The three key questions to ask yourself before retirement

It is never too late or too early to start investing for your retirement. Whether you have a retirement date in mind or you've just woken up to the shock realisation that retirement is not as far away as you thought, the perfect time to start investing is now.

But today (like tomorrow and yesterday, really) comes with its own set of investing challenges. Some are apparent, such as the dearth of interest on bank accounts and term deposits, and others are less apparent, such as how much money do you actually need? 

I spoke with Shane Oliver, chief economist at AMP Capital to discuss how investors can navigate this lower-for-longer environment. While Acumen Wealth Management's financial planner Cameron McLean gave insight into some of the most pressing concerns for pre-retirement investors today.

From this, we've drawn three key questions you need to ask yourself before you invest for retirement.

#1 How much income do you really need?

"Imagine your 80 year old self is sitting on your front porch. You're looking back. What are some of the things you wish you had done with your life?"

This is the first question McLean asks his clients.

"You get some pretty interesting responses to that. It's about helping people think about what could be, and then try to work out if they have enough capital over time to do these things," he said.

"For some people, it's about making sure their children had a great life. For other people there's a particular place in Italy (they) want to go to and they want to spend three months there…. (or) they want to see their grandchildren and watch them grow up," he said.

Investing for retirement really depends on the kind of lifestyle you want to lead and how much that will cost. It may be that you want to sell the house, pack everything into a caravan and live on half the salary you were spending before retirement.

If you ask most people, said McLean, in a perfect world they want to have access to the same level of income they had before retirement - if not more.

Let's start with the life you don't want to lead.

On 20 September 2021, the Age Pension increased by a measly $14.80/fortnight for a single person or $22.40/fortnight for a couple. This brings the Pension to an annual figure of $25,155 or $37,924 for a couple. According to leading actuarial firm Rice Warner, about 39% of Australians over the pension age receive the full Age Pension, while 24% receive a part pension. 

"The base levels of the Pension are very low," said Oliver. "You will struggle to maintain your lifestyle on it."

"There are ways around it if you sell the family home and downsize. That's an option. But a lot of people don't want to sell the family home." 

The Association of Superannuation Funds Australia (ASFA) has set the national benchmark for retirement. By its estimates, a "comfortable" retirement means having a budget of about $63,000 for a couple. The target is a super balance of about $640,000 for a couple.

So, if your retirement dreams involve travelling, grabbing lunches with your friends, maybe Pilates or golf. If in any way you want an active retirement with financial independence, then you're going to want to be invested. 

#2 Where should you find income?

There's a whole universe of income-producing investments. Throughout the income series, we'll be exploring each of these in more detail. But for now, we have a bit of a thought experiment.

Here is Shane Oliver's ideal portfolio for income in retirement

You might have noticed, I like to put Oliver on the spot with hypothetical portfolios. Call it a brainteaser.

I asked how he would put together a portfolio for income generation in retirement and this is what it looked like:

• 20% high-grade Australian corporate debt
• 25% resources stocks ("You get good income out of resources, but they tend to be more volatile," he said.)
• 30% banks/ financials
• 25% a mixture of REITS, telcos and utilities

One risk many people don't account for, said Oliver, is longevity risk. With people living longer than ever before the potential to run out of money is a real risk and this means investors have been looking for growthier investments.

"The real risk is if you run out of money. That also has the effect of forcing people away from fixed income private investments, zero capital growth investments towards investments that offer a bit of capital growth to cover that longevity risk," said Oliver. 

But with higher returns, there are of course more risks. 

#3 How much risk are you comfortable with?

When most modern retirees were at the peak of their careers and planning for retirement interest rates were a lot higher and investing much more straight-forward.

"The interest rates that looked super high in the late 1970s, 80s into the 90s, and to some degree that continued though into the 2000s. Some of the major banks - even in 2010 - were offering 5-year term deposits rates at 8%," said Oliver.

Imagine!

Now, savers are suffering. Thwarted by a lower for longer interest rate environment, stretching still more years ahead, saving isn't enough for retirement anymore.

"Now it's become far more difficult. Term deposit rates have crashed. This really makes investing in retirement a lot more challenging. Before you didn't have to think about it too much," he said.

Not only term deposits, but the low RBA cash rate has brought down the returns across most defensive asset classes. Where once, a well-rounded portfolio could have comfortably earned 5-6%, you would now be looking at yields of about 3% with similar construction.

To put that into perspective, if you were expecting to draw down $60,000 a year from a $1 million portfolio, you can now cut that figure in half.

On the flip side, investing in shares has become easier than ever.. which bring us to risk.

Usually, as you get older you want to downgrade your risk appetite. But in a lower-for-longer environment, you're extremely limited for choice. Investors have realised that There Is No Alternative - TINA - if you want returns.

McLean said he often hears clients coming in and saying they need to move up the risk curve.

"No one wants to take on more risk," he said. "But they're recognising that they need to take on more risk to meet their objectives and goals. Our role as advisers is to explain what that risk level actually means."

"When the next GFC happens - not if, when - they will see their (riskier) assets fall by 30-35% and they need to be comfortable with that," he said.

But the comfort level with the risk curve is really a symptom of the market frenzy that is going on. You need to consider not just your target return, nor your downside risk but also your own degree of risk appetite. 

Your ability to absorb volatility depends on your time until retirement, Oliver explains. This is why investors tend to de-risk as they approach retirement.

"Suppose the share market goes down now and I've got 10 years to go before I retire, then that's actually good because I'm still earning income, I'm still putting money into super and my investments outside of super," said Oliver. 

You don't want to be panicking because the market has shifted. Most people don't want to spend every day of retirement checking their investments either. 

One of the big things you want to be able to do in retirement is sleep at night, said Oliver. 

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