Many people aged between 50 and 65 are uncertain about being able to cover living expenses in retirement. In the past retirees could rely on the age pension to secure their retirement. Many retirees are now less confident about this source of support, as a growing number of baby boomers are retiring and the number of working people to support them is not keeping pace.
Governments are now encouraging Australians to save and invest on their own, so they can build income streams for retirement to supplement social security payments, and the earlier people focus on how to fund their retirement, the greater their capacity to respond.
How to set retirement goals
The first factor in retirement planning is establishing a retiree’s goals. Not everyone will have the financial resources to meet all their goals, so an adviser must help their client set priorities.
Retirement goals can be diverse, but most belong to one of three broad categories:
-
Essential needs
A person’s immediate need in retirement is to have an income to deal with the essentials in life, including food, housing, transport and paying regular bills. This represents the most important set of goals and requires the most pressing financial attention.
Confidence about the receipt of a steady cash flow becomes paramount. An adviser may recommend strategies centred on income-focused securities that deliver sustainable cash flow which keeps up with increases in the cost of living.
-
Lifestyle wants
Retirees may also want to set aside some capital to fund discretionary spending on goods and services such as holidays, hobbies, or the purchase of a new car. Attainment of these lifestyle wants enables a more enjoyable retirement, but the retiree doesn’t regard them as essential to their wellbeing. To help fund these lifestyle wants, investment strategies should grow capital steadily over time and have a low probability of producing a major or protracted decline in value.
-
Legacy aspirations
Finally, retirees with additional financial resources may aspire to leave a bequest for future generations.
Six things to look for when considering investment solutions
There are six key factors that advisors and investors should focus on when considering retirement investments.
- A predictable and reliable stream of income: Consider strategies that aim to deliver a steady income in the form of coupons from quality bonds, dividends from shares or distributions from Real Estate Investment Trusts (REITs) and infrastructure.
- Resilient returns: Focus on strategies that are designed to exhibit greater resilience in challenging market environments.
- Inflation protection: It’s important that the overall portfolio seeks to grow with the cost of living to maintain purchasing power over time.
- Tax effectiveness: Even though most retirees have an income tax rate of zero per cent in retirement, franking credits attached to the sustainable dividends of quality Australian companies represent a good additional source of retirement income. But it is important to watch out for potential regulatory change in this area.
- Liquidity: It is easier to redeem money from liquid investments when a change in circumstances may require it.
- Transparency of strategy: Seek strategies that are easy to understand and where the manager offers regular communications and insight into how funds are performing against retirees’ goals.
Set up success
The key is to understand retirement goals: what does success and failure look like? What do retirees want at this point in life and how might that evolve over time? What constitutes a ‘must have’; what is ‘nice to have’ and what is ‘aspirational’?
By answering those important questions, various goals can be matched with investment strategies that meet the unique challenges and risks of retirement.
Source: AMP Capital
