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Structuring your investment portfolio for retirement

Glenn Freeman  |  18 Jan 2017Text size  Decrease  Increase  |  

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As a large cohort of Australians approach retirement, questions around how to adapt your portfolio as you shift from accumulation to draw-down are increasingly common.


It's worth remembering that if you've been an active investor previously, many of the same basic lessons and themes are still relevant.

As you enter retirement, most of the same investment products that were part of your strategy during accumulation are still appropriate, such as term deposits and managed funds, according to Anthony Serhan, Morningstar's managing director of research strategy, Asia Pacific.

"All are still valid in retirement and all are reasonably liquid," he says.

Residential property is an asset that older Australians commonly hold in retirement, which also has its place, but Serhan emphasises the need to be mindful of the relatively illiquid nature of this.

He says there are three key points that become more important when managing your portfolio in retirement: liquidity, rebalancing and longevity risk.

Serhan also emphasises that your strategy should not provide too much focus on either of these, but maintain a balanced approach to ensure all three are given due consideration.


"You are going to need money to live off," says Serhan. To ensure you've got sufficient cash to hand, you should hold some investments that you can draw on quickly and easily to cover day-to-day expenses or necessary purchases.

"The most important thing is getting the difference between when you draw down and the income of your portfolio right ... people do often confuse the two," says Serhan.

While it's important to ensure your super is properly invested for growth, you also need to ensure you have some components that you are happy to draw on.


Shaping your portfolio appropriately once you enter retirement is also important. According to Serhan, this becomes more difficult at this stage, because when drawing down income from a super fund or pension plan, you may be inadvertently shifting the weightings held in different asset classes.

He also emphasises the importance of being prepared for various market environments.

"If you're drawing down for 20 years, the reality is you will be drawing down in both bull markets and bear markets, so plan for this and be ready."

Sequencing risk--which refers to the risk of experiencing poor investment performance at particularly disadvantageous times, such as when your portfolio balance is highest--is a consideration. However, adjusting your asset exposures amid a market downturn can mean you miss out on substantial investment earnings when the inevitable upswing occurs.

"And the flipside of that is also true. Just because markets are performing strongly at a certain point in time, be careful about changing too much in your portfolio," Serhan says.

Instead of reactively adjusting your investment weightings, Serhan emphasises this is something that should be done on a regular basis, with the timeframe varying depending on your individual circumstances, age, time horizon and other variables.

Longevity risk

This refers to the risk of outliving your savings, and is something addressed extensively in a paper, Safe Withdrawal Rates for Australian Retirees. It draws on a broad range of industry research and data gathered by Morningstar.

The Australian Bureau of Statistics (ABS) life tables are a commonly used measure of life expectancy for Australians. Life expectancies have changed markedly since 1890, increasing by 32.67 years for males and 33.41 for females. By 2011, life expectancy was 79.9 years and 84.3 years for a boy and girl, respectively.

With constant improvements in medical technology and treatments, average life expectancy in developed countries like Australia continues to trend upward.

There are various modelling approaches that individuals and financial planning professionals use in determining an appropriate, sustainable balance between draw-down, investment earnings and spending patterns in retirement.

Stochastic and deterministic modelling are two approaches discussed by Melanie Dunn, SMSF technical services manager at actuarial firm Accurium.

"Stochastic modelling involves looking at the range of outcomes you might experience. Instead of using fixed assumptions, it often involves running a household situation through potentially thousands of simulations of what investment markets might do and what their lifespans might be," Dunn says.

"So, we can build a picture of the range of outcomes they might experience. We can answer questions about the likelihood of them achieving their retirement objectives."

Regulatory attention

In 2016, the federal government introduced several reforms to superannuation regulations, including caps on concessional and non-concessional contributions. Treasury is also conducting further reviews into the sustainability of Australians' superannuation arrangements in retirement, particularly in pension phase.

Further draft regulations addressing income stream products will be released for public consultation in early 2017. Morningstar is among numerous industry participants making submissions as part of this process. Serhan expects that once this review is completed, individuals are likely to see many more income stream products made available.

However, he emphasises the importance of education around the basic principles of superannuation and planning for retirement, "with a view that there is too much reliance on products and not enough on education".

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Glenn Freeman is Morningstar's senior editor.

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