You asked for it, so we’re going to deliver. Here is a list of our 7 best retirement investments ranked from worst to best, including the pros and cons of each.
This does not constitute financial advice, you should most certainly seek professional financial advice when it comes to your retirement investments.
But, for those of you who care, here’s our two bob’s worth.
Retirement Investments
In retirement, you want your investments to provide you with an income, now that you will no longer have work-related earnings to rely on.
To this end, you might consider security, reliability of retirement income, consistency of returns, flexibility, liquidity and the ability to keep pace with inflation as important factors when putting together your retirement income investment strategy. Therefore, we have used these as our criteria.
There are a number of retirement investment options available to you and these investments can be held either inside or outside the superannuation environment. In fact, pretty much any investment available to you outside of super is also available inside super.
For the purposes of this show-down, we’ll be focusing on the actual type of investment, not whether it’s owned inside or outside super. Remember, superannuation is not an investment – it is a tax structure. It’s the investments you choose within super that matter.
Related Article: Best Retirement Planning Strategies
Best Retirement Investments
Regular income in retirement is essential. It’s what you rely upon to meet your retirement expenses. So, our focus is on income-generating investments for retirement and how to generate retirement income from such investments.
Are you ready?
Here’s our 7 best retirement investments in order from worst to best, assuming you could only choose one.
7. Bank Accounts
A bank account is a generally safe savings account that provides you with a basic interest payment each month on the balance you have saved.
Rating: 3/10
Pros:
The benefits of a bank account as a retirement investment include:
- Your balance will not fluctuate. The amount in your bank account can be relied upon as a constant value and will only change based on the amount you deposit and withdraw, as well as the interest paid to you.
- You know exactly how much you have at any given time.
- You have immediate access to these funds at any time.
- You should be able to find a bank account that has no fees associated with it.
- Bank accounts are government guaranteed for up to $250,000 per person, per institution.
- Very high liquidity.
Cons:
The disadvantages of bank accounts as retirement investment include:
- Interest earned on a bank account is generally low compared to other types of investments.
- Bank account balances are exposed to inflation risks and are likely to lose purchasing power over time.
- For a bank account to solely cover retirement income objectives, you would either need a very large sum or very low retirement expenses (due to the low interest, no capital growth and inflation risk).
Conclusion:
Generally, bank accounts as an investment in retirement are good for keeping emergency funds in. This can give you comfort in knowing you can access these funds under unforeseen circumstances. You may also consider keeping in a bank account an amount that can be used to cover any upcoming capital expenses over the next 12-months, such as a new car, holiday or home renovations, so that other investments do not need to be sold in what could be unfavourable economic conditions.
Related Article: 7 Ways to Cover Expenses in Retirement
6. Term Deposits
A term deposit is a fixed deposit you make with a bank (or credit union) for a predetermined time frame and an agreed upon interest rate. Your capital is returned in full at the end of the term, together with the accumulated interest. A term deposit can range from 1-month to 5-years.
Rating: 4/10
Pros:
The benefits of a term deposit as a retirement investment include:
- Your balance will not fluctuate. The amount in your term deposit can be relied upon as a constant value and will only change based on the interest paid to you.
- You know exactly how much you have at any given time.
- Generally, term deposits do not have any fees associated with them.
- Term deposits are government guaranteed for up to $250,000 per person, per institution.
- Medium liquidity (depending on length of term).
Cons:
The disadvantages of term deposits as retirement investment include:
- Interest earned on a term deposit is generally low compared to other types of investments.
- Bank account balances are exposed to inflation risks and are likely to lose purchasing power over time.
- For term deposits to solely cover retirement income objectives, you would either need a very large sum or very low retirement expenses (due to no capital growth and inflation risk).
Conclusion:
Putting all of your retirement savings in term deposits is generally not considered a sound retirement investment plan. It could be an idea to keep a particular amount in term deposits to cover any short-medium capital expenses, but given that retirement will often last 30 years or more, it’s probably prudent to include some growth-oriented investments as part of your retirement portfolio.
International shares are equity ownership in companies that are located outside of Australia. International shares provide the opportunity for capital growth and can also pay income in the form of dividends – neither of which are guaranteed.
