When it comes to planning your financial future, the average Australian will spend a large proportion of their life working and accumulating wealth for retirement. The investments we make during this period are typically long-term in nature and will favour capital growth over capital stability as we work hard to maximise the size of our retirement nest egg. As time goes by however, our preferences and risk tolerances tend to change such that our objectives become more aligned to capital preservation and lifestyle funding, as we start to edge closer to retirement.
When constructing a portfolio that meets these objectives, there are three crucial elements that one must consider, namely diversification, liquidity and taxation.
While capital growth may be the primary objective during the accumulation phase of our lives, a move into retirement is likely to come with an increased focus on income generation from our investment portfolio. While a post-work portfolio should be constructed in such a way that it provides predictable cash flow from dividends, interest and distributions, it is important that we continue to retain an appropriate blend of growth and defensive investments and not become too fixated on chasing income at the expense of overall portfolio return.
After all, with life expectancy rates regularly creeping higher for both males and females, we are long-term retired, and our post-work portfolios need to grow and keep pace with us as we continue to live longer.
How quickly one can exit an investment to return to a cash state, or a fund’s overall liquidity, becomes an important consideration in a post-work investment portfolio. A pension account will typically form the main source of a retiree’s income, so any unexpected costs or expenses will likely need to be drawn down from this account.
As the likelihood of unexpected costs increases as we get older (think Aged Care), it is critical that our investments can be exited quickly and with minimal fees incurred, so that we can meet our obligations with minimal stress.
Ongoing taxation can significantly erode the value of an investment portfolio over time, so it is vitally important that we structure our affairs to take advantage of the tax concessions that are available to us, both during our working years and particularly during retirement. This means considering the tax treatment of investment options that are available to us and understanding the alternatives should we ever need to make a change to our investment strategy. The recent outcry surrounding the Labor Party’s proposed removal of cash refunds for excess franking credits in the lead up to the 2019 Federal Election, demonstrated just how much this change to the tax system would have affected the portfolios of many self-funded retirees.
Further, it also illustrates the importance of knowing your options and how to respond if you need to adjust your portfolio.
Preparing to move on from the workforce into retirement not only brings with it a change in lifestyle, but it should also prompt a review of your investment strategy. Considerations extend beyond just income derision and tax liabilities, so it is important that a full-view assessment of an investment strategy is completed to ensure a portfolio is built to succeed and is not left to chance. If you would like to discuss any aspects of your financial planning for the future, contact your Findex adviser or reach out to our Wealth Management team.