Investing for Income and Growth in Retirement


Investing for Income and Growth in Retirement

Did you know that unlike 20 years ago, today over-55s account for more that 19% of the workforce. This number is expected to grow to about 40% by 2050 according to the Centre of Excellence in Population Ageing Research (CEPAR).

So what are the reasons that drive people to work longer? 

1. Longer life expectancy, which means money needs to support us for a much longer period of time.

2. Mounting financial pressures – life is not getting any cheaper

3. Expectation of “catching up with what we wanted to do while working, but never had the time or resources or both, to do it at younger age” 

4. For many families, the actual time to start saving and building own estate, starts after kids left home, mortgage has been paid off and we can start concentrating on ourselves and our future.  

Although the Covid pandemic and market volatility did not help in assisting 50 to 65 years olds to retire safely and with peace of mind, we can go back to Global Financial Crisis (GFC) where we see a very similar pattern of postponing retirement. As you can see, this trend is only strengthening.  

Just recently I wrote an article: What income do I need in retirement where we discussed annual income required for a “modest” and “comfortable” retirement. Please read it if you haven’t, as not only it is quite a fascinating information, but some good ideas for you how to set up your retirement income sources to reach the modest lifestyle as a secure, lifetime income stream.  

Speaking with retirees daily, I know for a fact that the most important factor in creating a retirement income is a need for a predictable and secure monthly income to meet expenses of daily needs.  

But let’s not forget that you are expected to live longer, there are other expenses you have to meet during your retired life or things that you want to do, enjoy and experience, your expenses will only keep growing not reducing, your money needs to keep up with inflation, otherwise you go backwards. 

So investing in retirement should be just as much about creating a predictable, secure income, as it is about capital growth of your investable assets as well. And that involves a completely different investment strategy, meeting different investment objective therefore employing different investment decision and different investment choices.  

And that is a topic of our today’s discussion: “How to invest for income and growth in retirement” 

Tony Robins said: “It is in your moments of decision that your destiny is shaped”, so let’s make some solid decisions today about how to improve value of your assets in retirement, so your money last as long as you will.  

Whether you invest your savings through superannuation or outside of it, is actually irrelevant for our today’s discussion, as we will mostly be discussing how to go about creating an investment portfolio that will support your retirement lifestyle for a very, very long time. I am sure this topic will require more than one video, so let’s jump into it.  

In the previously mentioned article What income do I need in retirement, I explained how to set up your income sources to create your “modest lifestyle” no matter what happens in your life or what the market is doing.  

I do realise however, that this particular video and investment strategy applies to you only if you are eligible for full or part Age Pension, or if you are just above the Centrelink tests limits but would like to have access to part pension.  

If you are unsure, just contact me directly for a personal advice how to improve your Centrelink Age Pension payments and improve your overall income.  

But what if you want more than that “modest lifestyle”? What should you do with your assets to have a “comfortable lifestyle”? to have “money backup” for your future capital expenses, such as a holiday, a new car, home maintenance or health expenses or Aged Care fees?  

Unfortunately, this is a scenario that I often see: 

1. Orange line is the current scenario, where the money is invested too conservatively and in 16 years due to living expenses exceeding income and a very low investment earnings, there is no money left, with value dropping below zero. 

2. The red line is when I applied the investment strategy explained in the video mentioned before to first reach the “modest lifestyle” as a secure income that is virtually guaranteed for life. That improved client’s income by close to $20,000 every year subject to CP. But it has not assisted in creating a better outcome for assets value, that still in 16 years reduced down to $0. 
So, in this situation you would end up with no assets backing you up, but at least the income will continue for the rest of your life with Age Pension increasing year after year and you meeting your “modest lifestyle” every year as well. 

3. The blue line – after applying the strategy for the “modest income” then we concentrate our efforts on creating an additional investment portfolio.  

