Let me ask two seemingly unrelated questions. How long do you intend to live after you retire? It could be nearly 30 years. What kind of assets should a 35-year-old invest in? ‘Secure’ type investments such as bank deposits, or growth investments such as property and shares?
Naturally, your answer to my second question will be growth investments because 35-year-olds probably have 30 years before they retire. But can you see the connection between the two questions? It illustrates the fallacy of most retirees believing they should be moving all their superannuation funds into non-growth assets on the day they retire.
Retirement means that you leave your permanent job and spend your time doing what you want to do, not what your boss says you have to do. Of course, you are hoping to live on the income from your investments and whatever government benefits are available. The higher the return you can achieve, the longer your money will last, and the better you will be able to live.
Don’t make the mistake of converting all your assets to cash on the day you retire. You may live for 30 years or more.
Think about a person who retires at age 60 with $300,000 in an account-based pension fund. If he draws the minimum pension, $15,849 to start, and increases it by four per cent per annum to keep up with inflation, his money will last till age 85. This is based on an average earning rate of seven per cent. The total pension paid in that time will be $715,000.
Look what happens if he places part of his account-based pension in more growth-orientated areas and manages to earn nine per cent overall. His pension will last to age 90 and total pension payments would be $1,029,394. The total payments are so much more because the faster-growing balance forces him to draw a bigger pension. For example, at age 80 he is drawing $40,259 a year instead of $36,374.
This is not to suggest that retirees should rush out and put their whole portfolio into the share market. However, it does show the fallacy of regarding your retirement date as the time to quit all growth investments. Provided you keep at least three or four years’ planned spending in the secure area, you can afford to go for conservative growth with the rest.
An extract from: Superannuation Made Simple, Noel Whittaker’s guide to all things superannuation.