Sonny Rahim Updated Dec 19, 2022
Mate Checked
One of the first questions people ask when planning for retirement is how should I invest to best suit my age and retirement goals. How well you save and invest your money while you are in the workforce directly impacts how you will live your life when you retire. That being said, it’s vitally important that you understand that the investments which may suit you in your 20s and 30s might not be the best for you when you are nearing retirement age. Below is some information that could help you understand how to invest in ways that are best suited to your investor profile.
Discussing the basics of asset allocation is an essential precursor to understanding how to invest best to suit your investor profile. An asset class or category is a helpful way for investors to diversify their portfolios. Different assets have varying degrees of risk and cash flow components, and by grouping or categorising these together, it helps to ensure you have diversification in your investment selection.
The three main asset classes you’ll find in most investment portfolios are equities (stocks), fixed-income securities (bonds) and cash and cash equivalents. Property, precious metals, commodities, futures, and other derivatives make up the other kinds of asset classes you might encounter. Each one has varying levels of risk and returns profiles. They all behave in different ways, driven by various factors, so it’s essential to try and make sense of it all.
As a general rule of thumb, when the economy is going well, and investors are optimistic about the future, growth stocks tend to perform well. During this period, cash is deployed in the market because the expected return will be higher, and investors tend to risk more. Conversely, when the economy is not going so well or stops growing, investors appetite for taking risk subsides. Future growth forecasts are revised lower, and investors will often take money out of the stock market and invest in fixed income or cash and equivalents. In this instance, stocks and fixed income will move inverse to one another, which means that bonds go down in price when stocks go up.
It’s easy to see why investing in only one asset class could be problematic. The market cycle will benefit different types of assets at other times, and it’s your job as an investor to try to allocate your investments accordingly. As the old saying goes – ‘never have all your eggs in one basket’ because if the asset class you are investing in declines significantly, and you are not diversified, your portfolio will decline (which isn’t much fun). Diversification is the secret weapon that could keep you from losing a material amount if the market falls. The process of arranging assets in your portfolio is called asset allocation and depending on your age and the time you have until retirement will determine what is best for you.
You could potentially allocate your investment assets differently at various stages of your life. However, we all have varying tolerance to risk when investing, and some investors seek more aggressive risk and return profiles. At the same time, some of us are more suited to stable investments with low volatility. Figuring out your investment risk profile is best suited to a professional financial advisor or financial planner.
Possible asset allocation for DINKs: Stocks 80% to 90% and Fixed Income 10% to 20%. A great way to speed up your retirement savings is by making concessional or ‘pre-tax’ contributions to your super. You can do this by asking your employer to increase the amount you contribute to super instead of your bank account, known as salary sacrifice. The amount specified is taken from your gross pay which also lowers your taxable income.
Concessional super contributions are taxed within your super fund, but at a lower rate of 15% compared to most peoples’ income tax rates. Employees that earn between $37,001 – $90,000 receive a marginal tax rate of 32.5% at the time of writing which is a big difference from the concessional rate of 15% mentioned above. The Australian Tax office states that this kind of contribution is not counted as taxable income which means you are not subject to PAYG tax on the amount chosen.
The sooner you can begin your investment journey, the better which is primarily due to compound interest. Time is a significant advantage in investing as you can ride out changes and fluctuations in the market short term. Growth assets usually have the most upside potential; however, they can be volatile compared to lower-risk assets like bonds or fixed income.
Sample Asset Allocation: Stocks: 70% to 80% and Bonds 20% to 30%. If you have not got the investment ball rolling in your 20s due to paying down your student debts and establishing a career, then your 30s is when you need to get serious. You still have the advantage of time with the potential of compound interest on your side, and old enough to put away 10-15% of your income for the future.
Many in this age bracket will be paying off a mortgage and thinking about starting a family if it hasn’t begun already so planning for your retirement should be a number one priority. Generally speaking, you will be in the workforce for another 30-40 years from here, so this is the time to maximise your retirement savings. It’s worth considering speaking to a qualified financial planner or advisor to discuss ways you can plan for the future. There are many different savings, super and tax strategies you can explore, and getting the foundation set it should help in your later years.
In terms of the investment allocation at this time, you could still afford to take some risk in growth-related assets, but adding a few fixed income securities could be prudent to decrease the portfolio’s volatility.
Sample Asset Allocation: Stocks 60% to 70% and Bonds 30% to 40%. You are right in the middle of your working life in this age bracket. Suppose you have had adequate capital available to viably start an SMSF (typically $200,000 or above). In that case, retirement and investment planning should be at the forefront of every financial decision you make.
It’s increasingly important to consider the investments you are making and how much risk you are taking in the markets. Establishing a relationship with a financial planner could be money well-spent as they can help guide what kind of investments to make and for what reasons you are making them. Whilst you will generally need growth assets to help your portfolio generate a positive return and beat inflation, you’ll need to think about increasing your exposure to investments like fixed-income securities and bonds.
Balance your portfolio’s risk-taking as best as possible by focussing on quality investments with good long-term performance, rather than ‘quick wins’ and investments that seem too good to be true.
Sample Asset Allocation: Stocks 50% to 60% and Bonds 40% to 50%. Retirement age is fast approaching, so now is not the time for excessing risk-taking. Market fluctuations in the short term can impact your retirement plans as you are getting close to needing your money. It is common to shift to a conservative and liquid investment strategy in this age bracket.
Investments which feature stability and low volatility are worth considering if you want to keep money in the market and reduce the ups and downs. Income funds, ETFs, bonds and money market investments could be a good option if you don’t want all your money in stocks.
It’s also an excellent time to take stock of what you have and start thinking about the date when you wish to retire from the workforce. Professional advice in this area can be worth its weight in gold, and another way to help you feel secure about the time you choose to hang the boots.
Sample Asset Allocation: Stocks 30% to 50% and Bonds 50% to 70%. Shifting your investment focus from growth to income is the aim of the game in this age bracket. While this doesn’t mean selling out of your equity holdings altogether, it does mean it could be worth considering stocks that provide a regular dividend stream, rather than upside growth potential.
Investing in quality is also increasingly important during this time. Quality assets are usually highly liquid, which means you can sell them quickly for a favourable price. An example of a non-liquid investment could be a small or micro-cap stock where there may not be enough buyers for you to exit an asset if you so choose. Large-cap stocks offer deep liquidity most of the time, which can be comforting for some investors.
As the old saying goes: the best time to start investing was yesterday. The next best time to start is now. This saying reflects the determination and commitment at the heart of all investing. It doesn’t matter how old you are now; the best time to get started was a while ago. But it is never too late to get started.
By considering the above information and speaking with a qualified financial planner, you can make the right investment decisions for your age group and financial position. It can be valuable to meet with a financial planner who can personal and tailored financial advice.
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