Introduction
Building a retirement investment portfolio requires a shift in mindset compared to saving for retirement. During your working years, you contribute steadily to your superannuation, allowing it to grow. In retirement, this reverses: your superannuation becomes a source of regular income, and you depend on investment returns to maintain your balance.
This phase, known as wealth drawdown, can last as long as the accumulation phase—potentially up to 30 years.
Key Considerations for a Retirement Portfolio
1. Start with Income Needs
Begin by assessing how much income you’ll need in retirement. Break your expenses into two categories:
- Essential Income: Covers necessities like food and utilities.
- Discretionary Income: Includes non-essentials like holidays and gifts.
This categorization helps structure your portfolio to generate income from suitable investments.
2. Plan for Changing Income Needs
Retirement isn’t a single, uniform phase. Instead, it typically includes three distinct stages:
- Active Years: The first decade, when health is generally good, and spending on travel and activities is higher.
- Quiet Years: When mobility decreases, and spending slows as people spend more time at home.
- Frailty Years: Marked by increased healthcare and aged care costs.
Spending often follows a “smile curve”—high in the early and late stages and lower in the middle.
Portfolio Construction Strategies
1. Manage Risks in Retirement
The risks during retirement differ from those in the accumulation phase:
- Longevity Risk: The chance of outliving your savings.
- Sequencing Risk: The impact of market downturns when you start withdrawing funds.
- Frailty Risk: The need for additional funds for health-related costs in later years.
2. Income-Layering Strategy
This approach involves securing essential income with reliable sources like:
- Guaranteed Income: Age Pension, annuities, cash, or term deposits.
- Growth Assets for Discretionary Income: Shares, property, or super pensions for potential capital growth.
Regular monitoring and adjustments are required as spending needs evolve through different retirement stages.
3. Bucket Strategy
A popular method to allocate funds into buckets for short, medium, and long-term needs:
- Cash Bucket: Holds 2–3 years of retirement income for immediate needs.
- Capital-Stable Bucket: Includes fixed interest investments with moderate growth exposure.
- Growth Bucket: Invests in shares and property for long-term growth, untouched for 5+ years.
This strategy ensures you have short-term liquidity while managing longevity risk with growth investments.
4. Add a Fourth Bucket
Plan for aged care expenses by creating a dedicated “frailty bucket.” Options include:
- Deferred annuities starting at an older age, such as 85.
- Home equity strategies, like downsizing or using the government’s Home Equity Access Scheme.
The Bottom Line
A well-structured retirement portfolio starts with understanding your income needs—separating essentials from discretionary spending. Factor in changing needs over time and use strategies like income layering or buckets to manage risks unique to retirement.
Planning for later years, including aged care, is essential to ensure financial security throughout your retirement.
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Author Profile: Jeffrey Liu, JP, is the founder and principal adviser of Hippo Insurance (aka: Hippo Wealth), with a deep expertise in wealth protection. His extensive experience includes roles in the wealth management divisions of Westpac, ANZ, and a local multi-family office. As the host of “Riches Talk,” a podcast dedicated to cultivating personal and business growth, Jeffrey has established himself as a thought leader in developing life riches. His insights have been featured on SBS, The Australian, and Channel 7. Notably, he was a semi-finalist on Australia’s Got Talent in 2010. Learn more at http://www.hippoinsurance.com.au