Stretching retirement income
Retirees can face some tough decisions if they find that their retirement income is not stretching far enough, particularly in the prevailing low-interest environment.
A reduction in spending is not really an option for those retirees who are already running a tight budget.
Certainly, some retirees think about returning to the workforce if possible, perhaps on a part-time basis. Continuing to work past traditional retirement ages provides an opportunity to save more for what will be a short and therefore less costly retirement.
In reality, retirees wanting to return to the workforce can struggle to find suitable jobs. And obviously numerous retirees cannot return to work for medical reasons.
Retirees who are finding that the income generated by their super and non-super portfolios (perhaps supplemented by the age pension) may consider seeking guidance from a financial planner about such issues as:
- Making retirement budgets as efficient as possible. Particularly given Australia’s ageing demographics, it is inevitable that more retirees will seek advice on budgeting for retirement and efficiently drawing down on retirement savings.
- Minimising investment costs. By lowering investment management costs, more of an investment’s return is left for the investor.
- Looking at whether to take a total-return approach to investing. Many retirees try to base their retirement spending solely on the income or yield generated by their portfolios. A classic Vanguard research paper, Total-return investing: An enduring solution for low yields, suggests that retirees consider taking both the income and the capital returns of a portfolio into account when setting retirement drawdowns and spending.
- Avoiding taking excessive risks in the pursuit of retirement income. This is linked to the previous point. Some retirees try to prop up income side of their portfolios by reducing exposure to high-quality fixed interest and broadly-diversified share funds to increase exposure to higher-risk, higher-yield bonds and a more-concentrated selection of high-dividend shares.
But by moving away from appropriately-diversified portfolios, such investors may have difficulty in meeting their long-term investment goals given the greater risks involved.
Interesting, recent CSRIO research on superannuation drawdown behaviour – from a team that includes behavioural economist Dr Andrew Reeson – confirms that many retirees in their 60s and 70s draw down on their account-based pensions at modest rates. Often only the minimum pension is taken.
Perhaps it’s a matter of understanding your financial position as a retiree and seeking advice when appropriate.
While some retirees have difficulty stretching their retirement savings far enough, others may be unnecessarily frugal as the CSRIO research suggests.
Robin Bowerman
04 October 2016
www.vanguardinvestments.com.au