Pre-retirement: A crucial time to reassess your investments
Australians are living longer and enjoying healthier, more productive retirements than ever before. And while this is definitely good news, it does mean we will need a substantial nest egg to see us through. If retirement is not too far down the track for you it is important to regularly reassess your investment plan to make sure your savings are on track. Here we look at some of the investment options you may like to consider leading up to your retirement.
The years leading up to retirement are crucial ones for your retirement savings. This is the time to further grow your savings so that you will not be caught short during your retirement years.
Understandably, the closer most of us get to retirement, the less likely we may be to take risks with our savings. And when investment markets are volatile we may be even more likely to seek security and put our savings in conservative assets such as term deposits.
This strategy makes sense when interest rates are high but with interest rates falling now may be a good time to take a look at some of your other options.
Falling interest rates and savings
Defensive assets such as term deposits can be an important anchor for your investment strategy, providing stability and a regular income. But with falling interest rates and a corresponding fall in term deposit rates, it may be difficult to maintain your desired level of income in the medium to long term if all, or most, of your savings are in a term deposit.
Since March 2008 interest rates have more than halved¹ and term deposit rates have fallen sharply². So if you have most of your investment in cash or term deposits this could have a marked impact on your savings.
For example, if you hold a term deposit of $100,000, a 0.25% cut in interest rates will reduce your interest income by you $250 in the first year, and by $1,430 by the fifth year. A 1.0% cut in interest rates would reduce your interest income by $1,000 in year one, and by $5800 by year five.
Another important factor to consider is the effect of inflation on your investment over time. The ‘real rate’ of return on an investment is what you will earn once inflation is taken into account. If, for example, your bank pays you 5% on your investment and the inflation rate is 3% then the real rate of return is 2%.
Growing your savings for retirement
The type of investments that may be right for you will generally depend on your life stage and your appetite for risk. If you are close to retirement you may want some of your portfolio invested in defensive assets such as term deposits and some in assets that have the potential to add growth.
While term deposits are useful for meeting short-term cash requirements, other assets such as bonds can be a good alternative as the core defensive component of your portfolio.
Corporate bonds may be a useful alternative for investors who want higher returns than term deposits but don’t want significant exposure market volatility, as may be the case with an investment in shares. Unlike term deposits, corporate bonds can generate capital growth and may act as a good portfolio diversifier when equity markets are down.
You may also want to consider investing part of your portfolio in assets which can help your retirement savings grow enough to keep up with the cost of living once you retire. We believe there are a number of attractive options to help grow your savings. These include equities that offer adequate and sustainable dividends, real estate investment trusts, unlisted non-residential property, and infrastructure.
Of course investment always involves some level of risk. Growth assets such as equities may involve a higher risk of fluctuating prices over the short term. But putting too much into defensive assets such as term deposits could put you at risk of not having enough income in your retirement.
When considering your investment plan in the years leading up to retirement we think it is important to consider strategies that will provide both cash flow and growth. That way we believe you will be better able to stave off the effects of inflation so that your income meets your long-term needs.
¹ Reserve Bank of Australia.
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² Reserve Bank of Australia, “Retail deposit and investment rates (December 2012)”. Based on averages of the five largest banks’ one-year $10,000 term deposit rates.
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.