Ask the experts

Balancing risk and return is a challenge in retirement years

NAME: Bill and Lynn STATUS: Pensioners, with Bill working part-time

QUESTIONS: Where is a safe place to invest that pays more than a term deposit? How do our savings fit with the age pension to provide a retirement income?

ANSWERS: Move your savings into a superannuation fund’s account-based pension as your income will be tax free. Avoid higher-yielding investments such as debentures as they are risky. Keep your money in a term deposit if you want low risk, but if you can take on a bit more risk try the “bucket” system: keep six years’ worth of income in cash and the rest in growth assets. That way if the sharemarket does go down, you will have money to live on so you don’t have to sell your shares and you can wait until they recover.

Bill and Lynn have an investment dilemma that is widespread among pre-retirees and retirees. With cash and term deposit rates so low, where do they put their money? They need to generate an income to live on comfortably.

Lynn has retired and is on a disability pension. Bill works part time and is on a part age pension. They own their home and have moderate savings for their retirement years. They have invested it in a term deposit earning 2.75%, but when they came to roll it over recently the rate had dropped. A financial adviser at the bank that handled the term deposit has offered to invest it into a portfolio in an allocated pension. The price tag for the financial plan, if Bill were to proceed, is around $4000 or 1.4% of their investment. He gets lots of advice from people who tell him that they are making good money in this investment climate, in the region of 8%-9%pa.

Bill says they don’t want to put their retirement savings in any risky invest- ments. “We can’t start over again,” he says. He wants to know if there are any investments without any volatility. Or are there any guaranteed returns on investments? “I would like to invest somewhere that will give better returns. I really want our life savings to be safe, and to be able to sleep at night,” he says.

Bill would like to know what sort of income he and Lynn can expect for their retirement. How can his savings and earnings from part-time work mix with the age pension? “I figure that we can have a good life if we have around $900 to $1000 a week to live on. We like to take a holiday once a year for around two weeks.”

They need their money to outstrip inflation. The Reserve Bank expects inflation to be around 2% over the next year and this means that if their cash is paying 1.5% then their return isn’t keeping up with the cost of living. To stop their money from going backwards, they need to find income at a higher rate.