A retirement investment strategy is an integral part of any retirement plan. Deciding which retirement investment strategy you should adopt is based on your comfort with risk, the return required to meet your objectives and the investment costs associated.
This article covers the five steps towards choosing the best retirement investment strategy for you, what your portfolio asset allocation should be prior to retirement compared to after retirement, and the process you can use to have confidence that you have chosen the asset allocation for your situation.
Once you’ve got an understanding of the main components of an investment strategy, I’m then going to explain what you can do to continually optimise your strategy throughout retirement to ensure you never run out of money. So, stay tuned.
This is the precise process that we use with our clients in preparing their superannuation and investments for retirement.
Your Retirement Investment Strategy In 5 Steps
The important thing to always remember is that investment returns are inconsistent and never guaranteed, so it’s important to keep abreast of your portfolio asset allocation and performance at least every few years. If you’ve set your retirement investment strategy correctly from the outset, there’s no need to review it any more often than that.
So, right now, we’re going to go through the 5 steps to developing your own retirement investment strategy. Let’s take a look.
Step 1: Access to Suitable Investment Options
The very first step to your retirement investment strategy is ensuring you have access to well-diversified, quality investment options. The rest of the steps are based on the assumption that (i) you have access to these and are not investing in speculative investments; or (ii) that your portfolio asset allocation lacks diversification.
Most of Australia’s leading superannuation funds will provide you with an investment menu ranging from pre-mixed options (e.g. balanced, growth, etc.) as well as maybe some sector-specific options (e.g. Australian shares, international shares, etc.).
Retirement investment strategies don’t need to be complex. In fact, simple is often the most effective and certainly the easiest to manage.
Assuming you have access to well-diversified pre-mixed options, or are very confident that you know how to build such a portfolio, you can move onto step 2.
Learn more about Superannuation Investment Options
Step 2: Understanding Retirement Portfolio Asset Allocations
Step 2 involves understanding what each investment option actually means. To keep this simple, I’m going to assume you have access to five pre-mixed options. Broadly, these options will include:
- Conservative (e.g. 20% Growth / 80% Defensive)
- Moderate(e.g. 40% Growth / 60% Defensive)
- Balanced (e.g. 60% Growth / 40% Defensive)
- Growth (e.g. 80% Growth / 20% Defensive)
- Aggressive (e.g. 100% Growth / 0% Defensive)
Just to make things confusing, each super fund will have different names for each of these, they may only offer the equivalent to 3 or 4 of these (not 5) and one super fund’s Balanced option may have the equivalent characteristics to another super fund’s Growth option.
If you want to compare apples with apples, you really need to look at the growth/defensive asset allocation ratio. Not all ratios will be the same across super funds, so you’ll really just be approximating at some point.
The growth portion of the portfolio asset allocation generally refers to the total amount allocated to Australian shares, international shares and property; whereas the defensive portion generally refers to fixed interest and cash. Infrastructure and alternative assets could be either growth or defensive or both.
Theoretically, the higher allocation you have to growth assets, the higher your average long-term returns should be – albeit with greater volatility (the rate at which your balance bounces up and down). Long-term should be considered 7-10 years.
Conversely, the higher allocation you have to defensive assets, the lower your average long-term returns should be, as well as lower levels of volatility.
Less volatile investments also provide you with a greater certainty of the eventual outcome, because investment returns are more predictable and have a lower standard deviation.
Like I said at the beginning, expected levels of investment returns are never guaranteed, but the more conservative your portfolio asset allocation is, the more likely the returns are.
Now that you have access to well-diversified quality portfolios and broadly understand your different options, we move onto Step 3.
This video explores whether you should be converting your super to cash in current market and economic conditions:
Step 3: Your Pre-Retirement Investment Strategy
So, how do you know which investment option you actually need?
Well, Step 3 is to figure out what long-term investment return you need to achieve your objectives. A good retirement calculator can help you determine this. The Government’s MoneySmart website offers one of these. Check it out here.
These projections will give you a good idea of the investment return you need to achieve your objectives. It may be, say 5% p.a. So, let’s say you need 5% p.a. now and throughout retirement to achieve your objectives. Once you’ve determined this, look at the investment options offered by your super fund and find one that is expected to, or has the objective of, achieving a long-term average return of around 5% p.a. – not more, not less.
