Financial Advice Blog

The best mix of assets for your retirement portfolio

The traditional approach of allocating 60 per cent of funds to growth assets as you near retirement is being challenged by ballooning life expectancies. Here's what you should consider instead.

Financial Spectrum’s Greg Suefong was interviewed for this article by Tom Richardson published in the Australian Financial Review.  You can view the original article here.

Australians with higher-than-average superannuation balances and savings should maintain significant allocations to equities as they near retirement to maximise their income, according to leading financial advisers.

The traditional approach of allocating 60 per cent of funds to growth assets and 40 per cent to cash equivalents for income is being challenged by ballooning life expectancies, which now reach 81.3 years old for Australian men and 85.3 years old for women.

“So your retirement savings must last longer now,” says Guy Freeman, managing principal of financial planning group My Wealth Solutions.

“If you need income for 20 or 30 years and go too defensive into cash at retirement, you’re missing out on potential capital gains and growing investments for future income.”

Freeman says how an individual or couple plan for retirement will vary depending on dozens of factors including net worth, risk tolerance and spending needs.

But the key principle is to maintain a balanced portfolio to offset the impact of inflation and prevent a retiree or someone close to retirement being forced to sell growth assets during regular equity market downturns, says Freeman.

Greg Suefong, a senior financial planner at Sydney-based Financial Spectrum, says inflation-beating strategies are relatively simple.

“We recommend clients start to plan income streams seven years before retirement and track their goals and needs on a yearly basis,” he says.

Senior financial adviser Greg Suefong says retirees and those nearing retirement should review their passive income strategies at least once a year.

“As a mathematical example, if you have a total portfolio of $3 million, yet you only need $120,000 per year to live off, then having 85 to 90 per cent of your assets in growth assets is fine. This would give you 5 per cent income of around $150,000, meaning you can save $30,000 per year cash year-on-year.

“Your 10 to 15 per cent of defensive assets equals a minimum of $300,000 of cash to which you add $30,000 a year to protect you from inflation and any one-off major issues such as medical emergencies.”

Whether you retire at 45 or 65, if you plan your income needs seven years before your life of leisure, you can keep on top of market movements, legislative changes and shifts in your attitudes to observe shortfalls or mistakes early enough to adjust the strategy, says Suefong.

He adds that retirees and those actively planning for retirement should review and rebalance their portfolios at least once every year.

“But the rate of capital drawdown will have a greater impact on the need to review than the client’s age or another arbitrary waypoint,” he says.

“If you’re accumulating wealth in retirement, the risk of something going wrong is minimal given the size of your retirement pool. However, if you’re relying upon capital drawdown and selling assets to fund your income stream, it’s imperative you keep on top of what’s sold and how your remaining portfolio is balanced.”

Market swings

The benchmark S&P/ASX All Ordinaries Index has returned an average of 9.2 per cent per annum including dividends for the 30 years to June 2023, versus an average return of 5.5 per cent on Australian bonds, and 4.2 per cent on cash for the period, according to Vanguard.

Despite these returns, Suefong says the traditional 60/40 or 50/50 split between growth and defensive assets is unlikely to be appropriate for the majority.

As a general principle, a retiree who has under $1 million in assets takes more risk the more they allocate to growth assets on retirement, he says.

“Say you had $700,000 to retire off and need $80,000 to live off, having 85 per cent in grow assets is incredibly risky,” he says.

“This is because you’re drawing down a lot more capital in a shorter period of time and can’t risk a significant downturn with your portfolio while still drawing down on it. The risk of a 20 per cent slide in the underlying investments means you’re crystallising losses without any alternative.”

To protect against regular equity market downturns, Suefong suggests maintaining six months’ cash expenditure, plus five times any shortfall in your portfolio income stream compared to your expenditure needs.

“So if you’re spending $70,000 per year, but only earn $55,000 in investment income, you’ll need at least $35,000 in the bank,” he says. “And another $75,000 to fund the shortfall for up to five years if necessary. This ensures that you’re never forced to liquidate assets in a market downturn.”

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