Spotting signs of trouble in a retirement portfolio

With Barry Lucas, Financial Adviser

Spotting signs of trouble in a retirement portfolio

“Retirement planning can be complex, and sometimes even the most obvious risks to a portfolio are more common than you may think,” says Barry Lucas, Financial Adviser at Soundbridge’s Mackay branch. “In these challenging financial times, it’s worth taking a closer look at your portfolio to make sure everything is on track.”

Two potential areas of trouble in a retirement portfolio in the current climate are a concentration of risk around property, and accelerated draw-down of retirement assets due to low yields on offer on fixed income.

Property exposure

“One particular area where we often notice concentrated risk in retirement portfolios is in residential property, both specifically within self-managed super funds, and also as a large component of the total assets of many people entering retirement,” says Barry.

The impacts from COVID-19 are yet to be seen in a property market context as transactions generally follow a due diligence process and are less liquid than the public market of the stock exchange. High unemployment rates, increased lending risk and credit tightening are all looming as roadblocks to a recovery. The residential property market could also be hurt by ongoing travel bans and possible restrictions on immigration. Although investors with a long horizon can take this kind of volatility in stride, retirement investors should be very cautious about the sequencing risks associated with these kinds of market events. On the flipside, there are opportunities on the horizon, if you know where to look.

Low cash and fixed incomes yields

Another point of concern is the effect of a low-yield world on retirement incomes. Retirees are having to draw down on their asset base in order to generate income from certain asset classes. This is a particular problem in the current economic climate and needs to be taken into consideration, given the likelihood that the current low-yield rate will continue for some time to come.

Similarly, cash exposure must be carefully managed to ensure inflation and financial repression don’t eat into your asset base. There’s also the issue of longevity risk to consider. You should plan to live long and better while also managing your assets to cover the eventuality that you do live until a very old age. Retirement investors don’t want to outlive the value of their portfolio.

Key considerations: retirement versus accumulation

Says Barry, “There are several key differences to consider between investing during the retirement phase as opposed to the wealth accumulation phase – the two have distinct needs and profiles. It’s important to understand the different needs and goals of each phase.”

In the accumulation stages, 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, and that has the potential to generate a large income from the equities and hybrid components of a retiree’s portfolio.

Secondly, investors must 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 order to prepare for the possibility of living a long life – or leaving a financial legacy for family members –  investors might need to consider their allocation between more conservative asset classes and other 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 should 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.

Everyone has 20/20 vision in hindsight, but consulting a financial planner can help you to identify signs of trouble in your retirement portfolio and put effective strategies in place to minimise your risk.

WARNINGS, DISCLOSURES & DISCLAIMERS

While every care has been taken in the preparation of this article, Soundbridge Pty Ltd (ABN 40 151 134 146) and AFTA Pty Ltd (ABN 18 624 984 550, AFSL 507423) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.

The information and any advice provided in this document is general and has been prepared without taking into account your objectives, financial situation or needs, and might not be appropriate to your situation. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to those things. Past performance is not a reliable indicator of future performance.  AFTA Pty Ltd does not warrant that future forecasts are guaranteed to occur.

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither the Licensee nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.

Soundbridge Pty Ltd (ABN 40 151 134 146) is a representative of AFTA Pty Ltd (ABN 18 624 984 550), Australian Financial Services License (507423), Registered office at 166 Quay Street, Rockhampton QLD 4700.

Any advice on this website is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

Sources:

https://www.firstlinks.com.au/spotting-signs-trouble-retirement-portfolio

https://pursuit.unimelb.edu.au/articles/where-to-now-for-australian-property

https://firstfinancial.com.au/understanding-sequencing-risk/

https://www.pwc.com.au/important-problems/business-economic-recovery-coronavirus-covid-19/guidance-on-tax-obligations-and-relief-for-businesses-affected-b1.html

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