When approaching retirement, one of the biggest concerns is how to protect the savings you’ve built up while not compromising your quality of life.
To achieve this, it can be sensible to shift your investments from growth options, into defensive and low-risk choices. Lower risk inevitably means lower returns, but if you’ve done the right planning in the lead up to retirement, a shift to safety can make sense.
So let’s look at a number of common investment options, and which of these are going to deliver the safest returns for your retirement.
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Cash and term deposits
Investing in cash includes keeping your money in savings accounts and term deposits. You always know where your money is, and how much is in your account. You know it’s generally going to grow by a steady percentage, providing steady income and stable returns. As such, it’s considered a secure investment option.
Cash investments are usually quite short-term affairs, spanning no more than a year or so. This makes investing a portion of your portfolio in cash a smart move to ensure you have liquidity in your portfolio and can meet unexpected expenses.
Fixed interest investments
Investments in fixed interest vehicles are considered to be fairly low-risk investment options. Effectively, you’re investing your money into bonds, and you receive a fixed interest rate throughout the life of the bond, usually every 6 or 12 months. When your bonds mature, you’ll receive the full sum of your investment back, on top of the interest it earned you.
This provides a stable investment, with little risk—particularly if you invest in government bonds.
There are a few other fixed interest investment options that you can consider too.
Exchange Traded Government Bonds
Australian Government Bonds, or AGBs, are debt securities that have been issued by the Australian Government. Exchange-traded Government Bonds can be used as a way to reduce your investment risk while accessing a stable cash flow.
There are two types of Exchange-traded AGBs you can invest in, Treasury Bonds and Treasury Indexed Bonds.
- Exchange-traded Treasury Bonds have a fixed value, and are medium-to-long-term securities. They feature the same rate of interest throughout their lifetime, which is paid every six months.
- Exchange-traded Treasury Indexed Bonds have a similar lifetime, but work in a different way. In this case, their value changes as the CPI does, and you receive interest quarterly at a fixed rate. When the bond matures you receive back the initial value of the security, adjusted for the CPI over the bond’s life.
Exchange-traded Government Bonds can be a smart investment option, as they provide regular, stable payments, while hedging against inflation. They’re also extremely liquid, and you can sell and access your money at any time the ASX bond market is trading.
Fixed-Interest Exchange Traded Funds
When investing in fixed-interest exchange traded funds, you’re essentially buying into a collection of different individual bonds. This collection of bonds is diversified across the market, meaning you’re effectively trading on exchange.
Fixed interest exchange traded funds give investors an easier way to access government and high-grade corporate bonds, which tend to provide less volatility.
This investment option is also a beneficial way to preserve capital, as when the bonds reach maturity you receive the face value of the bond in return.
Bank Hybrid Securities
Bank hybrid securities are considered as higher risk than typical bank deposits because there is no government guarantee provided for the money. On the flip side, they’re considered to shoulder less risk than bank shares, as they generally rank higher on the capital table. This means a bank usually has to be unable to pay a dividend before they stop paying distributions on a hybrid security.
Hybrid securities generally pay either a fixed or floating rate of return until a specified date. However, there's no guarantee on the amount and timing of interest payments.
An annuity is an investment vehicle that delivers a fixed income stream for a defined period of time. Under an annuity, you effectively invest in a selection of shares that deliver a series of payments periodically over the lifetime of the investment. These payments are designed to keep pace with inflation, and provide a level of security against share market performance.
One big benefit of an annuity is that once you reach preservation age, you can pay for the annuity with your super. This allows you to access the investment essentially tax-free.
However, it’s important to note that under some annuities, you may lock your money away until the annuity ends. There can be dispensation to discuss this with your investment fund should your situation change. But it’s important to be aware of this going into the investment.
The final word
The key thing to remember is that when you get closer to retirement, and throughout it, your investment habits should change. It's not advisable to make any risky decisions—you don’t have the time to make that money back.
Instead, consider transitioning to more defensive assets classes such as:
- Cash & Term Deposits;
- Government Bonds;
- Fixed interest; and
- Bank Hybrid Securities.
These types of investments can provide less exposure to risk for your hard-earned money. They help you experience less market volatility, while still providing a regular return. And when you’re ready to retire, you’ll be able to enjoy your new life stage to its fullest.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.