You have spent your working career building your Superannuation and investments to provide you with a stable income in retirement. Now that you are retiring, you need to ensure that you invest these funds appropriately to ensure that they provide you with the income you need to fund your lifestyle in retirement.
As there are many investment options available, it can be confusing to consider where you should invest your money now you have retired. While there is no single best investment option, there are a number of things that retirees should consider before they invest their funds.
When investing as a retiree, it’s easy to be attracted by the reported headline performance and fail to consider the effect of negative returns and market drawdowns at the same time as drawing an income from your investments.
By taking a more ensemble approach to investing, you can often achieve a more suitable and sensible investment outcome. Furthermore, it can assist with preserving your assets over a longer time period.
As a retiree, you may also have a lower tolerance for investment risk and a longer investment time horizon. You may also require the need for liquidity to access additional money to fund your retirement plans and needs. You may also want to minimise your estate taxes, preserve some wealth and pass it on to the next generation.
In this article, we will discuss some of the investment options available for retirement income.
What is the Best Investment for Retirement Income in Australia?
It’s not surprising that, as a result of compulsory Superannuation, many Australians are retiring with a substantial amount of wealth. Furthermore, due to the attractive tax rates of Superannuation (15%) and Account Based Pensions (0% once retired and over age 60, or from age 65), these structures are the most tax-effective ways to build wealth for retirement and then to fund retirement. If your total superannuation balance is over a certain amount, additional taxes may apply.
When you compare these tax rates to personal tax rates which can be as high as 45% plus medicare levy of 2%, Superannuation and Account Based Pensions offer a very attractive tax rate and way to invest.
Our Recommended Investment Strategies for Retirement Income in Australia
Due to the number of investment options available we recommend that retirees consider an ensemble approach by combining a number of difference investment strategies and asset classes to create a diversified portfolio.
It is also very important to consider your personal financial goals and consider when you will need to access your retirement funds. This is due to all investments having an element of risk. The main risks for investors are opportunity costs (missing potential returns) and loss of capital or volatility (meaning that your investment is worth less than what you started with). Furthermore, consideration also has to include the drawing of income, especially during periods of market volatility and drawdowns (for example, during Covid when the S&P/ASX 200 Index (ASX: XJO) fell 36% from its February high to its March low. Having to sell your investment during a down market can affect how long your capital will last in retirement. Learn more about our investment options from one of our investment planners.
Property & Infrastructure
Property and Infrastructure investments are a range of physical assets which include toll roads and bridges, energy and water infrastructure, shopping centres, offices, and industrial premises. Investors can also provide capital so a property or infrastructure projects can be built, earning interest of the funds used for the project.
The main way to invest in these types of investments is via a listed structure or unlisted structure.
Benefits of Investing in Property & Infrastructure
- Diversification of investment portfolio
- Reliable income from longer-term lease contracts with adjustments to inflation
- Usually, higher yields than interest earned from banks and term deposits
- Usually, higher yields than residential property
- Listed assets can provide liquidity
- May be suitable for longer-term investment periods
Potential Drawbacks of Investing in Property & Infrastructure
- Unlisted assets can have redemption issues
- Property by experience vacancies and tenant issues
- Potential for capital loss
- Maintenance, repair costs, ongoing costs, and other costs
- Not suitable for shorter-term investment periods
Fixed Interest
Fixed interest investments are also known as government bonds or corporate bonds, and they are used as a financing mechanism for governments and businesses. When you buy a bond, you are lending your money to that government or business. The government or the business is then required to pay you interest for the period/term of the bond. When the bond matures, the government or business is required to pay you back the face value of the bond (assuming the business has not gone insolvent and the government does not default).
There are many types of bonds for investors and invest in. The most common bonds include, fixed rate bonds, which pays a fixed rate of interest for the period/term of the bond. Also, floating rate bonds, which are typically linked to a moving benchmark rate and then additionally have a fixed margin applied.
There are also inflation-linked bonds, which aim to provide a hedge against movements of inflation.
Benefits of Investing in Fixed Interest
- Diversification of investment portfolio
- Regular Income
- Usually, higher yields than interest earned from banks and term deposits
- Usually, higher yields than residential property
- Can provide stability to investment portfolios during periods of market volatility
- May be suitable for short to medium-term investment periods
Potential Drawbacks of Investing in Fixed Interest
- Potential for capital loss if sold prior to maturity
- Risk of changes to interest rates
- Risk of a company going insolvent
- Risk of government defaulting
- Inflation risk
Australian Equities
Australian equities, also known as Australian shares, are listed companies on the Australian Stock Exchange. When investing in Australian shares, you become part owner of the company. As a part owner, you participate in any capital growth or income distributions the company experiences. As many profitable companies in Australia pay taxes, investors can also benefit from a tax credit (known as a franking credit), which can also boost returns.
