Provision Newsletter

The past 10 years have seen pretty good returns for well-diversified investors. The median balanced growth superannuation fund returned 7.3% pa over the five years to July and 8.2% pa over 10 years and that’s after fees and taxes. This is impressive given that inflation has been around 2%. 

Source: Mercer Investment Consulting, Morningstar, AMP Capital

Shares and growth assets have literally climbed a wall of worry this decade with a revolving door list of worries around public debt, the Eurozone, deflation, inflation, rate hikes, Trump, North Korea, China, trade wars, growth, house prices, etc. But returns benefitted from the recovery after the GFC and a search for yield as interest rates have collapsed depressing yields on most assets. But – while it sounds like a broken record – the decline in yields points to eventually more constrained returns ahead.

Declining yields = falling medium-term return potential

Investment returns have two components: yield (or income flow) and capital growth. Looking at both of these components points to lower average investment returns over the next five years compared to the last five years. It’s basic to investing that the price of an asset moves inversely to its yield all other things being equal. Suppose an asset pays $10 a year in income and suppose its price is $100, which means an income flow or yield of 10%. If interest rates are cut resulting in increased demand for the asset, as investors search for a higher yield, such that its price rises to $120 given the $10 annual income flow its yield will have fallen to 8.3% (ie $10 divided by $120) as its price has gone up by 20%. So, yield moves inversely to price. But as yields decline it means a lower return potential going forward.

Since the early 1980s investment yields have collapsed. Back then the RBA’s “cash rate” was around 14%, 1-year bank term deposit rates were nearly 14%, 10-year bond yields were around 13.5%, commercial and residential property yields were around 8-9% and dividend yields on shares were around 6.5% in Australia and 5% globally. This meant that investments were already providing very high income so only modest capital growth was needed for growth assets to generate good returns. So, most assets had very strong returns and balanced growth super fund returns averaged 14.1% in nominal terms and 9.4% in real terms between 1982 and 1999 (after taxes and fees).

Over the last four decades, investment yields have mostly fallen quite sharply. See the next chart.

Source: Bloomberg, REIA, JLL, AMP Capital

Today the cash rate is 1%, 1-year bank term deposit rates are 1.5%, 10-year bond yields are 0.9%, gross residential property yields are around 3%, commercial property yields are just below 5%, dividend yields are still around 5.5% for Australian shares (with franking credits) but they are 2.5% for global shares. This points to a lower return potential for a diversified mix of assets.

What’s more, the capital growth potential from growth assets is likely to be constrained relative to the past reflecting more constrained nominal economic growth. Several megatrends are likely to impact growth over the medium term. These include:

• Continued slower growth in household debt. 

• An ongoing retreat from globalisation, deregulation and small government in favour of populist, less market friendly policies.

• A shift in corporate focus from profit to “balanced scorecards”.

• Rising geopolitical tensions – notably as the US attempts to constrain the rising power of China as evident in the trade war.

• Aging and slowing populations – resulting in slowing labour force growth and rising pressure on public sector budgets.

• Technological innovation and automation.

• Continuing rapid growth in Asia and China’s middle class. 

• Pressure to slow emissions & the impact of global warning.

• A large shift to sustainable energy as its cost continues to fall.

Most of these will constrain economic growth & hence returns.

Medium-term return projections

Our approach to get a handle on medium-term return potential is to start with current yields for each asset class and apply simple and consistent assumptions regarding capital growth reflecting the above-mentioned megatrends. We also prefer to avoid forecasting and like to keep the analysis simple.

• For bonds, the best predictor of future medium-term returns is current bond yields as can be seen historically in the next chart. If a 10-year bond yield is held to maturity its initial yield (0.93% right now in Australia) will be its return over 10 years (ie 0.93%). We use 5-year bond yields as they more closely match the maturity of bond indexes.

Source: Global Financial Data, Bloomberg, AMP Capital

• For equities, current dividend yields plus trend nominal GDP growth (a proxy for capital growth) does a good job of predicting medium-term returns.¹

• For property, we use current rental yields and likely trend inflation as a proxy for rental and capital growth.

• For unlisted infrastructure, we use current average yields and capital growth just ahead of inflation.

• In the case of cash, the current rate is of no value in assessing its medium-term return. So we allow for some rise in cash rates over time.

Our latest return projections are shown in the next table.

Projected medium term returns, %pa, pre-fees and taxes

# Current dividend yield for shares, distribution/net rental yields for property and duration matched bond yield for bonds. ^ Includes forward points. * With franking credits added in. Source: AMP Capital.

The second column shows each asset’s current income yield, the third shows their 5-10 year growth potential, and the final column their total return potential. Note that:

• We assume inflation averages around or just below central bank targets.

