Question: I’ve read your article, How much do I need to retire? Let’s say I have the $1 million you say I need in my super fund. How do I generate the $60,000 a year I would like to live on?
Answer (By Melanie Dunn):
Thank you for writing in to the Switzer Super Report about my article.
If I pick up our example, a 65-year old couple requires just under $1 million in savings to support a spend of $70,000 p.a. for life – assuming spending reduces in real terms at older ages. We consider a household invested in a broadly balanced asset mix during retirement.
This $1 million is assumed to comprise of all of the households investments, not just super, but excludes the family home. The $70,000 p.a. in spending is assumed to be met from income produced by the household’s assets, age pension entitlements, and, as these vary year to year, also from spending capital when required.
In practice, how income in excess of the age pension and SMSF minimum pension drawings is generated to fund each year’s spending will come down to your personal decisions about where to draw your spending from. This is where it is useful to be able to revisit your situation each year to ensure you remain on track to meet your retirement goals.
Question: I have sold a large portion of shares in my super portfolio and now hold cash. What is a good place to hold it and get a decent return, until such times as the market improves? I keep hearing about bonds, but have no experience of them.
Answer (by Paul Rickard): I think “a decent return” is a bit in the eye of the beholder. If you were bearish on the stock market and thought the market might drop 15%, then a return of 2.5% to 3.0% from term deposits might look pretty decent.
Working on the assumption that protection of capital is pretty important, here are some suggestions:
- Term deposits. Have a look at the second or third tier banks for a higher rate – remember that the government guarantee applies up to $250,000 per institution;
- You can purchase bonds directly. Brokers like FIIG Securities can help;
- You can purchase government bonds directly – they trade on the ASX. See link here [1];
- Have a look at some bond funds. Consider duration (average maturity of the bond), credit risk and management fees. Consider funds like the AMP Corporate Bond Fund – see here. [2]
- Hybrid securities; and
- Potentially, some lower risk property assets – perhaps a well-diversified property trust.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.