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Portfolio management in retirement

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Managing money in retirement is different. Default super asset allocations can generally work well for most investors in the accumulation phase, but for older investors who don’t have the luxury of time to recoup potential losses, a different and more tailored approach is needed.

Jason Andriessen, General Manager, Marketing, Product and Advice for one of Australia’s leading financial planning firms, State Super Financial Services, lists his top five things to think about when heading into retirement.

1. Start with you, not the money

Don’t focus on the dollars first.

The best way to approach planning for retirement is to start with what you need, and follow this up with what you want. And be honest about which is which.

As a retiree, you will need to live day-to-day on what you have, so understanding your living costs is crucial. However, don’t forget that you also need to fund any future ad hoc expenditure. This could include a new car, holidays and even renovations to your house. Try to be as realistic as possible.

2. Life happens

This sounds like stating the obvious, but it speaks to a number of thorny issues around retirement.

Circumstances change, the market changes, legislation changes; the future is unpredictable. We all hope to live long and healthy lives, but we also know that this doesn’t happen for everyone. Understand the trade-off you are prepared to make around spending now and spending later.

The earlier and more thoroughly you plan for retirement, the better the likely financial outcome, no question. But at the same time, going without today in the expectation that the future will unfold in the way you hope, isn’t necessarily the best option either.

3. Get help from an expert

In the accumulation phase, setting and forgetting a broadly diversified investment strategy can lead to reasonable outcomes.   But this just isn’t  true for retirement. There are so many moving parts when it comes to financial outcomes in retirement that going it alone can be risky.

Be sure to consult a trusted, professional financial planner, who can develop a plan which responds to your personal situation, and then continue to refresh your strategy in line with changing circumstances.

How often you consult with your financial planner depends on you. Some retirees prefer to delegate the day-to-day management of their portfolio to their planner, and meet annually or less. Others are more personally engaged and prefer to take a more active role in the decision-making process.

4. Yield alone isn’t going to cut it

Very few investors are able to live on the yield from their portfolio alone. Record-low interest rates and sluggish economic growth mean that all investors have had to lower their expectations of returns across the board.

At the same time, accepting that you will need to access your capital can be challenging. Speak to your financial planner about the best options for you.

5. Consider Centrelink

Changes to the assets test for the Age Pension announced in the most recent Federal Budget are a stark reminder that retirees should never take current legislation and rules around entitlements for granted. They can, and do change, and every change creates winners and losers and impacts portfolio management decisions.

Understanding the interaction between Centrelink entitlements, your portfolio, and the repercussions of the decisions you make is not straightforward, so enlisting the help of an expert is essential.

A good example is the question of whether to access capital to renovate. In theory, a renovation will improve your lifestyle and increase the capital value of your house. On the other hand, it can feel contrary to good financial sense to eat into capital to achieve this. But in some cases, you could in fact end up better off.  If, by spending some of your capital your total assets are reduced, you may be entitled to a larger benefit from Centrelink.

The bottom line?

It’s never great to be broke, but heading into old-age without financial security is not something anyone would look forward to. It’s not all bad news however, the good news is that with the help of a trusted and professional financial planner, there’s no need to.

Contribution by Jason Andriessen, General Manager, Marketing, Product and Advice, State Super Financial Services