Key summaries
- Five principles to guide long-term investors: own productive businesses, favour value creators, plan for inflation, keep enough liquidity, and review rather than react.
- A market fall is an opportunity before retirement but a risk during retirement, so retirees will need a cash reserve, a flexible withdrawal plan and diversification to navigate the inevitable volatility.
- Holding both Australian and international shares reduces reliance on one economy, one currency and one policy framework.
Most people approaching retirement are trying to solve two related problems: saving enough and making it last. Investing for retirement is harder than it looks because both depend on something you cannot control, the health of the economy.
The good news is that you do not need to predict every economic turn. Your retirement savings strategy should not depend on one forecast, one country or one election result. The task is to own a sensible mix of productive assets that can endure and fund your goals. This article explains why productivity, incentives and diversification matter, and sets out five principles that can help your savings go the distance.
What is the best way to invest for retirement?
The best way to invest for retirement is to own a diversified portfolio of productive assets, hold enough cash to avoid selling in a downturn, and follow a withdrawal plan you can adjust as conditions change. There is no single right portfolio. The right mix depends on your goals, timeframe, income needs and comfort with risk.
A sound retirement investment strategy usually combines:
- Growth assets, such as Australian and international shares, to protect purchasing power over a retirement that may last several decades.
- Defensive assets, such as cash and fixed interest, to fund planned spending and reduce the need to sell shares at the wrong time.
- Reliable sources of income, such as dividends, interest and rent.
- A review process that rebalances when your circumstances or market valuations change.
Why productivity matters for your retirement savings
Productivity is the main source of higher real wages, stronger company profits and better long-term investment returns. When productivity stalls, households work harder just to stand still, saving becomes harder and returns tend to be lower.
Australian Bureau of Statistics (ABS) data clearly show Australia has a productivity problem.
In plain English, when productivity is falling, the economy can only grow if we work more hours, because each hour produces less.
This matters for three reasons:
- Living standards. When workers and businesses produce more from the same time and resources, incomes can rise without pushing up prices (inflation). With those higher incomes you can save, spend, or both, and improve your living standard. When you have negative productivity, it’s the reverse: you produce less with more. So, there’s less to go around and living standards will fall.
- Investment returns. Company earnings, and therefore share prices, and therefore your retirement savings, depend on productivity. It’s productivity that allows businesses to absorb higher wages and higher energy costs and deliver earnings growth. Productivity reduces the risk of inflation and improves the probability of higher investment returns for your retirement.
- Government finances. Investor Howard Marks, co-founder of Oaktree Capital, made the following point in a recent memo on government debt: faster GDP growth lifts tax revenue and reduces government spending, and the best route to faster growth is higher productivity.
The fastest way for any household, business or government to make a surplus and pay down debt is to spend less.
Where does productivity come from?
Productivity is not an abstract idea. It comes from better equipment, technology, skills, management and infrastructure, and from a willingness to invest. It comes from pro-business policies that cut unnecessary regulations. It comes from capital and people being free to move towards their most useful purposes.
Why incentives matter for investors
People respond to incentives. This is not an argument for or against any political party. It’s a practical observation about how households, businesses and investors act.
- Families will try to protect their savings and their future security.
- Businesses will invest when the likely reward compensates for the risks.
- Workers build skills when effort and expertise are valued.
- Investors will move capital to the best available opportunities.
When rules are unclear, or approvals are slow, or the reward for taking risk becomes too uncertain, investment slows or even stops, impacting consumers, workers and investors.
Good policy can support investment, protect communities and keep public finances sound. These goals are not in conflict. The question is whether the rules are predictable, the costs and benefits are honestly measured and whether labour and capital (your savings) can be used productively.
Policy that taxes the investor, on the pretext that it favours the worker or the family, ignores the reality that the worker and the family are the investor. Policy needs to balance the needs of the whole, not favour one part of a family or one stage of a life’s journey over another.
Why Australian and international shares belong together
Holding both Australian and international shares will reduce your reliance on any single economy, currency or policy framework.
Currency movements can help or hurt returns from year to year. However, over a long retirement, exposure to more than one currency can itself be useful diversification, as your future spending power depends on both Australian inflation and the value of the Australian dollar.
