As an adviser one of the most frequently asked questions I receive is how should an investor’s asset mix shift as they move into retirement?  The objective to maximise income returns whilst preserving capital proves one of the biggest challenges faced by retirees.  A portfolio should allow flexibility not only in respect to the investor’s risk tolerance and income requirements, but also the ability to be modified easily to meet the changing economic environment.  For retirees this generally translates to less exposure to growth assets and increased exposure to income or defensive assets.  Here are some useful methods of enhancing income returns for direct investment portfolios.

As an alternative to simple cash accounts, you may choose from the plethora of online cash accounts offering high introductory rates but beware of the fine print in respect to introductory rates, restrictions on capital or required savings to receive the bonus interest.  Term deposits are a simple alternative to increase the rate of return but in the current low interest rate environment the net benefit of cash and term deposits are quickly eroded once taxation and inflation are taken into consideration.

Bonds often form a core component of a retiree’s portfolio due to the historically low correlation to growth assets such as shares and listed property.  In the past investors have had to use unlisted managed funds to get access to a diversified bond portfolio, however this is becoming easier thanks to the introduction to Exchange Traded Funds (ETFs) which are traded on the Australian Securities Exchange (ASX).  Bond ETFs tend to provide greater levels of income return over the medium term compared to cash rates but investors must expect more volatility in the short term as capital values can fluctuate.

The rise in popularity of hybrid securities in recent years is a direct result of the low interest rate environment.  Hybrid securities are instruments that feature characteristics of both debt and equity capital, and are generally complex and highly structured instruments that can be traded on the ASX.  Preference shares and subordinated notes typically offer investors a margin on top of the bank bill rate.  Whilst they allow a higher income return compared to bank and term deposits, investors need to be very careful when selecting hybrid investments to ensure they understand the term of the offer as hybrids exhibit elements of equity risk and the share price can fall in line with the fortunes of the issuing company.

Shares in high yielding listed companies have been well supported in the current low interest environment as investors chase income, with franking credits adding to the appeal as the income return may effectively be boosted if the investor is entitled to a refund of the credits.  Fully franked dividends are particularly beneficial for retirees in pension phase of superannuation.  Whilst the income from some shares is considerably higher than cash rates, investors must be prepared to accept the risks of permanent capital loss and the volatility that comes with owning shares.  The risk of declining dividend income is also a key risk for companies with falling earnings.

Getting the correct asset mix in retirement is crucial to ensuring your retirement objectives are met.  In my opinion the solution is to ensure the asset mix is tailored specifically to the needs of the investor, as factors such as health and mobility, family assistance and emergency situations are a part of life.  It is equally important that the portfolio’s asset mix be reviewed regularly to ensure it remains appropriate to your changing needs.  I encourage you to seek professional advice to determine which approach is best for you to get the retirement you want for as long you live.

This article appeared in The West Australian newspaper on 1 September 2014