MONEY TALK: Low maintenance doesn’t mean low risk

Bryan Ashenden
02:40pm March 13 2020

A man walks past the Australian Securities Exchange in Sydney. (Getty)

After years toiling away just to get to retirement, the last thing you want is for it to be complicated – right?  

Yet if you have been putting your money away in superannuation to build your nest egg, you would probably know that super is anything but simple and have probably experienced numerous changes over that time. 

So, is it possible to have a low maintenance retirement portfolio that will make your life easier? 

Amid heightened volatility across financial markets reeling from growing fears about the COVID-19 outbreak, it’s a timely question many retirees are likely asking themselves. Yesterday, the S&P/ASX 200 index – which tracks the stock market’s largest 200 companies – slumped 7.4 per cent, its largest one-day fall since the global financial crisis and second biggest on record, putting total losses since the market’s peak last month at more than 25 per cent. 

Obviously, the premium for being able to sleep at night has probably just gone up. 

Low maintenance is different to risk free

But at the outset, it’s important to draw a distinction between low maintenance and risk-free.

A risk-free portfolio can almost only be obtained by putting all your money in cash, outside of the super system, in the bank and/or in highly rated government bonds. You’ll know where it is and how much you have, but it’s still not without risk. 

For example, with interest rates at record lows, you won’t generate much return on money in a bank account. And what if you need to access your funds before a term deposit expires? Is there a penalty to pay? And of course, investing in cash carries potentially large opportunity costs of missing out on capital growth so your money lasts longer. 

A low maintenance portfolio is simply that – one which you don’t need to spend a lot of time adjusting.  

How do you build a low maintenance retirement portfolio?

As with any investment portfolio, the starting point is to know what it is that you are looking to achieve. 

How much income will you be drawing each year and how regular will those withdrawals be? 

How long ideally do you want your money to last? And do you want to leave money to family or are you happy to run down the entire balance? 

We all want it to last forever, but in reality that’s not going to happen for everyone. So be realistic – get an idea of how much you withdraw (and how frequently) and set a level of return you could reasonably expect to generate to calculate how long your money should last.  

If it’s not as much as hoped, think about whether you can you work for longer to boost your starting figure? Can you reduce withdrawals? Or do you need to adjust your return expectations?

Once you have some answers to these questions, you can start to determine the ideal, low-maintenance portfolio. 

If some certainty of income is what you’re after, annuities could be worth a look. They pay a regular income stream (and can be adjusted for inflation) and are not subject to market risk, but you generally give up access to the capital invested for the income certainty.

If you want a return that largely mirrors the overall stock market performance rather than constantly picking and assessing (and worrying about) individual securities, you could consider index funds. There’s lots of them these days, tracking stock markets, specific industries or themes, commodities, bonds and other asset classes.

In a broad sense, index funds mirror the different markets or segments they track, meaning you don’t need to worry about choosing individual investments, for example, companies in the S&PASX 200. But because the spread of underlying investments can be quite wide, there’s a risk of missing out on better returns from specific market segments or companies. 

Finally, you can also look to invest in a more concentrated portfolio of assets depending on your risk profile, reducing the time required to monitor them. To maximise this, you could have an investment manager or a financial adviser manage it, making investment decisions and doing the transactions on your behalf without needing to gain your approval before every trade. 

So, where do you start?

As with many things, the best way to plan your journey into retirement is to have an idea of your end destination. As always, perhaps the best starting point is getting some professional advice. 

Then, if you decide the simpler and easier route is for you, there are a number of options to build a low(er) maintenance investment portfolio. 

But remember, the best option will usually be different for everyone and there’s no silver bullet to erasing risk. Low maintenance is not necessarily low risk.   

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group.

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.
 

Bryan Ashenden

Bryan is head of Financial Literacy & Advocacy at BT, leading a team of professionals committed to supporting the adviser community with technical, regulatory, policy and research support. He brings to the role many years’ experience, the last 16 spent with BT. With qualifications in Law, Commerce and Financial Planning, and being a SMSF Association Specialist Advisor, Bryan is a frequent industry presenter, facilitator and commentator.

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