Most of us recognise the importance of maintaining a diversified portfolio when we are building our retirement nest egg. Keeping the right balance of growth assets and capital secure assets allows us to build a bigger super balance over time, with a degree of security, and potential to maximise your end results.
But what happens after you retire? Is asset allocation still an important principle, or is it just a case of ‘putting up the shutters’ and opting for a purely safety-first approach? Let’s examine the factors involved in answering these questions.
The Perils of a Low Interest Environment
The reality of the economic world we now live in is that interest rates are stubbornly low, with no real prospect of a radical change in the foreseeable future. While this is great for mortgagees, it presents a major challenge for those who depend on investment income for their livelihood — which is precisely what happens when you retire.
Retirees are traditionally risk averse by nature, and tend to favour defensive assets such as term deposits and fixed interest investments as their default investment position. Such persistently low interest rates, however, result in a greater need to dip into capital in order to fund an ongoing retirement income.
An over-emphasis on capital preservation in retirement, therefore, will ironically result in capital being eroded more quickly, thus reducing the potential to sustain retirement income levels over the long term.
Asset Allocation is Key
The only logical answer to this retirement income conundrum is to seriously consider how you allocate your assets after you retire. In fact, it could be argued that asset allocation is even more important after you retire than it is while you are still building your super.
This doesn’t mean that you should throw caution to the wind and gamble your whole nest egg purely on shares and property, but it does mean you need to give proper consideration to a balanced strategy. You need a spread of growth assets based on sound research, while still maintaining a proportion of cash and fixed interest investments that allow you to sleep easy and have the liquidity you need for short term needs.
Think of it Like a Mortgage in Reverse
You probably remember that when you first took out a mortgage, the first few years of repayments were largely all interest and it was only in the latter stages that you really start to pay down capital. In relation to our retirement investments, you ideally want the opposite effect to happen: in the early years you want any drawdowns to be coming from your investment earnings, so that you can delay drawing down on your capital for as long as possible.
Time Horizons are Important
The key with investing in any growth asset is to understand your time horizons. This means knowing what portion of your investment capital can be allocated for long-term investment, without you having a need to access those funds in the short term. A longer time horizon allows any volatility in that investment, such as share market fluctuations, to be smoothed out over time, giving a greater likelihood of capital growth.
In the case of retirement, you may be looking at 25, 30, or even more years over which you are planning your investment strategy. This certainly gives you plenty of scope to allocate some of your money into growth assets, with any risks being tempered by the confidence that you can ‘sit tight’ and ride out any fluctuations.
Not a One-Size-Fits-All Answer
Of course, when you start to talk about sophisticated asset allocation strategies, there is no simplistic formula that can be applied to everyone’s situation. Knowing your comfort level with risk has an all important influence on your ideal allocation to growth assets, along with a good understanding of how your living expenses and spending requirements will play out over the duration of your retirement. This is why a financial adviser can be such a crucial ally in planning your retirement asset allocation.
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837. This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or a registered tax agent. Examples are illustrative only and are subject to the assumptions and qualifications disclosed. Part of the IOOF group. In referring customers to Bridges, Southern Cross Credit Union Ltd. does not accept responsibility for any acts, omissions or advice of Bridges and its authorised representatives.