Raffi PailagianMBA, BSc, DipFP
Adviser / Managing Partner
This might sound self-evident, but your investment needs in retirement are very different from your needs during the wealth-building phase that got you there. Many people retire without thinking about the changes in their investment needs. This can lead to grief later, which is why it is important when approaching retirement to look at all your existing assets, retirement income streams and determine whether they will work for you in retirement.
Prior to retirement you are in the wealth building phase and are generally more concerned with the capital growth of your assets/portfolio than income. However, once you retire you are dependent on the income generated by your investments for your livelihood and it is likely that not all your investments are good income generators.
That said, if you don’t have any growth assets in your portfolio, you are at risk of your investments not keeping up with inflation, which can reduce your income in real terms over the period of your retirement.
Pre-retirement is the ideal time to look at the mix of investments in your portfolio and ensure you are comfortable with the balance between growth and income investments. Typically, growth investments like shares and property are aimed at longer term investment while income investments, like cash and fixed term, are ideal for short term goals. As we mentioned in our last article When Should I Start Planning for Retirement, this might also be a time when your risk profile begins to change, and it’s a good idea to take a good look at the balance of your portfolio.
If you have a rental property, you will need to consider the income and costs to determine the net income you receive, along with the capital growth potential of the investment. If the income you are receiving is not sufficient for your needs, consider the tax implications of selling the property. A financial advisor will be able to tell you if and when it is best to sell the property to get the best tax benefits.
Although your home does not attract CGT, or provide a rental income, it is still an asset that can provide you with income either by downsizing or reverse mortgaging. Again, a Financial Advisor will help you understand the pros and cons of these strategies.
We all understand that markets rise and fall, and generally, over the medium to long term it is fine to look at average returns. However when you retire, the ebb and flow of the market can sometimes work against you. This is known as Sequence of Returns Risk. If the market hits a prolonged low later in your retirement, the effect will generally not be too dramatic. However, if that low occurs early in your retirement years you may need to sell assets to meet your needs. This can have a significant effect on your balance, and your ability to meet your income needs later on. If you look at the graph below, you can see how this happens[i].
Average Return for all three portfolios – 7%
Annual Income Withdrawal – $9000
Scenario 1 – Constant annual return of 7%
Scenario 2 – Single poor return early in the investment period
Scenario 3 – Single poor return late in the investment period
So, as with most things in life: timing is everything!
There are ways to mitigate this risk if you plan ahead. Income laddering, cash reserve bucketing and other strategies can provide effective short to medium term solutions. A good Financial Advisor will be able to talk you through your options.
Last, but certainly not least, an important element of retirement planning is developing a cash flow strategy that works for you. Some people are great with budgeting on a quarterly or half-yearly income, others need a monthly or even fortnightly income in order to operate effectively. Considering when your investments pay income, and how you translate that to cash flow will help ensure you stick to the plan and don’t nibble away at your capital too quickly.
If you would like advice on how to assess your position and prepare for your retirement funding, no matter how far away it seems, please contact us on 02 9976 3388 or click below and we’ll be in touch.
Head Office: Suite 105-106, Level 1, 39 East Esplanade, Manly NSW 2095
Manly Financial Services Pty Ltd is a Corporate Authorised Representative (Representative No.: 321127) ABN 38 115 806 883 of Futuro Financial Services Pty Ltd, Australian Financial Services Licensee (AFSL 238478)
This website contains general advice only. You need to consider with your financial planner (or adviser), your objectives, financial situation and your particular needs prior to making an investment decision. Futuro Financial Services Pty Ltd and its authorised representatives (or credit representatives) do not accept liability for any errors or omissions of information supplied on this website.