Look beyond term deposits to fund your retirement

Retirement isn’t what it used to be. It lasts longer and we expect to do more. In the early years we spend more on travel and as we get older health care costs rise.

On average, in 1970 you would have around 12 years in retirement. Today the average is closer to 20. However, this can easily stretch to 30+ years if you have good genes and look after yourself.

Once you retire, you need to take a different approach to investing, regardless of whether your money is in super or not.

You need to balance out the need to generate an income with the need to make what you have last as long as you can. After all, if you run out of money you can’t easily replace it.

Recently we have seen the share market fall by around 6%. For retirees, this can be distressing as they feel as though their retirement savings are evaporating. As a result, many put all of their savings into term deposits. However, it is important to put the current share market crash into context.  The market is still higher now than it was this time last year or any of the 10 years before that.

When most people think of risk, they only look at market risk. However, they should also consider the following:

Inflation risk – Currently banks pay around 2% on term deposits. Once you consider inflation, the real return is close to zero. If you are also withdrawing money to fund your retirement, your retirement nest egg is guaranteed to shrink. One way to manage this is to have a portion invested in growth assets.

Longevity risk – As life expectancy increases, your savings need to last longer. I am conscious of this as my grandparents lived until their 90’s. I always recommend you factor in living until you are at least 95, when looking at your retirement needs.

Emotional risk – After people retire, they often pay more attention to the market and their returns. However, reading the news daily about market movements can also make people do irrational things, such as selling everything – usually after the market crashes and often closer to the bottom than the top of the market. To avoid this, it is best to have a strategy and stick to it.

When it comes to what to invest in, there are broadly two different types of assets.

Conservative assets include things like term deposits and bonds. These generally provide lower returns. People often see these as less risky as you have lower market risk. However, you do have more inflation risk and longevity risk.

Growth assets include things such as shares and property. These generally give higher returns. People see these as riskier as you have more market risk and with this comes more emotional risk. On the upside, you have less inflation risk and less longevity risk

So, where to from here?

I generally recommend retirees have a diverse mix of assets that balances out your need for short-term income with the need to have long-term growth. This usually means a mix of conservative and growth assets. It will differ for individuals, but as an example, you could have a portfolio with conservative assets to the value of three years spending, with the rest in higher growth assets. This way, if the market does crash, you could theoretically wait for two to three years before you move any funds from the growth to conservative assets. This should give them enough time to recover.

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