirement is you don’t want to sell just as you will run out of money. The risk is you sell at the wrong time.
Lastly it is important that you don’t change your investment strategy. If you are feeling comfortable now because everything looks positive and as a result you increase your investment risk – then when things turn it is likely you won’t be able to handle the losses and will sell at the bottom. Not investing according to the risk you are prepared to accept is just asking for trouble in the future.
4. Estate Wishes
This is an important part of the consideration.
For instance an annuity can be very tax effective and great for government benefits. Annuities can pay you a guaranteed income for life (indexed if you wish), however after being held for 15 years or longer they generally don’t provide any capital back to the estate.
The consideration for your retirement becomes how much do you want to enjoy a lifestyle now for your retirement v how important it is to help the next generation or a cause close to your heart.
Understanding this can help influence how your funds are invested and what type of assets are preferred.
5. Taxation
The big benefit of superannuation is that once you retire the income and earnings are tax free. However, superannuation is not the only way to invest in retirement. You still have a tax free threshold which can be used and annuities and investment bonds can also be tax effective in retirement.
Further, see the previous blog article - you need to organise your superannuation so that it is tax effective for your dependants.
6. Government Benefits
If you have been successful in life, you may not be able to access the Aged Pension. However, there are other benefits such as the Commonwealth Seniors Health Care Card which you may be entitled to. This card still offers significant benefits that you should apply for if eligible.
To qualify for the Aged Pension you need to meet both the income and assets test.
If you are failing the test but only by a small margin then there are options. For instance there are investments you can make which immediately reduce the value of your assets by 40%. When close to the assets test this strategy can help you get access to a part pension and the benefits that come from being an Aged Pensioner.
Income can also be adjusted. You could move the investments to something that changes the income profile and therefore lowers your income and grants access to a part pension.
In summary investing in retirement is very different to investing when you are creating wealth. Investment properties can be a good way to build wealth, but in retirement they may not provide the income you need to fund your expenses and they also cannot be sold in pieces so they carry a risk of selling into a slow market.
Growth companies that pay no dividends, or geared share funds are also a good way to create wealth, but neither is likely to be the only solution for someone looking to live of their income in retirement. Likewise dividend reinvesting might need to be reconsidered once you retire.
Planning is key and creating a tailored portfolio can help you target exactly the income and growth mix you require.
For more professional retirement planning advice, call 02 9634 6698 or book a free consultation online with our expert financial advisors at our office in Sydney's Norwest.
*Please note that this is not investment advice and does not take into account your personal circumstances. You should not make and decisions without first receiving accounting or financial advice for your personal situation. This article does not constitute personal advice and the content may be updated by future legislation.
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