A STEP-BY-STEP GUIDE TO
RETIREMENT PLANNING AND INVESTING

Australians now live longer than ever before, with retirement expected to last as long as three decades for many of us. With so much down time to look forward to, it is no surprise that many of us are looking for better ways to support ourselves in our post-work years. Whether you are hoping to say goodbye to work life soon or are just beginning to think about investing in your future, with a little planning, you can make a big difference in your retirement fund.

Read on to learn more about retirement investing, how you can benefit from it and how to ensure you get the fulfilling and financially secure future that you want.

Step One: Financial Goal Setting

The average Australian lives to be 82.8 years old, making us one of the highest-ranked countries in the world in terms of life expectancy. While this is undeniably good news — we are enjoying more time in retirement than any generation before us — it also highlights the need for a robust retirement plan. To do that, you need to set yourself some financial goals.

Retirement is not something we have complete control over either. Unforeseen events such as accidents, ill-health or redundancy could see you entering retirement earlier than expected. The earlier you start to think about securing your future finances, the better.

The first question to ask yourself is what sort of lifestyle do you want to be living when you retire? Do you plan to travel the world, see the great outdoors of Australia, or do you have something more modest in mind? You also need to consider everyday living costs such as rent, food, health insurance and other miscellaneous expenses.

Even if you only want to live a modest lifestyle, the Age Pension alone is not enough to live on for most people. The Association of Superannuation Funds of Australia (ASFA) has calculated that to support a fairly basic lifestyle, couples aged around 65 would need an annual income of approximately $41,170. If you want to enjoy your golden years and live comfortably, you will need at least $22,000 more.

How much do I need to retire in Australia?

Whatever your individual circumstances, gaining a clear idea of your debts, income, savings and expenses is crucial. Understanding how much you have, and how much you will need, is the key to a robust retirement plan.

Before moving on to developing your investment strategy, make sure you have the answers to these important questions first. The answers will vary depending on your lifestyle and will indicate approximately how much money you need to retire.

1. When do you want to retire and approximately how many years would your money need to last?
2. What are your monthly living expenses? And yearly living expenses?
3. How much will your retirement period cost?
4. Therefore, how much do you need to save?

Step Two: Decide on a Retirement Investment Strategy

Other than clearing any debts where possible, avoiding high-interest loans, and salary sacrificing some of your pre-tax income into your superannuation fund, you should be thinking about how to achieve higher returns through investments, to potentially grow your assets at a faster rate.

It is important to decide on a retirement investment strategy that is appropriate for your specific circumstances. Here are some factors you need to consider.

Your risk tolerance. Like all types of investing, you need to consider your risk tolerance when putting a retirement investment strategy in place. Lower-return investments, such as blue-chip stocks, are considered more reliable and secure, so they may be a good option if you are approaching retirement. As a retired person, you will no longer have an income from wages or a salary, so protecting your capital is a key factor. This might mean steering clear of high-risk assets and making sure to diversify your portfolio. A common strategy for people nearing retirement is to invest in profitable companies that pay larger dividends, to maintain a flow of income.

On the other hand, investments considered to be higher risk, such as CFDs (‘Contract for Difference’) and cryptoassets, may be more suitable for people who have many years until they retire and are happy to ride the highs and lows of the market.

Your liquidity requirements. Ask yourself, will you need to have access to cash in your retirement or are you comfortable with a large portion of your savings being tied up in different investments? Your answer to that question will go a long way to determining your retirement investing strategy.

For example, a liquid investment is an investment that you can easily convert to cash and access quickly if you need it. Cash, savings accounts and certain stocks are among the most liquid types of investments because they are so easy to access.

Non-liquid assets, on the other hand, such as real estate, cars and land, are assets that cannot be sold or converted into cash easily without a significant loss of investment, and so are generally better if you are looking for a long-term investment.

Step Three: Plan a Retirement Portfolio

When planning a retirement portfolio, it is crucial that you understand the different asset classes and which investments fall into each. An asset class is a group of investments that have similar features, and, therefore, perform similarly. Some of the main classes of assets include:

• Stocks and shares. The terms “stocks” and “shares” are often used interchangeably, however they do have slightly different meanings in different countries. In Australia, the term “stock” means the total of all shares listed for a particular company, and “shares” means the smallest unit of division of ownership in a company.

Companies will issue shares to raise money to grow their business or run new initiatives. When you buy shares of a company, you are effectively buying part ownership of that company. If the share price goes up, you can then sell the shares for a profit. If the share price goes down, you can also lose money. Some stocks also pay dividends, which are payments made to shareholders out of the company’s revenue, typically paid quarterly.

Before investing in stocks, it is important to research the companies you are interested in and decide whether you want regular income or capital growth. This will help you determine which stocks to invest in.

• Bonds (fixed interest). When you invest in bonds, you are lending money to a company or government, and will receive regular interest payments, called coupon payments, in return. All bonds have a set value that you pay upfront when they are first issued, which is called the face value. If you hold the bond until maturity, which is the date when all debt and interest payments must be paid in full, you will receive the face value of the bond.
• Cash. Cash includes bank deposits, term deposits, savings and cheque accounts and cash management trusts. While the potential return is low, so is the risk. Cash is suitable for people with a short-term outlook or who have a low tolerance to risk. Income is typically generated through regular interest payments.
• Real estate. Real estate or property investments are investments in land and any accompanying facilities. This can include industrial, retail, commercial and residential real estate, or publicly listed property funds. Any return from unlisted property comes from changes in its value and also rental income. Returns from listed property come from changes in share price and dividends.

Real estate is less liquid than stocks and bonds, so is generally seen as a long-term investment. The risk is moderate to high, as property markets will fluctuate.

If your retirement portfolio encompasses investments spread across different asset classes, it is considered balanced and diversified. However, if your portfolio is heavy in one area — say the majority of your investments are in stocks — then, if that sector does not perform as well as you had hoped, you risk losing a lot. To prevent this from happening, you want to build a diverse portfolio. That way, if one asset experiences problems, you will still have the others to help get you through the crisis.

Step Four: Picking Individual Assets

The kinds of assets you choose should be based on your risk tolerance, liquidity and the profitability you desire; that is, the factors you took into account when deciding on an investment strategy. This is known as asset allocation and it is an important part of any investment strategy, including retirement investing. No asset is risk free so the aim is to diversify your investment into several different types of investments. For instance, you might put half of your money in bonds and the other half in stocks. However, for a more diverse portfolio, you can also invest in commodities, forex, real estate and international stocks.

Other popular assets to invest include blue chip stocks, as a lower-risk, long-term strategy. A blue chip stock refers to stock from companies with an excellent reputation. They are usually large, financially sound and have a history of paying dividends to investors, which makes them an attractive investment option for retirees because of their comparatively low risk. Some examples of blue chip stocks include:

• Apple (AAPL)
• Microsoft (MSFT)
• Coca-Cola (KO)
• Cisco (CSCO)
• Lockheed Martin (LMT)

While blue chip stocks may seem like an alternative to riskier, less well-known stocks, there is no such thing as a 100% safe investment. Take, for example, industry giant General Motors. They were a highly regarded company with blue chip stock that had to declare bankruptcy in the wake of the 2008 financial recession. Regardless of how you choose to invest, there are always risks involved.

The question is often asked: “When should you start investing for retirement?” No matter what your age or circumstances are, there is no better time to begin investing than now. Ensure that the decisions you make are the appropriate ones for your age, risk tolerance and liquidity requirements. It is easy to delay, but by putting in the time and effort, and taking the proper steps, you can earn the retirement lifestyle that you deserve.