• For Australia we have adopted a relatively conservative growth assumption reflecting slower productivity growth.

• We allow for forward points in the return projections for global assets based around current market pricing.

Key observations

Several things are worth noting from these projections.

• The medium-term return potential has continued to fall due largely to the rally in most assets and fall in investment yields. Projected returns using this approach for a diversified growth mix of assets have fallen from 10.3% pa at the low point of the GFC in March 2009, to 8.6% five years ago, to 6.2% a year ago and to now just 5.6%.

Source: AMP Capital

• Government bonds offer low returns due to ultra-low yields. Yes, bond returns have been strong lately as yields have collapsed pushing up bond prices. But this is no guide to future returns, particularly if bond yields stop falling.

• Unlisted commercial property and infrastructure continue to come out relatively well, reflecting their higher yields.

• Australian shares stack up well on the basis of yield, but it’s still hard to beat Asian/emerging shares for growth potential.

• The downside risks to our medium-term return projections are that: the world plunges into a recession driving another major bear market in shares or that investment yields are pushed up to more normal levels as inflation rebounds causing large capital losses. Just allow that drawdowns in returns tend to be infrequent but concentrated and it’s been a while since the last big one. See the first chart. 

• The upside risks are (always) less obvious but could occur if we see improving global growth but inflation remaining low.

Implications for investors

• First, have reasonable return expectations. Low yields & constrained GDP growth indicate it’s not reasonable to expect sustained double-digit or even high single digit returns. In fact, the trend decline in the rolling 10-year average of both nominal and real super fund returns since the 1990s indicates we have been in a lower-return world for many years – it’s just that it only becomes clear every so often with bear markets and then strong returns in between.

• Second, remember that responding to a lower return potential from major asset classes by allocating more to growth assets does mean taking on more risk.

• Third, bear markets are painful, but they do push up the medium-term return potential of investment markets to higher levels and so provide opportunities for investors.

• Fourth, some of the decline in return potential reflects very low inflation – real returns haven’t fallen as much. 

• Finally, focus on assets with decent sustainable income flow as they provide confidence regarding future returns.

Source: AMP Capital 25 September 2019

¹Adjustments can be made for: dividend payout ratios (but history shows retained earnings often don’t lead to higher returns so the dividend yield is the best guide); the potential for PEs to move to some equilibrium level (but forecasting the equilibrium PE can be difficult and dividend yields send valuation signals anyway); and adjusting the capital growth assumption for some assessment regarding profit margins (but this is hard to get right). So, we avoid forecasting these things.

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

One thing that’s guaranteed to leave you feeling on top of the world, is a holiday. That’s until, along with the plane descending towards home, you sink into the beginnings of holiday debt regret. Even thinking about getting an Uber from the airport leaves you in a state of panic about dwindling your funds further.

We all fall into the trap of overspending on holidays and, really, why shouldn’t we? Holidays are an absolute necessity and we all thoroughly deserve to spoil ourselves. However, there’s a difference between splashing out occasionally and mindlessly blowing the whole budget in a state of freedom-induced spontaneity. 

Here’s how to avoid it in the future. 

Give your budget a head start

The time to avoid holiday debt regret is before you jump in the car or jet off to that exotic destination. Write down all the big expenses, including flights and accommodation, and aim to pay for those up front. While it’s still possible to get good deals at the last minute, you’ll find that most travel bargains appear well in advance, especially for flights. Doing this also gives you the time to do plenty of research to hunt them down, without needing to grab whatever’s available because you have to. 

To budget for food, activities, tours and transport while you’re there, really think about what you love doing best. For example, if scuba diving overseas is at the top of your list, tours to do so are likely to take a huge chunk out of the budget. To allow for it, figure out other ways to save, such as staying within close proximity to dive sites to avoid transport costs and booking an apartment with a kitchen to save on food. 

Use your own money and watch the fees

It’s pretty obvious that relying on credit cards to pay for holidays is a fast track to debt. Therefore, change your mindset about them and shove them very firmly into the ‘for emergency use only’ category, whether you stay at home or travel overseas. If you are heading across the pond, stay vigilant with regard to how much you’re paying for each transaction.

Make sure you’re fully informed about international transaction fees and exchange rates, with regard to your cards. Don’t withdraw money from ATMs constantly, as fees can add up astronomically before you know it. Speaking of which, it’s usually best to withdraw and pay in the local currency, rather than converting to the Australian dollar. Use travel money cards and preloaded credit cards, and get the maximum amount of cash out each time you withdraw. 

