There’s a common philosophy that you should tilt your investment portfolio towards more conservative investments at retirement. This is done by increasing exposure to term deposits, annuities and cash while reducing exposure to more volatile assets such as shares and property. This philosophy is built on the foundation that preservation of capital is key, as without an earned income it is hard to recover from any downturns in markets.
Preserving capital is absolutely important.
In the days of high interest rates, switching investments to fixed interest solutions might have been a no-brainer strategy. But when interest rates are at record lows and life expectancies are long, being too conservative can result in your retirement savings eroding too soon.
Peter plans to retire on his upcoming 63rd birthday. He has $600,000 in super and wants this to provide him with an income of $50,000 per year. If his net return is 3% pa, Peter’s nest egg will last for just over 15 years. The problem is there’s a good chance Peter will live into his late 80’s or even 90’s. To give his savings a chance of lasting until he is 90 (27 years), Peter will need to target a net return of 7% pa.
Chasing higher returns does generally involve taking on greater risk of volatility and ultimately market downturn. However, for a well-designed portfolio the great moderator of investment risk is time.
Just because you’ve retired doesn’t mean your money needs to stop working also.