Investing before and during retirement: what changes?
The same market fall can help you before retirement and hurt you during it. That is why your investment approach should shift as you move from building savings to drawing on them.
The risk of poor returns arriving just as you start withdrawing is known as sequencing risk. A sound retirement strategy needs an appropriate cash reserve, reliable income, sensible diversification and a withdrawal plan that can change with conditions. The aim is to avoid becoming a forced seller at the wrong time, while keeping enough growth assets to protect purchasing power.
Five principles for long-term investors
These five principles can help you invest for retirement with more confidence, whatever the headlines are saying.
- Own productive businesses
Over time, returns should come from companies that serve customers well, reinvest wisely and earn a sound return on capital. Productive businesses tend to grow their earnings, and their dividends, through the economic cycle. - Favour businesses that create value, rather than capture it
Look for companies whose pricing power is earned from customers, not simply taken. Businesses that depend on subsidies or favourable regulation can lose their advantage with a change of government or a deterioration in the local economy. - Plan for inflation
Judge retirement income by what it can buy, not only by the number of dollars received. Growth assets that can lift their earnings over time help protect your purchasing power across a long retirement. - Keep enough liquidity
Cash and defensive assets can fund planned spending and reduce the need to sell shares during a downturn. Liquidity gives you time, and time lets a market recover. - Review, do not react
Rebalance when your circumstances or market valuations change. Avoid rebuilding a long-term strategy around short-term headlines.
What you can and cannot control
You cannot control markets, but you can control how your portfolio is built. Focus on what’s under your control.
Build a retirement plan that can last
Investing for retirement is not about being optimistic or pessimistic. It is about recognising that productivity, incentives and diversification matter. A portfolio that spans Australian and international shares gives you more ways to share in innovation and growth. A well-designed retirement structure, with enough liquidity and a flexible withdrawal plan, helps you stay invested through inevitable periods of uncertainty.
To recap, the five principles are:
- Own productive businesses.
- Favour businesses that create value, rather than capture it.
- Plan for inflation.
- Keep enough liquidity.
- Review, do not react.
If you would like to discuss how these ideas apply to your objectives, timeframe and retirement income needs, contact Ken Howard directly on 07 3334 4856 or at [email protected]. You can also explore Morgans' financial planning, retirement and estate planning and wealth management services, or find a Morgans adviser near you.
Frequently asked questions
What is the most important principle for investing during retirement?
The most important principle is to avoid becoming a forced seller. History is clear: all investment markets are volatile, and when prices fall you don’t want to be a seller (ideally you want to be a buyer, but buying during a downturn is harder than it sounds). The simplest way to avoid being a forced seller is to hold enough cash and income-generating assets to cover your planned expenditure, and if necessary be prepared to amend your spending plans. The second most important principle is to diversify. Stick to quality and diversify. No-one knows the future, but navigating it is so much easier when you have options (i.e. a diversified portfolio of quality assets).
What is sequencing risk in retirement?
Sequencing risk is the risk that poor investment returns arrive just before or early in retirement, when your balance is largest and you have started withdrawing. Selling assets during a fall locks in losses that may not be recovered. However, a cash reserve and a flexible withdrawal plan can help you manage it.
How much cash should I hold in retirement?
There is no single right amount. Some retirees aim to hold enough cash and defensive assets to cover one to two years of planned spending. However, the right amount will depend on your other income, your spending needs and your comfort with market movements.
Should retirees own international shares?
Yes. If your focus is on quality, diversification and growth, you should own international shares. Australia is a great country, but if your retirement portfolio is going to keep up with the cost of living, your investments should include exposure to growth assets, and growth comes from innovation and productivity, not geography.
Why does productivity matter for investors?
Productivity drives real wages, company profits and share market returns. When output per hour worked stalls, as it has in Australia over the last five years, it becomes harder for households to save and for investments to grow.
How often should I review my retirement investments?
It depends. For experienced investors, maybe once or twice a year. However, if it is all new, it is definitely worth investing the time to understand it; and in my experience, it is better to invest the time before you retire, not after, and it is better to invest the time during good times, not bad. The first step in the journey is not to be the expert, but to learn, so that when you do retire you can ride through the bad times and be there for the good times.