Don’t fall for tourist traps

No matter where you are in the world, it’s likely that tourist traps are out to get you. Those restaurants surrounding top attractions, more often than not, feature exorbitant prices and substandard food. Walk one or two streets away to find the real deal, at half the price. Avoid being sold on tours, activities or items by enthusiastic merchants, without doing your research first. If a deal sounds too good to be true, it usually is. So, rather than saving money, you’ll be throwing it away on something that doesn’t meet your expectations or breaks the second you get back to the hotel. 

With a bit of planning and awareness of what you’re actually opening your wallet for on holidays, you can avoid holiday debt regret and keep that stress-free feeling as a souvenir, long after you return home. 

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

The return environment in commercial real estate has become more challenged, with pockets of outperformance matched by underperformance, not only across the sectors but, more frequently, within the same sector.

Against this backdrop, passive portfolio management pegged to a benchmark has begun to look outdated.

By shifting our focus to one of active management with the freedom of a benchmark-unaware approach we now have more levers to pull in terms of portfolio construction and risk management.

This means we can take a more holistic approach to the construction and management of the portfolio, better capitalising on opportunities in the real estate market and managing the downside risks.

Sector selective

A great illustration of how we can better manage risk for our investors is how our active approach has allowed us to de-weight the portfolio’s exposure to the retail sector.

Over the course of the last 18-24 months our research had helped us identify that investments in the retail sector would be challenged from a returns perspective for the next few years due to the continued rise of online shopping and cyclical headwinds such as low wages growth and a more moderate housing market.

However, the Australian Real Estate Investment Trust (AREIT) index – in which we were previously invested – has a ‘look-through’ exposure to the retail sector of about 50 per cent.

By adopting an approach that means we are no longer constrained by this passively-managed AREIT exposure, we have instead been able to build a bespoke portfolio of retail assets, being selective about the type of assets that we are comfortable holding.

These include assets such as dominant regional shopping centres, as well as neighbourhood and convenience-based centres, which have a point of difference that means customers will continue to shop there, resulting in the asset continuing to be able to attract tenants throughout the market cycle.

Backing the winners

Conversely, active management has also allowed us to double down in areas that we see providing runways to growth.

Industrial real estate, and, in particular, logistics-related assets, has been a real outperformer as it is positioned as a beneficiary of the growth in e-commerce, and as a result of our active management approach we have been able to increase our exposure to this sector.

Similarly, in the office market, we are currently focused on the Sydney and Melbourne CBDs where there has been a significant withdrawal of stock over the last few years. As a result, there’s been limited new supply in the market and that has resulted in record low vacancy rates in both of those markets.

Another structural trend that we are looking to take advantage of is the global aging population. This translates into growth in healthcare real estate facilities and low-cost retirement housing assets, such as manufactured housing. We have been able to increase our weighting to these exposures, resulting in a well-diversified portfolio.

Conclusion

By having the flexibility to target growth sectors while being selective in our exposure to under performers, we feel confident we can deliver better diversification and risk-adjusted returns for our investors.

https://vimeo.com/355947376

Author: Claire Talbot, Fund Manager – Real Estate Sydney, Australia

Source: AMP Capital 11 Sept 2019

Important notes: While every care has been taken in the preparation of this information contained in this website, neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information on this website, and seek professional advice, having regard to their objectives, financial situation and needs. Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice.

If you’re a celebrity in New York, an apartment in a Tribeca warehouse conversion is a prized accessory. Taylor Swift has a place there, as does Beyoncé. One apartment block on Greenwich Street recently boasted a roll-up of owners that included Justin Timberlake, Jennifer Lawrence, Harry Styles and Jake Gyllenhaal. Despite their exclusivity today, some of the most prized aspects of these conversions betray their more utilitarian origins – their high ceilings and large windows allowing for natural light and airflow through the crowded workspaces of yesteryear.

From the Embarcadero in San Francisco to Shoreditch in London, and closer to home in suburbs like Docklands in Melbourne, inner-city industrial suburbs across the globe have been transformed into sought-after residential postcodes. Emblematic of this trend was the announcement this year that the City of Sydney will rezone entire blocks of warehouse space in Alexandria to create a new cultural and entertainment precinct.

As residents and developers moved in, traditional industrial tenants have fled to the suburbs, into larger premises with cheaper rent. For retail logistics in particular, this made sense: the stores they were supplying were larger and increasingly located further away from traditional urban centres.

In an interesting reversal, however, the paradigms that forced industrial space out of our city centres and into the suburbs no longer hold true for retail logistics. As sales move online, and the time taken to span the “last mile” from warehouse to consumer becomes the critical metric for retailers, proximity is fast becoming king, and thanks to decades of competition from booming residential markets, space is at a premium.

This isn’t just about the more traditional, package-based model of online retail – It is true even for bulk retailers such as grocery stores – much of the demand for inner-city warehouse space is being driven in Australia by Australia’s largest super-market chains, responding to consumer demands which today require deliveries to be with the customer almost immediately. The trend may well be amplified by the increasingly refined power of retailers to predict purchasing behaviour, and transport and store products in proximity to their customers in anticipation of the purchasing decision, ensuring the right inventory product mix is being warehoused at the right location.

