This stage of life should be something to look forward to, with plenty of enjoyment and loads of “me” time. No more alarm clocks. No more fighting busy traffic. No more boring meetings or mundane jobs. It truly is an exciting time of life.
But, finding freedom and cutting the ties from working full-time is often met with a little trepidation. Because, once you retire, your regular pay just stops. That’s it, no more pay day.
We are all living longer… (80 is the new 70, and 70 is the new 60), so it is really important to invest some of your financial assets into strategies that will replace that regular pay day and give you the confidence that your spending needs will be covered. It’s imperative that those strategies will keep delivering with longevity in mind, not just the next couple of years.
Research indicates that the average superannuation balance at the time of retirement is in the order of $197,000* for men and only $105,000* for women. That is well below what is needed for a half decent retirement and means that the majority of Australians will be forced to rely on the age pension.
A rule of thumb that we use, is that you need $500,000* in assets (cash, savings, superannuation and other nest egg assets) for every $30,000* in income you would like in retirement. Whilst it’s not a guaranteed metric, we do find it quite reliable and will provide you with the ability to create some goals.
For example, if you want a retirement income of $90,000* then your target should be not less than $1,500,000* in assets when you finish work.
Having identified a goal, what are your investment choices?
If you listen to the media, or watch some of the entertainment investment programmes on television you might be led to believe that there are scores of investment choices out there and you need to be constantly changing strategy.
Whilst there might be many strategies available to those enjoying the Finding Freedom journey, all of your choices will ultimately fall into one of these four.
Business: A business could be your business or someone else’s, and if it’s the latter the most common version is what we see listed on the stock exchanges around the world. Some examples of shares that we all know and most probably use everyday include Commonwealth Bank, Woolworths, Telstra, Nestle, Visa and Apple.
Property: There are several types of property assets, ranging from residential to commercial, industrial or tourism properties. For those with an investment in property and the time of retirement we are seeking long term stable cashflows and tenancy, with minimal if any debts.
These two are what will provide you with access to a growing income stream over the medium to long term, and hopefully some modest capital growth as well.
Cash: You might not realise it but when you keep your monies in bank accounts, term deposits, bonds or other fixed income securities you are actually lending your money to that institution. These short term investments will provide you with liquidity and rapid access to capital if it is required. So, it’s vital that you have some short term money tucked away in this relatively safe and secure investment choice.
Stuff: All other assets such as gold, silver, art, jewellery and various alternative assets that produce little or no income and are highly speculative fall into the category that we call ‘stuff’. As an investment choice if you happen to stumble upon it or be influenced to ‘invest’ some of your retirement savings into, then proceed with caution, as it could be a very costly experience.
Security of capital is paramount in all that we recommend, as is an appropriate balance between the first three investment choices and ignoring the noise of commentators that consistently try to distract us with ‘stuff’.
Defensive and Growth Assets – are they both important at this stage ?
Both of these are critical as you approach and throughout retirement. Defensive assets (Cash, Term Deposits and other Fixed Income assets) will provide you with security, liquidity and the ability to support your family independent of the swings we sometimes see in markets.
As we are all living long and longer though, should you have too much of your portfolio in defensive or cash based assets, it can actually be a risk to your ability to fund your retirement. The reason is that over time only Growth assets will provide you access to an income stream and asset that keeps pace with inflation. That’s right, your investments still need to be growing to soak up the increases in prices for food, medical, travel etc.
We all need an overall plan that combines strategy with product selection to pay a consistent, predictable cash flow with balance.
Tax credits become income
For Aussies investing in the Australian sharemarket, imputation credits from dividends are very important as you might be eligible for a refund of some or potentially all of the franking credits. Did you know that there is a 0% tax rate on both capital gains and income when you are in pension phase and as an added bonus your fund will also receive all of the franking credits as a refund. The fine print is that you need to make sure your fund passes them onto you.