Benefits of Investing in Australian Equities
- Diversification of investment portfolio
- Australian shares have been one of the best-performing asset classes over the long term
- Investors may receive franking credits on dividends, which effectively boosts returns
- Ability to invest in small, medium, and large listed companies
Potential Drawbacks of Investing in Australian Equities
- Australian equities are exposed to market volatility
- Potential for capital loss
- The Australian share market accounts for only approximately 2% of the global market
International Equities
International equities, also known as Global shares, are listed companies on International Stock Exchanges. Like Australian shares, when investing in Global shares, you become part owner. As a part owner, you participate in any capital growth or income distributions the company experiences. However, as Australian Shares only account for 2% of Global shares, there can be greater investment opportunities by including Global shares in a diversified portfolio.
Benefits of Investing in International Equities
- Diversification of investment portfolio
- Global shares have been one of the best-performing asset classes over the long term
- Currency diversification
- Ability to invest in small, medium, and large listed companies in specific countries
Potential Drawbacks of Investing in International Equities
- Global equities are exposed to market volatility
- Potential for capital loss
- Global equities are exposed to currency volatility
Cash
Cash is the funds you have in a bank account, high-interest account, or term deposit.
Benefits of Investing in Cash
- Diversification of investment portfolio
- Cash at call accounts are immediately accessible
- Protected by the government guarantee
- Generally considered a safe investment and suitable for short investment timeframes
Potential Drawbacks of Investing in Cash
- There may be a break fee if accessing a term deposit before maturity
- Generally lower returns compared to other investment options
- No potential for capital growth
- Interest earned is taxable
Take the First Step to Getting Financial Freedom Through Your Retirement
As you can see from this article, there are many investment options available for retirees. No one investment option is the best, and the most important thing with investing is to construct an investment portfolio which is suitable for your financial goals, investment time horizon, your risk tolerance, and your income needs.
If you are about to retire or currently retired and wanting to ensure that your investment strategy to suitable for your needs, we can help. We have helped thousands of people plan their retirement and then live their ideal retirement dream. Getting started is very easy, simply contact our office or book a consultation with one of our financial advisers.
FAQs
How much do I need to retire?
To determine how much you will need to retire will depend on a number of factors, which include:
- When would you like to retire?
- What are your planned expenses in retirement?
- What lifestyle do you want in retirement?
Most people seem to choose age 65 as their retirement age. With many people now enjoying longer life expectancies, well into their late 80s, 90s and possibly even longer, you may find that your superannuation needs to fund 20 to 30 years or more. So, for everyone, this answer will be different.
What is the safest investment for retirement income?
The safest investment for retirement income is a Lifetime or Term Annuity, where you can lock in a rate of return and receive regular payments over that time frame. However, these products also expose investors to risks, such as opportunity costs as the investment returns can be lower when compared to other investment options. So, it’s important to consider if this would be a suitable option for you to include in your retirement funding strategy.
How to prepare for retirement investment?
It’s important to note that while there is an age when you can access your Superannuation or the Age Pension, it does not mean that you must retire at this time. Some of our clients choose to retire earlier by having a suitable financial plan and strategy which allows them to live the lifestyle they desire. Others chose to keep working in their preferred field either on a full time, part time or casual basis. For everyone this will be different.
The key thing with preparing for retirement is to plan out your goals and what is important to you. This may include:
- When would you like to retire, and is it a specific age or date?
- What planning do you need to do before retirement?
- What activities will you participate in once you retire?
- Working out your living costs (how much do you need to fund these expenses)?
- What lump sum expense item will you have (repaying any debt, travel, renovations, helping family, replacing cars, purchasing a caravan)?
- Will you need to consider possible aged care funding options in the future?
These are all things that Solace Financial can assist you with.
Solace Financial is the trading name of the entities that are Authorised Representatives of SFDS Pty Ltd (AFSL 509493). This website contains general advice which does not consider your particular circumstances. You should seek advice from Solace Financial who can consider if the strategies and products are right for you.
