A large number of Australia’s population are approaching retirement age and looking for an income stream to fund their retirement. By law retirees aged between 65 and 74 need to drawdown a minimum of 5% of the value of their pension investments each year. Unfortunately, a conservative investment portfolio will generally provide a return below the 5% drawdown rate.
With a current cash rate of 2.0% and the 1 year term deposit average of the four major banks being 2.46%, a retiree with $1,000,000 in assets can produce an interest income of just $24,600 per annum. This is too low to provide enough income for most people to live on, and only marginally beats the 1.5% inflation rate.
This means many in retirement / approaching retirement are considering shares as a source of retirement income, in particular dividend paying Australian shares, which are averaging around 6% per annum (including franking credits). Historically this high income approach often involved concentrating investments in a small number of sectors, for example banks and property stocks, resulting in limited investment diversification.
Another sector which provides an attractive income return is unlisted property trusts. These investments can be particularly attractive when the underlying properties are leased by quality companies with long term leases of up to 20 years, which provides security of the income return. We have been using these investments for many years to provide clients with a diversified strong income return to cash flow match their retirement income needs.
At Harvest we are continually looking for new investment ideas to meet clients’ investment needs. In recent times more global shares investment funds have started to focus on sustainable higher income returns. Some significant benefits of high yield global shares are that there are more investment opportunities and a greater sector diversification available. We are starting to introduce this approach for clients close to, or in retirement.
In retirement the income produced from investments assists in funding the pension payment, we refer to this as cash flow matching your income needs. This strategy reduces the risks involved with selling down assets at a time when the market is down.
It is a strategy that can be quite difficult for the individual investor to manage on their own by investing in individual companies. There are risks involved and dividend growth is not always guaranteed. Also, there are risk factors pertaining to both the income yield of an investment and the capital growth or loss that can occur.
If you would like to learn more about investing for income in retirement please contact us to discuss further. We can assist with developing a retirement strategy tailored to your situation, or with the review of your existing retirement strategy.