Many people aged between 50 and 65 are uncertain about being able to cover living expenses in retirement. Some will choose to extend their work years while others may need to accept lower than desired living standards in retirement. The earlier that people focus on the issue of funding their retirement, the greater their capacity to respond. In this article, Jeff Rogers, Chief Investment Officer, ipac Investment Management delves into the role of advisers in helping clients develop an investment strategy that is aligned with their retirement goals.

The need to plan

In the past, the age pension was the primary source of money to ensure a secure retirement. Today, governments are encouraging people to save for their own retirement. This is because as a growing number of baby boomers reach retirement, the number of working people to support them is not keeping pace. So increasingly, Australians are being asked to invest on their own to create a source of income to supplement their support from social security. That’s why, goal-setting and retirement planning have become so critical in recent years.

A closer look at retirement goals

Typically, a retiree will work with an adviser to scope, and prioritise their life goals. This process will inform how much financial resource to allocate to accounts supporting each life goal as well as the investment strategies to support the achievement of the goals. While the goals associated with retirement can be diverse, most goals belong to one of three broad categories or ‘buckets’. These are essential needs, lifestyle wants, and legacy aspirations.

  • Essential needs: A person’s immediate need in retirement is to have an income to deal with the essentials in life, the ‘must haves’. This includes the need to pay for food, housing, transport, regular bills etc. As such, this represents the most important goal; one which requires the most pressing financial attention. For essential needs, receiving a steady cash flow becomes paramount. (The day-to-day value of their portfolio is arguably of less importance). To address this goal, an adviser might recommend a strategy based on income-focused security strategies that aim to deliver a sustainable level of income to keep up with the cost of living. The powerful link between regular, sustainable income and living expenses represents a source of great confidence and helps a retiree stick to their strategy.
  • Lifestyle wants: Retirees may also want to set aside some assets earmarked to fund discretionary spending. Holidays and hobbies or the purchase of a new car might belong to this category. These lifestyle wants make for a more enjoyable retirement but are not regarded by the retiree as essential to their wellbeing. Investment strategies appropriate for these goals should aim to grow capital steadily over time with a low probability of a major or protracted decline in value.
  • Legacy aspirations: Retirees who have additional financial resources may aspire to leave a bequest for future generations. Not everyone will have the financial resources to meet all their goals, so an important aspect of an adviser’s role is to help their client set priorities. Investment strategies focused on these goals can accept greater short-term price variability provided there is confidence they will deliver strong compound growth in portfolio value over the long-term.

6 things to look for when considering investment solutions

  1. A predictable and reliable stream of income: Consider strategies that aim to deliver a steady income in the form of coupons from quality bonds, dividends from shares or distributions from Real Estate Investment Trusts (REITs) and infrastructure.
  2. Smoother returns: Focus on strategies that are designed to exhibit lower volatility than the broader market.
  3. Inflation protection: It’s important that the overall portfolio seeks to grow with the cost of living to maintain purchasing power of income over time.
  4. Tax effectiveness: Even though most retirees have an income tax rate of 0% in retirement, franking credits attached to the sustainable dividends of quality Australian companies represent a good source of retirement income.
  5. Liquidity: It is easier to redeem money from liquid investments when a change in circumstances may require it.
  6. Transparency of strategy: Seek strategies that are easy to understand and where the manager offers regular communications and insight into how funds are performing against client goals.

Final thoughts

The key to knowing which investment products are most appropriate for clients in or approaching retirement is to understand what success and failure looks like for the client. That is, what does a client want at this particular point in life and how might that evolve over time? What constitutes a ‘must have’; what is ‘nice to have’ and what is ‘aspirational’? These are important questions whose answers enable investment strategies to be better matched to a client’s various goals. Advisers and clients who work together to clearly identify what truly constitutes success and failure are more likely to enjoy a successful long-term relationship.

Find out more information on goals-based investing - Read more.

About the Author

Jeff Rogers, Chief Investment Officer, ipac Investment Management
Jeff Rogers joined AMP Capital in 2011 from ipac Securities and he has over 27 years’ of investment management experience. Jeff holds a Bachelor of Science (Honours) from the University of Melbourne.