Frances White retired six years ago at the age of 63. In addition to a modest super account and share portfolio, the former qualified accountant owns three investment properties in Brisbane, the Sunshine Coast and Melbourne.
She is counting on capital growth from the properties to spice up her retirement. “Some financial advisers say when you retire you should sell assets and invest in things like conservative managed funds that generate cash,” she says. “But that’s not the only way to do it.”
Experts agree that retirees should go for growth if they want to boost their retirement lifestyle. “Having some growth assets in retirement is essential,” says John Owen, Portfolio Specialist at MLC Asset Management.
In the past, Australians could expect to have a relatively short retirement. Fifty years ago, ABS data showed that men lived to an average age of 67.6 and women to 74.2. But life expectancy has increased to 80.7 years for men and 84.9 years for women. “The money they [retirees] have got may have to last much longer than they think,” Owen says.
Returns from traditional retirement assets like cash and bonds have slumped as interest rates fell to record lows. Owen notes that in 2010, three-year term deposits were returning over 6% pa. Now they return just 1.25% pa.
Owen says if retirees are drawing down their savings, some research has shown they risk running out of money if they are too defensive.
That means investing in growth assets. These include international and domestic equities, listed and unlisted property, some high-growth infrastructure, and private equity that invests in unlisted companies.
Andrew Boal, CEO of financial services consulting firm Rice Warner, says growth assets should give you better returns over longer periods.
In the 10 years to December 31, 2019, growth assets have outperformed other asset classes. Australian shares returned 7.9% per annum, Australian property securities 11.6%, global shares (hedged) 11.3%. But Australian bonds returned 5.7% and cash just 2.9%.
Frances White says she needs those higher returns to have a chance of a better retirement lifestyle. Because she was a single mother she started investing later and didn’t accumulate a lot of super. To catch up, she turned to investment properties, accumulating four in the decade before her retirement.
White sold one of the properties to help fund her retirement, but she has continued to hold three investment properties primarily for growth through capital gains.
“My assets should keep going up in price. I plan to sell another in five years and then put that money into things like shares that give me regular income.”
While growth assets return more over longer periods, they can lose a significant amount of their value in the short term.
Owen notes that in the December quarter of 2018, Australian shares fell 8.2%, US shares 13.7% and Japanese shares more than 16%. Australian residential property prices in Sydney and Melbourne have also suffered steep losses in recent years.
“But that [volatility] doesn’t mean you avoid them,” Owen says. “There’s always opportunity to manage risk.”
The best protection is diversification. “Buy growth assets alongside other things that have a less volatile pattern of return,” he says.
Owen says that investors in growth assets should invest with longer time frames in mind. “Often they need to give those assets time to deliver their superior return potential.”
Boal says the risks of growth investments can be overstated when you are investing for the long term. Over a 20-year period, a poor outcome for growth assets is similar to that delivered by conservative investments. “By investing more conservatively, over the long term you’re mainly limiting the chance of getting upside returns without really protecting the downside that much.”
Going for growth
Frances White decided to go for growth. She says being totally conservative and investing for income is fine for retirees with a big enough super portfolio to draw a pension. “But most of my generation don’t have big amounts of super.”
Boal says how you invest your money is really important. "Retirees these days are expected to live a longer life and need to have some exposure to growth assets to make a material difference to their spending and standard of living in retirement."
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