Money and Life
(Financial Planning Association of Australia)
When it comes to investing for retirement, what are your options? Whether youâ€™re retired or still working, our complete guide to retirement investments will help you with making the right choices for your future in retirement.
Your investment options
In the simplest terms, investing your money means buying an asset with the expectation ofÂ earning returnsÂ from ownership of that asset. If you own anÂ investment property, for example, you can expect toÂ receive rentÂ as income. But if you then sell the property for a higher price than you paid, youâ€™ve increased your returns from your asset even more.Â This is known as a capital gain â€“ the growth in value of an asset over time.
Different types of investments are grouped together intoÂ asset classesÂ â€“ a group of investments with similar characteristics, such as term deposits,Â bonds, property orÂ shares/equities. When it comes to choosing between differentÂ investment options, they generally fall into two broad categories, defensive and growth assets. Defensive assets offer less opportunity for growth, but more stability and security for your original investment. AÂ term depositÂ is an example of a defensive asset â€“ the interest youâ€™ll earn is fixed but youâ€™re guaranteed to get your original deposit back at the end of the term. Growth assets, such as shares, carry more risk but offer more potential to grow your wealth over time.
Why diversification is important
When choosing growth assets and defensive assets to invest in youâ€™re looking at how much you can expect to earn compared with the risk of losing some of the original sum invested.Â Diversifying your investmentsÂ can be a good way to strike a balance between risk and reward. Because different asset classes behave differently at different times, spreading your money across a number of assets can help you earn more stable investment returns overall.Â
Every type of investment comes with costs. For buying and selling shares, youâ€™ll pay brokerage fees for each transaction. When you buy and own property, there are upfront and ongoing costs such as stamp duty, agency fees and maintenance costs. Plus, youâ€™ll be liable for tax on the income from your investments and on any capital gain you earn when you sell assets. These are all things you need to take into account when looking at different investment options.Â
Should you invest in a super fund?
You can invest in all sorts of assets outside of super, either directly or throughÂ managed funds. Most super funds will also offer a wide range ofÂ choices for investing your money, including their own blended investment options, such as growth, conservative (defensive) or balanced.Â So should you be investing your retirement savings in super or look elsewhere?
A key benefit of investing through your super fund is the potential savings on theÂ tax on your investment income. Any investment earnings in your super fund are taxed at a maximum rate of 15%, regardless of the marginal tax rate on the rest of your income. The main drawback of investing in super is the money you invest and the investment earnings are locked away until youÂ reach your preservation ageÂ and/or meet a condition of release. If you need access to the money youâ€™re investing in the short or medium term, then your super fund isnâ€™t the right place for it.
What about SMSFs?
If youâ€™re looking for more flexibility in your choice of investments than you can expect from a super fund, aÂ Self Managed Super Fund (SMSF)Â could be the answer. However, there are significant costs involved in setting up and managing an SMSF so your freedom to invest super savings in property or collectibles, for example, comes at a price.
Your superannuation investment strategy
Thereâ€™s no one-size fits all when it comes to investing. Whether itâ€™sÂ your investment strategyÂ for retirement or another purpose, there are lots of personal circumstances and preferences to think about. Some of these include your investment timeframe, your appetite for risk and how much you already know about different types of investments. Talking with a CERTIFIED FINANCIAL PLANNERÂ®Â professional can help you narrow down the options and guide you towards a blend of investments that works best for you and your goals.
Investing after retirement
An investment strategy that works well for you whilst working full-time may need to change when your goal is having anÂ income to rely on in your retirement years. You may want to limit your investment risk to be sure of having enough money to last throughout retirement, but also earn sufficient returns so that inflation wonâ€™t reduce the value of your savings over time.
This is why itâ€™s important to get the right advice about changing your blend of investments when you retire. Plus, there are new types of investment opportunities available when you retire.Â AnnuitiesÂ andÂ account-based pensionsÂ come with pros and cons and a CERTIFIED FINANCIAL PLANNERÂ®professional can help you understand how products like these can work with yourÂ retirement investment strategyÂ and financial plan.
Looking for the best advice for your retirement investment? Discover why discussing your financial plan for retirementÂ with a CFPÂ®Â professionalÂ can help you look forward to life after work.