Wondering how to make your money last in retirement? You are not alone, it’s probably one of the most common questions we get asked. People are now living into their 90’s so if you plan to retire at 60, you may need to fund a 30 year time frame (or more!).
Even with a significant balance, it’s important to consider investment management strategies to ensure your funds will go the distance.
Here are 3 approaches to consider :
The benefits are well known, however many investors still do not implement this strategy. By diversifying your investments across a range of asset classes such as shares, property, fixed income and international investment, it lowers your portfolio's risk because different asset classes do well at different times. If one business or sector fails or performs badly, you won't lose all your money. Having a variety of investments with different risks will balance out the overall risk of a portfolio.
You can diversify further within each asset class. For example, if you buy shares, you buy across a range of different sectors such as financials, resources, healthcare and energy. You can also diversify by investing your money across different fund managers and product issuers.
Layering with an Annuity
A layered approach utilises different products and/or structures, to assist you to meet your needs over time.
Annuities provide a guaranteed regular income stream, much like a term deposit. The rate of return is set at application and then regular payments are made to you at your chosen intervals (monthly, quarterly etc). While annuities are typically thought of as an income stream for life, you are able to set them for a fixed period of time (for example for 5 years, or 10 or 20 years). Other options you have for this financial product include indexed annuities, which help to protect against the effects of inflation, and deferred annuities, which delays the payments until the policyholder reaches a predetermined age.
Utilising annuities for your known expenses (utilities, rates, car registration and other regular bills) can provide certainty and comfort that you can meet these expenses into the future, regardless of market movements.
The bucket system
The bucket strategy involves dividing your retirement assets into three (or more) categories based on when you will draw on them. The first bucket is for money that you intend to spend very soon -- over the next year or two.
The next bucket is for the portion of your portfolio that you expect to use in the medium term -- say, from 2 to 10 years in the future. This money may be invested in assets that do not fluctuate too much.
The last bucket is for growth. Money that you don't expect to use for at least 10 years and can be invested in asset classes that will provide you with higher long-term rates of return. If there's a market crash during your retirement, you will be able to hold onto those assets for quite some time, which should give your portfolio time to recover. As bucket one runs low, you'll replenish it from bucket two, which in turn should be topped off by shifting money from bucket three.
Make sure you seek advice to understand the positives and negatives and how a strategy may suit your personal circumstances.
General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.