Ask the ex­perts

Bal­anc­ing risk and re­turn is a chal­lenge in re­tire­ment years

Money Magazine Australia - - CONTENTS - SU­SAN HELY

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.

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