Obviously you always have to keep a small balance in your “rainy-day” bank account. The remainder of your assets needs invested to benefit from growth assets. As you can see, the outcome is an investment value of $200,000 after 16 years of investing, while not sacrificing any income at all.  

As a matter of fact, this client not only received additional income of $20,000 from Option 2 (as per red line), but this diversified portfolio is still able to pay additional annual income of $6,000 or more, while after 16 years still providing a value of $200,000. 

Which option would you choose if that was your money and your future? What would be your plan to improve your income (but keep in mind we are talking about secure and reliable income for life). What would be your plan to keep your savings alive?  

So what assets should be included in such investment portfolio? As I said, this is a pretty complex area, so let’s start with the basics. A well-diversified investment portfolio will include:

1. Defensive Assets
2. Growth Assets  

The mixture of those assets will determine how conservative, or growth oriented your diversified portfolio is.  

The greater your exposure to defensive asset, the more conservative your portfolio becomes, the lower the market risk, but also the lower investment returns. Especially in the very low interest rate environment we’ve had for number of years now with no expectation for a change any time soon.  

This is not helping retirees, but is a huge benefit for young people, first-home buyers. 

So if you know that you cannot derive any income from your investment and there is hardly any capital growth, as a retiree, you really have no choice, but to have some solid exposure to growth assets.  

Unfortunately, I can see day after day many people who are petrified to invest properly their retirement savings, thinking that they will lose it all.  

Well think about it this way: this is your choice: 

  •  you either continue conservative investing and just like I’ve shown you in the graph, you are guaranteed to run out of money, or 
  • you take some calculated risk with assistance of professional adviser, give yourself and your money a chance to keep its value, keep growing, keep providing your with consistent income to have a better quality of life and some good, solid capital left behind. 

What are examples of Defensive assets: 

  • cash – in your bank account in CMA or even internationally
  • fixed interest – that could be here in Australia or any other country. Examples are – terms deposits, bonds, mortgages, debentures. 

They all provide some income (currently – very low), but they do assist with reducing volatility of your overall investment portfolio returns by not being invested in growth assets.  

What are examples of Growth Assets: 

  • Australian Shares – Personally I love shares, I think this is the sexiest part of money investing, but it does require knowledge, research and consistency. But most certainly you can make some great profits  
  • International shares – Australia is not just a country, but it is a separate continent, but as big as our land is, our economy is only 2% of the world economy. So if you restrict your investing to Australia alone, you are missing out on some fantastic investments from other courtiers.
  • Property – you can invest into property directly, and lots of people do that, unfortunately it is very hard to diversify with direct properties – how many can you really buy? 
    But there are many listed and unlisted investments that you could participate in and benefit from great income (this is what the property sector does – provides a pretty reliable income, with some capital growth as well). Again, it could be Australian property sector, as well as international.  

Please read: Property, Shares or Super? where I explain those different growth assets in more details. 

There is no limit to diversification that you can introduce to your portfolio, not only in underlying investments, but the choice of fund managers or shares or Exchange Traded Funds (ETFs) or Listed Investment Companies (LICs), your choices are endless, and this is what’s exciting, but could be quite overwhelming. 

It is very easy to get caught up in the latest “best thing” and keep chasing the best last year performance – and both of which are recipes for a disaster, I have seen it so many times. 

So if you would like to improve your investment portfolio, have a solid future performance, create great asset allocation with good allocation to growth assets while paying attention to markets behaviour and keeping pace with inflation, you really need solid financial advice. 

As I have shown you in the graph, the overall level of risk of the whole portfolio is quite low, if you know how to use available products, types of investments.  

This is exactly how I create a secure income for life, introduce inflation-protected investments, to remove longevity risk so your income and your assets will support you for life or hopefully will outlive you, so you can pass your estate to your beneficiaries.  

I have just scratched the surface here, so we will continue our investing discussions in my future articles.  

Please remember: “Retirement is a journey not a destination, so be well prepared for the ride”. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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