One of the real joys in my role is that I’m afforded the privilege of providing financial advice to Australians from all walks of life.
I’ve advised those in their teens who are just starting their investing journey. I’ve worked with people who have decades of business experience and amassed portfolios worth many millions of dollars. Sometimes the advice is complex and other times it’s as simple as telling the client that, perhaps, Stockspot is not even the right fit for them!
From experience, each client has different goals and needs. It’s my role to work out how they can get to their destination with the least amount of risk and downside.
I recall once speaking to an elderly client. Due to some very unfortunate life circumstances, she had to raise her children as a single mother. She also didn’t have the chance to accumulate much superannuation.
One thing I advised her was that it’s never too late to start investing and that even though she was now retired, she could still manage her hard-earned finances to give herself a retirement that didn’t have to rely only on the age pension.
“It is critical that whatever strategy you choose, it aligns with your horizon and cash flow needs.
Retirees, like this client, face a unique set of challenges when it comes to investing and the right approach can make all the difference in ensuring a comfortable and secure retirement.
One of the questions I’m most frequently asked is, “How should I invest when I’m retired?”
Here are the four things to consider when you are investing during your retirement.
Get the balance right
As a retiree, you need to ensure you have the right balance between protecting your nest egg and keeping up with inflation, so you don’t outlive your money.
Most retirees tend to focus on protecting their nest egg, justifiably, to avoid significant losses.
However, you must balance that against other factors like inflation, which could mean you outlive your retirement nest egg. Therefore, you need to earn enough returns to keep up with inflation and ensure that you have enough funds to live off in the future.
Striking a balance between protecting your nest egg and keeping up with inflation is crucial.
It’s important to protect your investments from inflation risk. Diversifying your investments (see below) will protect your investments from inflation. When considering a retirement income product such as an account-based pension or annuity product, you can speak to the provider or your financial adviser regarding selecting inflation indexed payments. Some providers give you the option to have payments linked to changes in the RBA cash rates.
Make sure time is on your side
It is critical that whatever strategy you choose, it aligns with your horizon and cash flow needs. If you are only drawing down say 5%, a balanced or growth investing option might still be right for you. That is, you have an even mix of growth assets (shares) and defensive assets (bonds and gold).
Time horizon is easy to determine. If you have a time horizon of 5, 10, or 15 years, you can still afford to have some growth assets in your portfolio.
It does not make sense to have everything in defensive assets because there is enough time to recover financially if markets are volatile in the short-term.
Moreover, you need to balance this around the income needs you have along the way. If you are in the drawdown stage of your retirement and need to live off 5% of your portfolio per year, it is different from someone who needs to live off 15% or 20% of their portfolio per year.
If you are only drawing down a small percentage, you should not worry about markets going up or down in that year. You can still afford to have some growth assets in your portfolio. Also, you should not be worried about markets going up or down year-to-year if you are just taking out 5% per year.
Diversify and rebalance your portfolio
My third tip is to diversify your portfolio. Diversification is crucial because it helps to reduce the risk of losses in any one asset or sector. As a retiree, you should not have all your eggs in one basket. Instead, you should spread your investments across different asset classes and sectors.
Aim to diversify into investments that perform well in different market environments. In deflationary times, bonds work well. In inflation, some share market sectors and gold perform better.
You can either create an investment portfolio using the asset classes like shares, bond and gold as building blocks for diversification and generating a retirement income. You can use low-cost index ETFs via online share trading platforms or set up an account with Stockspot where they will recommend an appropriate investment solution for your circumstances. Stockspot will automatically rebalance your portfolio to ensure you meet the target portfolio weighting.
Account-based pensions are offered by super funds. When selecting the right super fund, you need to check for fund performance, fees, investment options, insurance, services and potential risks. The Moneysmart website provides a comparison tool for selecting super funds.
Ideally, your portfolio should have an automatic process for rebalancing so you don’t have to watch your portfolio and monitor what is performing well and what isn’t.
Seek professional advice
Finally, my fourth tip is to consider seeking professional advice.
Plenty of parents reach the empty nest phase of their life once the kids are out of the house and slowly realise they are completely unready for retirement.
You don’t need to wait until retirement to get financial advice. The sooner you do so the better.
Retirees should seek professional advice to help them navigate the complex investment landscape. Qualified financial advisers can help you determine the right investment strategy for your retirement needs and help you avoid costly mistakes.
Additionally, they can provide guidance on how to balance your risk tolerance with your retirement goals.
While investing can be challenging, it can also be the key to building a financial future that helps you achieve a comfortable retirement. Don’t be afraid to reach out and ask someone for help.
I hope you enjoy your well-deserved retirement.