Rating: 5/10
Pros:
The benefits of international shares as a retirement investment include:
- By providing the potential for capital growth and dividends, you can achieve retirement income that keeps pace with inflation, so as not to lose purchasing power over time.
- Diversification can be achieved across a range of countries, economies, industries, and developed & emerging regions, which can reduce overall risk and provide exposure to different types of returns.
- Access to international equities can be achieved via Australian fund managers.
- High liquidity.
Cons:
The disadvantages of international shares as retirement investment include:
- It can sometimes be more difficult to understand how and where to get exposure to international shares.
- Brokerage costs are often higher if you wish to invest in specific companies listed on international markets.
- In general, dividend yields for international shares are lower compared to Australian shares and are not tax-effective.
Conclusion
Including international shares within your portfolio is great for diversification, particularly considering Australia only makes up approximately 2% of the global economy. International shares give you access to regions and industries outside of Australia. However, it can be difficult and more expensive to purchase international assets, as well as keep abreast of the world’s economic activity and how that could affect your retirement investments.
Related Article: 5 Biggest Retirement Planning Mistakes
4. Investment Property
An investment property is a residential or commercial property owned by you, but rented out or leased to someone to occupy. An investment property can increase in value if demand for your property increases and will usually also provide regular income in the form of rent.
Rating: 6/10
Pros:
The benefits of an investment property as a retirement investment include:
- Regular, reliable income can be received in the form of rent for an agreed time period.
- Over time, properties (as a whole) tend to increase in value.
- A property is a tangible asset that you can see, touch and drive past.
Cons:
The disadvantages of an investment property as a retirement investment include:
- If the property makes up the majority of your portfolio, you will have all of your eggs in one basket, which is a risk if it doesn’t produce the expected returns (inlcuidng the risk of declining in value).
- It is an illiquid investment and cannot be partially sold, or may be difficult to sell in unfavourable market conditions.
- Renters and tenants are getting ever-increasing rights – making being a landlord less enticing.
- There are often regular costs such as agent fees, maintenance, rates, etc. as well as the potential of larger costs being incurred.
- Large costs incurred when purchasing (stamp duty) and selling (agent fees).
- Low liquidity – properties often take at least one month to sell and the property cannot be partially sold.
Conclusion
Australians love property and can sometimes turn a blind-eye to its shortcomings as an investment. As a whole, investment properties can provide stability of income and reasonable capital growth. However, unlike shares, managed funds, annuities, term deposits and bank accounts, properties also incur non-negotiable running costs, non-negotiable time input and provide no short-term liquidity.
3. Lifetime Annuity
An annuity is a policy purchased that provides you with a guaranteed income for the remainder of your life, regardless of how long you live. It can also provide your estate with a lump sum if you were to pass away prematurely.
Rating: 7/10
Pros:
The benefits of a lifetime annuity as a retirement investment include:
- An annuity is specifically designed for retirees.
- Annuities can be favorably assessed for Centrelink purposes.
- You can be confident in knowing the exact income you will be receiving for the remainder of your life.
Cons:
The disadvantages of a lifetime annuity as a retirement investment include:
- The overall return received from a lifetime annuity throughout a person’s retirement is generally lower than what could be achieved, on average, through shares and property, or a diversified managed fund/super investment option.
- Once purchased, lump sum withdrawals cannot be made from lifetime annuities and they are rarely closed down.
- No liquidity.
Conclusion
Annuities are a great conservative retirement strategy that provide a high level of certainly with little flexibility. These are arguably the highest income generating investments for retirement. Having an annuity as your only retirement investment can be quite restrictive, but including a smaller annuity as part of your overall retirement plan might be a suitable investment strategy.
Australian shares are equity ownership in Australian companies. Australian shares provide the opportunity for capital growth and usually also provide income in the form of tax-effective franked dividends.
Rating 7/10
Pros:
The benefits of Australian shares as a retirement investment include:
- As an Australian, you are likely to be familiar with the companies you own shares in and possibly even consume their products or services.
- Overall, they provide a good balance of income and capital growth.
- Dividends are often franked, which makes the income received more tax-effective.
- High liquidity.
