This is the second article in the mini series titled: ‘Traps to avoid in retirement’.
There’s a common view that as you approach retirement you should tilt your investment portfolio towards more conservative investments. This means favouring things like term deposits, annuities and cash management trusts while reducing exposure to more volatile assets such as shares and property. The thinking is that preservation of capital is key, as without an earned income it is hard to recover from any downturns in the share or property markets.
In the days of high interest rates this might have been a good strategy, but when interest rates are low and life expectancies long, being too conservative with investment can see the money running out way too soon.
Peter plans to retire on his upcoming 63rd birthday. He has $600,000 in super and wants this to provide him with an income of $50,000 per year. If his net return is 3% pa, Peter’s nest egg will last for just over 15 years. The problem is there’s a good chance Peter will live into his late 80s or even 90s. To give his savings a chance of lasting until he is 90 (27 years), Peter will need to target a net return of 7% pa.
Chasing higher returns does involve taking on greater risk. However, for a well-designed portfolio the great moderator of investment risk is time. Even over just a 10-year period it’s much more likely that a ‘growth’ portfolio will meet Peter’s needs rather than a more conservative one.
Just because you stop working doesn’t mean your money should too. To ensure your nest egg keeps working hard through your retirement talk to us at Focused Financial Advice.