Help your retirement savings last the distance
21 January 2013
Retirement is a very rewarding time of life when you finally have more time for travel, family and new activities. But to really enjoy these years your retirement fund needs to last the distance. To make sure of this it is a good idea to regularly reassess your investment plan.
This is particularly important when you consider we are living longer, healthier lives. Many of us are likely to spend as long in retirement as we did in the workforce.
The trick is to invest your retirement savings in assets that meet your need for regular income but that also earn enough to keep up with the cost of living. And because we’re living longer than ever, you’ll also need to ensure that your portfolio continues to grow in value while you’re in retirement.
This is not always easy as our appetite for risk generally decreases in retirement, and we naturally want to protect our hard-earned savings.
How much is enough?
One of the most common questions retirees ask is “How much money will I need to fund my retirement?”
According to the Association of Superannuation Funds of Australia (ASFA), even to buy the basic necessities and enjoy a modest standard of living in retirement, a single person needs $22,539, while a couple needs $32,511 a year. For a comfortable lifestyle, with involvement in a broad range of leisure activities, you’ll need $41,090 if you are single and $56,236 for a couple¹.
With life expectancies improving over time, many Australians are living 30 years or more in retirement. So based on ASFA’s guidelines, an individual may need in excess of $975,000. So how can individuals prepare for this?
What are your financial needs in retirement?
The first requirement most retirees need financially is income—or a cash flow to meet your short-term needs. In retirement this can be generated by drawing down on your pension/superannuation or through investing in income assets such bonds, cash and term deposits which provide regular yields.
We believe these assets can be an important anchor for your investment strategy, providing stability and a regular income.
However we believe it’s equally important for retirees to have some assets that will help to continue building the value of their portfolio, which can be draw down from later in life. Investing in assets that provide some growth during retirement may not seem like the top priority, yet a recent study has shown that up to 60% your investment earnings could come from your portfolio’s growth after you’ve retired².
Beating inflation with growth investments
While you can control some of your discretionary expenditure, there’s one element to spending that is entirely out of your hands. One of the greatest challenges in retirement is keeping pace with inflation. Even if inflation is low it still has a significant long-term effect and will eat away at your retirement savings.
Fortunately you can mitigate inflation and meet the challenge of funding your retirement by choosing investments that can outpace inflation over time.
As a retiree you may prefer a mix of conservative assets that protect your capital, however we believe it’s also important to hold some growth assets that offer the potential for higher income.
It may also be important for you to have the ability to change your level of income. As your lifestyle or circumstances change, or as your living expenses increase with inflation, you may need the flexibility to adjust your income to reflect these changes.
¹ The Association of Superannuation Funds of Australia (ASFA) Retirement Standard 2012
Act now for a better tomorrow
To learn more about how to build your wealth and investing, speak to your financial adviser or explore our range of investment options.
² Collie, B and Smith, M, (2008) “The 10/30/60 Rule: Where do defined contribution benefits come from?” Russell Investments DC Insights; January 2008.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This information is issued as at January 2013.