Now you have your chosen investment option.
In saying that; typically, you can be more aggressive pre-retirement compared to post-retirement. The reason being is that you are presumably contributing to super and not drawing down on it, meaning that each month your balance increases, then your retirement savings are growing, but for each month that your balance decreases, then the contributions are simply buying quality investments at a lower cost, yet still trending higher over a longer time frame – so it’s a win-win situation.
Therefore, you might choose a more aggressive investment option pre-retirement that is expecting to earn, say, 7% p.a. and then reducing the risk and expected return once you reach retirement. You should only do this if you are comfortable with an increased level of risk.
Step 4: Your Post Retirement Investment Strategy
Once you retire, not only do you not have contributions potentially buying investments at a lower cost (when markets fall), but you could also be selling part of your investments at a low price in order to fund regular pension payments, or lump sum withdrawals.
Therefore, in retirement, a preference may be to have less volatile, more conservative investments, so that your projected balance over time is more predictable, provided you understand that lower long term returns are also likely. But, you should be able to opt for a more conservative option in retirement, if you went for a more aggressive option in pre-retirement.
Either way, you should be updating your projections at retirement, based on your new expected return rate to see if you are still on track.
Step 5: How to Review Your Investment Strategy
Now that you’ve retired, it’s time to put your feet up, settle in, and enjoy the glory years while you live off tax-free retirement income.
However, I mentioned earlier that I’d be sharing with you what you can do to continually optimise your strategy throughout retirement so that you never run out of money. And, this is something we do with our clients every day.
Here it is: To ensure that you remain on track – and even increase the probability of remaining on track – you should perform your retirement projection calculations every 2-3 years. If you find that you are comfortably on track, you might use this as an opportunity to further reduce the risk of your portfolio asset allocation. Why? Because, the lower the risk, the more certainty of outcome.
Being ahead of schedule is usually as a result of higher than average expected returns over the past couple of years. Either that or you’ve been spending less than you had anticipated. Regardless, that may signify a good time to reduce risk.
Alternatively, if you find that you are no longer on track, it could mean you’ve either been spending more than you thought you would, which means you need to reassess your investment strategy (or reduce spending), or it means that your investment strategy has produced lower than expected returns over the past few years – in which case slightly increasing the aggressiveness of your portfolio may be beneficial to take advantage of a possible upcoming economic turnaround.
At Toro Wealth, we specialise solely in retirement planning advice – it’s all we do. We provide one-off advice for a one-time cost. This can give you confidence in knowing you’re doing everything you should be doing between now and retirement. Click here to see exactly how our advice process works and arrange a complimentary appointment.
That’s it! There are the 5 steps to choosing your superannuation and retirement investment strategy.
Frequently Asked Questions
Here are some frequently asked questions in relation to retirement investment strategies:
What Is the Best Investment Strategy for Retirees?
The best investment strategy for retirees is taking on as little investment risk as possible, while ensuring you are still able to meet your retirement objectives. Ideally, you want to aim for lower volatility and certainty of returns, provided those returns are sufficient to meet your goals.
What Is the 4% Rule Investing for Retirement?
The 4% rule when it comes to investing for retirement is based on the theory that, as a retiree with a 30-year time horizon, you could withdraw 4% of your investment balance, with the dollar-value adjusted annually for inflation.
How Long Will $1 Million Last in Retirement?
In retirement, $1 million would last 30 years if you were a single person retiring at 60 or 65 in Australia and wanted to cover retirement expenses of $60,000 per year. If you are a couple, $1 million would provide you with an income of $70,000 per year if you retired at 60 and $73,000 per year if you retired at 65.
How Long Will $500,000 Last in Retirement?
In retirement, $500,000 would last 30 years if you were a single person retiring at 60 in Australia and wanted to cover retirement expenses of $42,000 per year, or $45,000 if you retired at 65. If you are a couple, $500,000 would provide you with an income of $50,000 per year if you retired at 60 and $58,000 per year if you retired at 65.
How Long Will $2 Million Last in Retirement?
In retirement, $2 million would last 30 years if you were a single person retiring at 60 in Australia and wanted to cover retirement expenses of $105,000 per year, or $115,000 if you retired at 65. If you are a couple, $2 million would provide you with an income of $155,000 per year if you retired at 60 or $125,000 if you retired at 65.
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