Cons:
The disadvantages of Australian shares as a retirement investment include:
- Australian shares are volatile and therefore your investment will fluctuate in capital value.
- Poor economic conditions can cause dividend payments and the value of the shares to reduce considerably.
- It might be confusing as to which shares to buy and how.
Learn more: Can I Invest My Super in Shares?
Conclusion
Australian shares are a familiar asset class for most Australians. A well-diversified portfolio can provide good long-term growth and regular tax-effective income that keeps pace with inflation. But, relying solely on Australian shares for your retirement portfolio is not for the faint-hearted. We’ve seen this asset class temporarily drop by more than 50% and that’s enough to make anyone cry. As a retiree, Australian shares will usually form at least some portion of your retirement portfolio.
… And, drumroll. The number 1 best retirement investment (in our opinion).
1. Diversified Index Managed Funds / ETFs
A diversified index managed fund (or ETF) will provide exposure to a range of asset classes (shares, property, fixed interest) at a low cost. It is a passive investment option that requires minimal input and is a set-and-forget retirement investment that can provide decent long-term returns. The diversified managed fund can be as conservative or as aggressive as you choose.
Rating: 10/10
Pros:
The benefits of diversified index managed funds as a retirement investment include:
- Low-cost exposure to a range of asset classes, geographical jurisdictions, industries and sectors.
- Ability to choose level of risk and expected long-term returns.
- Provides a mix of capital growth and income.
- Simple to manage.
- Medium-High liquidity.
Cons:
- You won’t always know what all of the underlying assets are (due to there being so many), which means limited transparency.
- Fees are deducted from the managed fund pool (not paid directly by you). However, such fees are relatively low (e.g. 0.2% – 0.5% of your investment balance).
Related Article: How Much is Enough for Retirement? 8 Considerations
Investment Advice for Retirement
The best investment advice for retirement is to reverse-engineer how you should invest for retirement. The first step is to define your retirement objectives and what you would like to achieve.
The next step is to determine the capital sum and average investment return required to meet those objectives (in conjunction with other forms of income such as the Age Pension).
The final step is to then find an investment that has a good probability of achieving those expected returns over a 30-year period. This is why we believe a low-cost, diversified index portfolio is a 10/10 retirement investment option, because you can essentially choose the level of expected risk and return (within reason) and it is highly diversified.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
Frequently Asked Questions
Here are some of the most frequently asked questions in relation to retirement investments.
What Should I Invest In If I Am Retired?
If you are retired, you should invest in a portfolio that has a high probability of achieving the long-term investment returns that are required to meet your retirement objectives, at a level of investment risk that you are comfortable with.
The easiest way to achieve this is probably through a diversified managed fund commensurate with your risk comfort levels. Generally, the higher allocation (ratio) an investment option has to growth-orientated assets (shares and property), the higher the risk and higher expected long-term return. Conversely, the lower the risk, the lower the expected long-term return.
How to Invest $250,000 for Retirement
The best way to invest $250,000 for retirement is to determine how many years this $250,000 needs to provide for you and the level of withdrawals you will be making from it each month. Then, calculate the investment return required so that the balance is $0 at the end of the timeframe you need it to provide for you (or to be at the balance you would like it to be at by the end of your investment term). Once you have calculated the required investment return, find an investment that has the objective of producing average long-term returns in line with your needs and at a level of risk you are comfortable with.
Where is the Safest Place to Put Your Retirement Money
The safest place to put your retirement money depends on your definition of safe. For example, bank accounts and term deposits (which are available both inside and outside superannuation) are low-risk and the safest type of investment available. However, these types of assets will also produce the lowest level of returns and have no capital growth component – meaning you will lose purchasing power of these funds each year, due to inflation.
On the other hand, investments such as shares and property trusts can generally provide an income stream that keeps pace with inflation, but are not necessarily considered safe, because your investment value will fluctuate as a result of share price volatility. Plus, income from these types of investments is never guaranteed.
Therefore, the safest place to put your retirement money is in a bank account or term deposit if you want capital stability, whereas shares and property are the safest place to put your money if you want your investments to produce an income that keeps pace with inflation. Maybe a mix of both would be prudent?
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Hi, I hope you enjoyed reading this article.
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Thanks for stopping by - Chris
