Planning essentials for comfortable retirement
By Alexandra Cain.
As we approach and enter retirement, it's important to ensure our investment strategy is appropriate for our time of life.
Our circumstances change over time – even in retirement. For instance your home may need a new roof, or one of your children may fall ill and need to be cared for at home. What’s essential is to work towards a position where you have sufficient capital and income so you can live the life you want.
Some people want to take an overseas holiday each year. While others are happy to take a trip to the beach as their annual vacation. Working out what a comfortable retirement looks like for you is the first step in understanding how much income you will need to do that.
John Owen, a portfolio specialist with MLC, says you can start working towards this right from the time you enter the workforce.
"A lot of people leave it too late and there are number of reasons for that. Apathy is one. It's easy in your twenties and thirties not to pay attention to your super because the amount invested is low. But if you start planning for your retirement then, you'll be a lot better off down the track," he advises.
Understanding how your super is being invested
Owen says it's essential to take an active interest in your super early on to maximise your retirement funds. This includes ensuring you are invested in the right option for your age, circumstances and risk profile.
"A lot of investors don't make an active choice with their superannuation. Most working people are invested in their company’s default super option, which may not be appropriate for their circumstances and aspirations."
"Most funds' default options have a significant exposure to shares and growth assets, but in some cases the default option may be more conservative. If that's the case, investors who don't make an active choice may retire with less money than they need. So it's important to understand how your money is invested and ensure it's appropriate for your stage of life," he recommends.
Taking on risk as you approach retirement
Risk is an inherent part of financial markets. But it's important to approach risk in the appropriate way for your time of life. Often, younger investors can afford to take on more risk because it will give them the opportunity to build their nest egg, while also having the time to ride out market cycles.
Says Owen: "People in their twenties could consider a high-growth option because they have plenty of time before they need to access their superannuation. If anything, people in this cohort should take advantage of market weakness to boost their retirement savings and buy assets when values are down."
Typically people's risk appetite drops as they age, amid concerns about capital preservation when they have less time in the workforce to make up for any share market falls. But even as people approach retirement, it can make sense to have some allocation to growth assets.
"It's worth having a meaningful exposure to growth assets to continue to grow your nest egg. Assets like Australian shares, many of which pay a healthy dividend, also provide good income along the way," Owen says.
Investing in managed funds
It's difficult for the average retail investor to get this balance right. Which is why it makes sense to invest in a managed fund run by professional managers who can do this for you. Given they typically manage millions or even billions of dollars in assets for their investors, fund managers are also able to properly diversify the assets in a portfolio, which also helps investors to ride out market cycles.
"Everybody loves a sale. But when the market falls, the risk for retail investors is selling assets when prices are down. Life's distractions also get in the way. People in their thirties and forties have so many financial responsibilities in addition to building wealth – paying the mortgage is a big one. There's often not a lot left over to salary sacrifice or make voluntary contributions to superannuation," Owen says.
Taking advantage of compounding interest
But the risk is you won't be able to live the life you want if you wait until after the mortgage has been repaid and kids have left home to contribute a little extra to your super fund. You also won't benefit as much from the power of compounding if you wait until down the track to add some extra funds to your retirement savings account. Which is why it can be very powerful to contribute some extra money to your super in your twenties before life's responsibilities get in the way.
"Even adding $50 a week or $100 a month while you are young can really help to boost your retirement savings down the track," he adds.
The value of speaking to a professional
The right path for you, however, will depend on how long you have until retirement, your salary and lifestyle aspirations in retirement. Which is why it's a great idea to ensure you seek professional financial advice. That will help to build your super and have the lifestyle you want down the track.