This is a very important area, because the type of investment assets you hold as you approach, and enter retirement, will affect the size of your nest egg, and therefore your retirement income.
A hyper-abbreviated, crash course in investment basics might help here.
- Risk equals return. This simply means, the higher the investment risk you take, the higher your potential return – but also the higher the risk of losing money.
- Cash, term deposits and other interest bearing securities are lower-risk ‘income’ investment assets, most suitable for providing a reliable income stream
- Shares and property are higher-risk ‘growth’ investment assets, most suitable for longer term capital (asset price) growth.
- The risk of quality growth investments is reduced when those investments are held for the long term.
Now that you know these key investment characteristics, you need to base an investment strategy and asset mix upon them that best suits:
- your temperament (how comfortable are you with risk?)
- the returns you want (growth assets for capital growth; income assets for regular income streams)
- your stage in life (are you approaching retirement, in retirement, or in aged care? How old are, what’s your health like, what’s your present financial position, what are your retirement goals?)
Say for example you were 10 years out from retirement, and your nest egg was looking too small to fund the retirement you would like. To achieve the higher capital returns you needed to boost the size of your nest egg, you would want to increase the growth assets in your investment portfolio – at the same time taking comfort from the fact that the higher, (short term) risk involved in increasing your growth assets would be reduced by the (long term) decade still to run to retirement.
On the other hand, if you were already in retirement, and the regularity of income and lower risk of capital loss were your main priorities, you would want to reduce your growth assets and increase the volume of lower-risk income assets in your portfolio.
In addition to all this, as I mentioned in tip six, you need to take into account the tax implications of your investment strategy and holdings, particularly in relation to how much money goes into your super, and when and how much comes out of it.
Getting your investment mix right and keeping it right for your situation is an ongoing process requiring regular attention. By all means get involved in it yourself, but there are times, I’d suggest, particularly as you enter retirement and need to consider your super options, that getting assistance from a good financial adviser is a good move.