How do I structure my portfolio at retirement to maximise income?

Record low interest rates and a low-growth outlook are making it very tough for retirees to fund a comfortable lifestyle. But there are plenty of options to help meet your income needs, and while picking the right investments is important don’t underestimate the importance of strategic planning and risk management.

1Analyse and position your goalposts

Separating your annual living expenses into core and discretionary expenses can help to set boundaries around what you are aiming to achieve from your retirement nest egg. Listing one-off lumpy capital requirements, such as renovations, is also vital. If the cash needs to be available at a certain time, it may change how much of your retirement nest egg can be invested in medium- or long-term investments.

2Agree plans for bad weather

It’s a good idea to consider how much risk you are comfortable taking on because, unfortunately, unexpected outcomes are a fact of investing. So plan for the bad weather that will inevitably turn up at some point. If you can’t bear volatility or the risk of capital loss, it may be prudent to stay away from the more volatile growth investments.

3Diversify, diversify, diversify

Holding cash may not feel attractive but it’s a good buffer against volatility and provides flexibility. Dixon Advisory recommends that retirees hold three years of annual expenses in cash to protect their ability to meet expenses and reduce the risk of having to sell investments at a low point.

To produce income from the part of your portfolio that can be invested for the long term, consider alternative yield-focused investments such as infrastructure and commercial property. Big investors have been buying up in these areas for a number of years now, so do your due diligence on pricing before jumping in.

Because of the long-term nature of infrastructure assets, they tend to be more defensively positioned than share investments. A key feature of infrastructure can include highly predictable future cash flows. The unlisted

New Energy

Solar for example, invests in large solar power stations that generate emissions-free power, producing positive social impact while you invest. Set up in 2015, it targets assets that generate returns of around 7% to 10% (before tax and borrowing costs) but fund performance will depend on the actual investments selected and future performance, so may be less.

Returns from commercial property have historically been underpinned by high income yields. The difference between commercial property yields and official cash rates remains close to 10-year highs. For most self-funded retirees, it can be difficult to access quality investments due to the amount of capital required. The Australian Property Opportunities Fund series allows long-term investors (including SMSFs) to invest as little as $2000 in a high-quality portfolio of assets in this sector. The investment targets properties with yields (net rental return) in the range of 5% to 8% but actual returns will depend on market conditions and other circumstances, and may be lower.

Lastly, beware of FOMO – the fear of missing out. Focus on your total returns (income and capital growth) after accounting for how much risk you are taking on. Your neighbour or friend may generate a higher return than your portfolio but they may be taking on a lot more risk. It’s important to consider the risks and disadvantages of these opportunities, such as the ability to get into them, and cash out, and if it’s right for you.