How to protect your retirement funds using the 70/30 investment strategy

May 12, 2020
Investing during retirement is all about reinstating some safety measures to protect your money no matter what. Source: Getty.

We all know that time in the market and compounding are key ingredients to successful, long-term investing, and very general rules such as not putting all your funds into one investment and diversification should apply regardless of the age and stage of any investor.

But investment strategies and risk need to be rethought as investors age and their nest egg grows. At some point they’ll need to switch from thinking about outright returns to protecting what they have worked so hard to build. The time this usually happens is around 60 years of age.

When to shift your investment strategy

In the lead up to retirement, at around the age of 60, the average investor needs to be more protective of the capital they have built over their working life. Most investors don’t have the time to recover from a severe market disruption such as a Global Financial Crisis-type event where the value of shares plummeted by more than 50 per cent, or indeed the current Covid-19 pandemic where the ASX200 declined by 36 per cent in just one month.

Generally, around the age of 60 is when the shift in ratio from risky assets, such as property and shares, to defensive assets, such as term deposits, bonds and annuities, should start to occur. From the age of 50 to 65, the ratio should ideally move from a 50:50 split to be more like 70 per cent defensive assets and 30 per cent riskier assets.

It’s very common to see investors holding too much in cash and earning low returns as they transition to lower risk investments. Even the best one-year term deposit rates are under 1.5 per cent per annum at the moment. That’s why it’s worth exploring other fixed income defensive assets that are a little riskier than deposits, but pay more, such as bonds, which have some advantages over deposits because they’re typically tradable and do not incur penalties if investors need to access their capital and they can earn higher than expected returns.

How to pick the right investment option

For those aged over 65, who have likely retired, there are a few great unknowns that need to be kept in mind (even if the answer isn’t clear), which are:

  1. How long you will live (also known as longevity risk)
  2. If you can make your funds last
  3. Your capacity to rejoin the workforce and thus derive a steady income if you need to
  4. The rates of return available on your investments
  5. Inflation risk – the chance that the cash flows from an investment will decline because of changes in purchasing power due to inflation
  6. Sequencing risk – the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to you.

It’s been shown that retirees spend quite a lot of money straight after retirement as they travel and do things they have been waiting to experience. While they can possibly defer retirement or re-enter the workforce as back-up plans if they find themselves running short of funds or their savings take a hit from a market fall, neither is guaranteed or desirable so investors in this age bracket should transition to a predominantly defensive asset class allocation.

For those investors who haven’t saved enough, now is not the right time to aggressively invest in high-risk assets and potentially lose valuable capital. That means holding more in bonds and or an annuity, an insurance product that pays a regular income. But this doesn’t always mean sacrificing returns.

Statistics from financial firm Vanguard showed the return of Australian shares, bonds and cash over the past 30 years, and found that shares only outperformed bonds by 1 per cent per annum, but for a lot more risk and volatility. Within the category of bonds, investment-grade bonds are, of course, lower risk than high-yield bonds.

Within annuities, how much retirees receive depends on whether they opted for a guaranteed payout (fixed annuity) or an income stream that’s determined by the performance of the annuity’s underlying investments (variable annuity).

For all investors, the aim should be to avoid extreme asset allocation, both at the conservative and higher-risk ends of the spectrum, and at the same time ensure adequate diversification. After all, an investor’s asset allocation is one of the most important decisions made and ultimately determines the performance of the investment portfolio.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

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Do you review your investment strategy as life changes? What's your top tip for later-life investing?

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