Retirement is the capstone of a busy life. You've worked hard, saved your money, and now it's time to enjoy the rewards. So you want to make sure you have enough money to actually meet your retirement goals.
That is why investing for retirement is so important—getting it wrong can have serious consequences for the quality of your remaining life.
So let's look at options for investing for your retirement and how you can go about it in the safest way possible.
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When it comes to investing for retirement, your aim isn't just about returns: it's to build the wealth that meets your retirement goals. To do this, it's wise to take the least amount of risk possible while still achieving your goals.
Where many people go wrong is in comparing their investment strategies to others. It's not an accurate scale because everyone has different goals. They face different financial situations, and no two investment portfolios are the same.
It should be all about your goals.
Here's a general guide for how to invest in your retirement.
Determine how much you need to live your retirement goals
The first step to understanding how to invest for retirement is by working out what you want to achieve—and what this will cost. To determine this, you need to work out:
- When you'll retire. The age at which you retire significantly impacts how much money you'll need. Early retirement means you'll need more funds to live off. Later retirement means you may not be as active or able to enjoy things as you once might have been.
- The type of life you'll lead. The lifestyle you wish to have in retirement will also determine your retirement financial goals. For example, are you looking forward to a quiet lifestyle? Or do you plan to spend money freely and take advantage of travelling again?
- How much do you want to spend? As we've written before, planning the amount of money you want to spend in retirement can be an excellent place to start in your calculations. A good rule of thumb is to budget spending 70–80% of what you currently spend now.
Determine the structure of your retirement investments
When it comes to the structure of your retirement investments, you may be wondering where is the safest investment for retirement money. While we can't answer this definitively, we can give you a guiding hand.
Super is the most tax-effective place to hold your investments when you're retired. Once you're over 60 and retired, your super fund enables you to receive both your income and any capital gains tax-free.
But where and how you hold your assets in your super account will significantly impact the retirement income you can access. When planned in the right way, you should be able to stop paying tax on your income altogether. Capital gains tax, too. You may also have investments in your own name, a family trust, or an investment company. All these options can also be a tax-effective option if planned the right way.
So be sure to speak with your tax adviser to determine the most tax-effective way to structure your assets. They can ensure you optimise your holdings, so you can minimise the amount of tax you pay on your retirement income.
Determine your investment options
You've determined your retirement goals, how much you want to spend each year, and the most tax-effective structure in which to hold your investments. This means you're ready to start selecting the right investments and building your asset allocation.
The key to investing in a way that delivers robust income in retirement is to use financial modelling. This helps you to identify which investments are most suitable for your retirement goals and enables you to decide on the appropriate asset allocation that delivers the retirement you want.
Financial modelling can help you predict what sort of returns your investments are likely to get each year (based on historical averages). You can then overlay that with how much you're spending each year, to determine how long your money will last—and ensure you don't run out.
Example
Let's say you have $1.2 million to invest. Your goal is to spend $70,000 in retirement each year.
You plan to retire at 65, and you want your investments to last for 35 years until you're 100 years old.
Financial modelling can predict what may occur in the future and what your asset allocation may look like. For example, your asset allocation may be:
- 40% in Australian shares
- 20% in international shares
- 20% in fixed interest
- 10% property
- 10% cash
Looking at historical data, you're expecting :
- Australian shares to return 4.5% per year in income, and 5% per year in capital growth (the share price increase)
- International shares may be likely to return 6% capital growth and 2.5% income
- Fixed interest could return 3% income, but no growth
- Property could return 4% growth and 4% income
- Cash returns nothing but keeps your money in a safer investment environment.
[table][thead][tr]
[th]Investment type[/th]
[th]Allocation[/th][th]Amount[/th][th]Income [/th][th]Growth[/th][/tr][/thead][tbody][tr]
[td]Australian shares[/td]
[td]40%[/td][td]$480,000[/td][td]$21,600[/td][td]$24,000[/td][/tr][tr]
[td]International shares[/td]
[td]20%[/td][td]$240,000[/td][td]$6,000[/td][td]$14,400[/td][/tr][tr]
[td]Fixed interest[/td]
[td]20%[/td][td]$240,000[/td][td]$7,200[/td][td]-[/td][/tr][tr][td]Property[/td][td]10%[/td][td]$120,000[/td][td]$4,800[/td][td]$4,800[/td][/tr][tr][td]Cash[/td][td]10%[/td][td]$120,000[/td][td]-[/td][td]-[/td][/tr][tr][td]Total[/td][td]-[/td][td]-[/td][td]$39,600[/td][td]$43,200[/td][/tr][/tbody][/table]
So in the first year of this hypothetical example, your portfolio generates $39,600 in income and $42,200 in capital growth. This delivers a total return of $82,800 per year.
If you draw down $70,000 to fund your retirement, you'd be taking $39,600 of the income generated, but also a portion of the available cash.
In this way, you'd eventually need to start selling some of your assets each year, to ensure you had enough cash to withdraw. But the capital growth in this portfolio would keep it strong, and the financial modelling shows you wouldn't run out of money for another 45 years.
Stay on top of your investments
Knowing how your investments are tracking is crucial to ensuring you have enough money to fund your retirement. So you need to review your portfolio every year.
After all, things can change each year. The market may face a downturn, your spending habits can change, or you may withdraw a large amount to buy a new car or take a holiday. Or it may happen that you need extra care in your later years.
So planning your retirement investments isn't a set-and-forget affair. You should review your portfolio every year, to ensure it still meets your goals. A qualified financial adviser will help you with this.
The final word
The key thing in planning how to invest for your retirement is getting the right support. Find an experienced financial adviser who'll work with you for the long term to help you enjoy the next stage of your life.
Liston Newton Advisory has over 40 years of experience helping our clients plan their retirement. So you can trust us to help you with yours.
