Gaining a clear understanding of the duration your savings need to support you during retirement is crucial for effective retirement investing. By determining this timeframe, you can create a well-informed plan that safeguards against the risk of outliving your savings or unintentionally underspending. Our expert guidance will help you optimize your retirement investment strategy, ensuring your financial resources align with your retirement goals.
As Australians are living longer, retirement could last for a minimum of 25 years. It is crucial to plan wisely to ensure that your savings will be sufficient for this extended period. A viable option to secure a comfortable retirement is to invest in a lifetime annuity that guarantees regular payments for the entirety of your life.
Investment options in retirement explained
Getting the balance right between a safe spending rate and having enough income to enjoy retirement takes some careful planning. Investing for a reasonable return is one approach to helping your savings go the distance.
What is your risk appetite?
There’s a rule of thumb when it comes to investment risk. Generally speaking, the higher the expected return, the higher the risk involved. But taking on investments with the least possible risk can make it difficult to earn investment returns that keep up with inflation and any rises in living costs. On the other hand, taking on too much risk could lead to steep falls in the value of your investments. This can have an even bigger impact when you’re retired because you can’t expect to replace these losses from your salary or other types of income. Plus, you’re relying on your ‘nest egg’ to provide at least some of your income. When you lose a portion of those savings to risky investments, you have less to spend for the rest of retirement and less to earn returns on over the long term. Understanding the investments available to you, and their risks will be crucial to looking forward with confidence in your retirement.
Investment strategies for retirement
Everyone has different investment goals. However, a common objective for many people investing for their retirement is striking a balance between maximising available cash flow and protecting the remaining savings. Your risk appetite will determine which investment strategy is right for you, and according to the Government website MoneySmart may fall into one of the following four types:
Cash: Invests 100% in deposits with Australian deposit-taking institutions or in a ‘capital guaranteed’ life insurance policy. This option aims to guarantee your capital and accumulated earnings cannot be reduced by losses on investments.
Conservative: Invests around 30% in shares and property with the majority in fixed interest and cash. Aims to reduce the risk of loss and therefore accepts a lower return over the long term. There is less chance of having a bad year than in the balanced or growth options below.
Balanced: Invests around 70% in shares or property, and the rest in fixed interest and cash. Aims for reasonable returns, but less than growth funds to reduce the risk of losses in bad years. Those losses usually occur less frequently than in the growth option. You may also be able to invest in a ‘moderate’ option with around 50% in shares and property.
Growth: Invests around 85% in shares or property. Aims for higher average returns over the long term. This also means higher losses in bad years than those you would experience with lower-risk options. You may also be able to invest in a ‘high growth’ option with 100% in shares and property.
The importance of diversification
Diversification is a golden rule of investing. Spreading investments across different asset classes can strike a balance between security (defensive assets), and higher investment returns (growth assets). This can reduce your overall investment risk and the impact of significant market downturns, or poor returns from a particular business or sector.
Examples of diversifying include:
Asset Allocation: Allocate your retirement portfolio across different asset classes, such as stocks, bonds, real estate, and cash. Each asset class carries its own risk and return characteristics, so diversifying across them can help reduce the impact of any single asset's performance on your overall portfolio.
Geographic Diversification: Invest in a mix of domestic and international markets to diversify your exposure. Different regions and countries may experience varied economic conditions and market cycles, so spreading your investments globally can help mitigate the risk of being overly dependent on a single market.
Sector Diversification: Invest in a range of industries and sectors. By diversifying across sectors, you can reduce the risk associated with any one sector's performance. This way, even if a particular sector experiences a downturn, your portfolio can benefit from other sectors that may be performing well.
Investment Vehicles: Utilize a combination of investment vehicles, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment options. Each investment vehicle has its own risk and return characteristics, so diversifying across different vehicles can provide additional protection against volatility and market fluctuations.
Time Diversification: Spread out your investments over different time horizons. This involves staggering your retirement investments to mature at different points in time. By doing so, you can mitigate the risk of investing a significant portion of your retirement savings at a single point in time, potentially reducing the impact of market volatility.