What to invest in before you retire

May 12, 2015

You might expect that an article about how to invest before you retire would be all about which are the best assets to grow your wealth. The truth is that so long as you have some diversity and quality assets – it’s the structural factors that will determine whether you have the right setup for retiring.

Two key measures to look at when heading into retirement are liquidity and debt levels.


Liquidity is a term used for investments that really describes how easy it is to turn an asset into cold hard cash.

So your bank account is a highly liquid investment – it’s immediately available as cash.

Many shares in large Australian companies have high liquidity. You can trade them on the stock exchange every day and will usually receive your cash three business days after you’ve sold your shares.

Typically an investment property will not be very liquid, because a standard real estate contract will take 30 days to settle, and you have to allow the time to prepare, market, and sell the property beforehand.

Some retirees were caught out in the GFC by liquidity, typically in managed funds that were investing in mortgages. While they were popular and new investors were putting money in regularly they were able to offer daily or weekly withdrawals, but when new investment stopped, the assets of the fund were long-term mortgages which take a long time before they turn back into cash through principal and interest repayments.

If you have a small business that you’re going to sell to fund retirement, there’s a very good chance it has low liquidity as well, because small businesses usually take longer to sell because there isn’t a large range of potential buyers.

Debt levels

The second factor is to review your use of debt and make sure it will still be suitable in retirement.

It’s not uncommon to use debt when you’re building your nest egg – especially if you’re investing in property which usually has a purchase price that runs into hundreds of thousands of dollars. Sometimes the asset itself will produce enough income through rent or dividends to make all of the loan repayments (positive or neutral gearing), but often the investor is subsidising the investment by making up the difference from their wage or business income (negative gearing).

If you’re going to be heading into retirement and stopping your wage or business income, you need to have a plan for how your assets will be supporting the debt by then, or have other capital you can use to reduce the debt such as a payout of annual or long service leave when you retire.

You’ll also want to talk to your accountant about the tax effectiveness of your debt in retirement. A negative gearing structure that benefits you because of a high marginal rate of tax on wages might be very ineffective if you’re drawing tax-free super in retirement.

Proper financial planning is as much about preventing problems as it is about creating opportunities – so reviewing these factors early into your pre-retirement plan will keep you on solid ground.

Are you preparing for retirement? What are you hoping to invest in? Or are you already retired with investments?

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