Understanding the Essentials of Investing for Retirement

Getting ready for retirement presents challenges for investors. On the one hand, retirement savings are reaching their maximum amount, making them susceptible to fluctuations and prolonged declines. On the other hand, these investments must generate greater returns than low-risk investments, such as cash and bonds. 

Reaching this critical time can create the temptation to change strategies. Also, short-term market noise can lead investors to opt for lower-growth investments before retiring, but the historical data shows us it is usually better to stay the course as an investment strategy to reach your financial goals. 

In 2022, Australian exchanges (in some form) marked their 147th year. The data shows us that during this time, the market (including share prices plus dividends) has risen 117 of these years and declined 30 years. So nearly 80% of the time, the market rises, and it declines 20% of the time.¹

When the market rose during these years, it did so by an average of 16.1%; when it declined, the average was 10.1%. When you average all the years, you find that the annual growth has been 10.8%. So if you want to experience gains in 80% of the years, you need to be prepared to experience losses in the remaining 20%.

If we use the Accumulation Index (introduced in 1979), the results get better and show that since that year, the average market growth has been 13.0% per annum. This growth is despite the serious downturns in the 1987 market crash, the 1997 Asian Financial Crisis, the 2008 Global Financial Crisis and the COVID-19 pandemic. 

The data shows us that one of the big essentials of long-term investing is staying in the market to reap the growth in the good years despite the declines that occur along the way in the bad years. 

Investment Strategies For Retirement

There are a number of investment strategies based on where you are in your investment journey. The main distinction between them is that pre-retirees generally invest for growth while retirees focus on generating income. Choosing your strategy is part of the retirement planning process. 

Value Investing

With this investment strategy, you invest in shares underappreciated by investors and the overall market. These shares look inexpensive compared to the business’s underlying revenue and profit. Investors who apply this form of investment hope the share price will increase as more investors realise the company’s intrinsic value and solid fundamentals. 

What makes a business a value investment? One of the characteristics is having a low valuation compared to the value of its assets and/or its key financial metrics, including revenue, earnings and cash flow. Other features that point to a value investment include:

• Being a well-established business with a long-term history of success
• Generating consistent profitability
• Revenue streams that are stable without large sales contractions
• Dividend payments – however, these aren’t required to be a value share. 

Growth Investing

Growth investing is an investment strategy focused on growing capital for investors. The typical growth investment strategy is to invest in shares of growing businesses, particularly small or young companies with earnings that are expected to have a faster growth rate than average when compared to their sector or the entire market. 

The key factors that growth investors consider are past and future earnings growth, profit margins, return on equity and the performance of the share price. Instead of choosing individual shares, you can invest in managed funds (listed or unlisted) or choose a super fund that is focused on growth businesses. 

This investment option can deliver impressive returns but they are more risky than shares in traditional ‘blue chip’ companies that have slower growth. 

Income Investing

With an income investment strategy, you focus on investments that will generate a consistent income stream. This is a common option for retirees who want to receive a regular income from their investments to fund living expenses. This strategy involves setting up your investment portfolio to generate an ongoing income stream. The income can come from interest-bearing bank accounts, share dividends, annuities, and interest from bonds. Rather than experience gains – such as with growth investments – this generates income during retirement, which can be supplemented by the age pension. 

Traditionally, income investing has included receiving income from interest-bearing savings accounts. But low interest rates, especially after 2011, made it difficult to generate income this way. While the interest rate on savings accounts has increased, it’s not keeping up with the inflation rate. 

Get Assistance With Investment Strategies

You might find it challenging when it comes to choosing or changing your strategy when investing for retirement. As we noted earlier, volatility is part of growing your wealth over time before retirement. Alternatively, generating a stable income during retirement will help you meet your financial needs. 

The team at Finextra Wealth takes the time to understand your current situation, your investment style and goals and guide you through the investment options and retirement income planning, whether your retirement is some way off on the horizon or approaching soon. We provide regular monitoring, expert information and tailored strategies to match your needs and improve the likelihood of you enjoying your desired retirement. 

Get in touch with Finextra Wealth with one of our retirement specialists to discuss creating a comfortable future.

Reference: ¹ https://katanaasset.com/four-all-time-best-charts-for-every-adviser-and-investor/