Key considerations in the transition to retirement
Sydney, Australia
There are a number of important differences to consider between investing during the retirement phase as opposed to the accumulation phase.
In accumulation, the investor is typically contributing towards their superannuation and at the same time making other investments outside that portfolio. The principal goal is growth, with the aim of reaching retirement with the largest possible portfolio of assets. In retirement, investors will need to think a little differently.
The first consideration is their tax situation. In retirement, investors will likely be in a lower tax bracket than they were through the accumulation phase, and with that comes a number of advantages. In retirement phase, franking credits are worth much more. Every dollar of franked income is worth $1.43 in retirement, and that has the potential to generate a very large income from the Australian equities and hybrid components of a retiree’s portfolio1.
Secondly, investors need to consider longevity and the risk of outliving their asset pool. Portfolios in the retirement phase are typically more exposed to fixed income, and potentially cash and more conservative assets. The income from many of these asset classes is currently quite low, and expected to stay low for some time. In fact, annual returns from franking alone in our retirement fund (*period 31 October 2009- 31 October 2019) exceed current yields across a number of fixed income asset classes2.
In order to prepare for the possibility of living a long life – or, leaving a corpus for family members or benefactors investors might need to consider their allocation between more conservative asset classes and other defensive positions in assets that have the potential to generate higher income in the current climate. This may help investors to retain sufficient equity in their portfolios so that over time they can draw down on their asset base as well as invest for the future and generate some capital returns in their retirement.
Finally, investors need to keep a close eye on valuations, and how they relate to yields across different asset classes, and be prepared to adjust their allocation over time in accordance with changes in these relationships.
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Dermot Ryan, Co-Portfolio Manager (Income)1 ATO - https://www.ato.gov.au/
2 AMP Capital
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Important notes
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While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.