The result, in most major cities, would be a significant shortage of well-located, strategic industrial product. Returns for those who have held on to inner-city industrial space, or taken the time to invest strategically in infill urban logistics, are, in our opinion, likely to be sustained and substantial, further leveraged by trends towards inner-urban living, increasing pace of lifestyles and advances in technology.

Property values in these areas will likely be more resistant to any down-turn in the market than more remote sites, as investors continue to realise the benefit of strong cash flows from retailers who are prepared to pay a premium to get their products into the hands of consumers on shorter turn-arounds than their competitors.

There will be few better examples of these dynamics in action than in South Sydney, which is at the centre of a perfect e-commerce storm. Already located on the doorstep of Kingsford-Smith Airport, Australia’s busiest freight airport, and Port Botany, our second-largest container terminal, industrial property in places like Alexandria and Waterloo has long benefited from its location between these two hubs and the dense inner suburbs of Sydney. Today, this advantage has been super-charged by residential developments which have created Green Square, the densest urban area in Australia, right in the midst of these existing industrial holdings. Add in the completion of WestConnex, the Sydney Gateway project and the Port Botany Rail Duplication, and it’s not hard to comprehend that demand for logistics space in this neighbourhood is only likely to increase into the foreseeable future.

Author: James Maydew, BSc (Hons), MRICS Head of Global Listed Real Estate, Sydney, Australia

Source: AMP Capital 29 August 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

The holy grail of active investing has always been alpha, the excess return of active investing over passive investing. Research suggests the era of alpha is over, but it’s not as simple as it seems.

Earlier research claims two-thirds of active Australian equity managers are not delivering alpha, net of fees¹.

The assertion might be right, but behind it is a much more complicated story.

Active Australian equity managers have performed below expectations over the past five years. It has led to significant mandates being pulled from active managers and a switch to passive and factor-based investing. Not helping is investor sentiment towards being underweight on Australian equities.

Considering the performance, it should come as no surprise then that ‘mega funds’ have pulled mandates. The market is sufficiently small that when you scale you quickly become the market. This means it is difficult to generate reliable alpha at this size while paying active fees to a number of core managers.

At AMP Capital, we believe there are strong pockets of alpha to be found in the Australian market for those managers that are looking in the right places and correctly tailoring their approaches.

Benchmark-aware strategies have struggled

Alpha does exist in the Australian market although it is not as broad-based as it once was.

Over the past five years, we have observed a noticeable decay in the alpha of benchmark-aware strategies of all styles. Long-only or long-short, growth or value, small-cap, large-cap and others; all have experienced the same fate. According to the MercerInsight^® database, one-year alpha of the median Australian shares manager is at record low levels over the available history which almost stretches back as far as the formation of the Australian Securities Exchange which was in 1987.

On the upside, we are instead seeing strong pockets of alpha among concentrated managers that employ hybrid ex-50 strategies, which is how we manage the AMP Capital funds. These high alpha strategies typically have limits of around $3-$5 billion, due to the relatively small size of this asset pool.

High alpha for all sizes is a matter of technique

Alpha in the Australian market does not scale well.

This means that when managing larger assets, there is no effective ‘lift-and-shift’ or upsizing of investment strategies. High alpha strategies that work for smaller investments can’t be borrowed and applied to larger ones. They just don’t fit.

What that means for the mega super funds and industry funds out there is that there are limitations to extracting alpha from the market. When you are already such a large slice of the market, it is difficult to be in the pockets of the market that are conducive to alpha.

Instead, there is a technique to building specific high alpha strategies for larger assets. Typically done in increments of around $10 billion, they also come with nuances to avoid over-diversification while gaining access to top quartile managers at low fees.

The strategy we observed elsewhere in the marketplace was to employ a collection of benchmark-aware managers. The funds that did this are typically the ones that have underperformed in the last five years. Investors have subsequently replaced them and gone passive or terminated them.

At AMP Capital, our approach to managing large Australian equity funds is to have a high alpha bucket and an enhanced quant bucket. Such an approach avoids most core managers, instead selecting managers that take large active positions or have exposure to ex-50 companies diversified with enhanced quantitative strategies. In terms of the fee structure, this kind of ‘barbell’ approach avoids paying active fees for no alpha.

AMP Capital’s MySuper and Future Directions funds employ a style where we commonly have a 50-50 barbell setup of enhanced and high alpha strategies; 50% enhanced and 50% active. We only hold concentrated managers and have a sizeable exposure to the ex-50.

This approach offers a blend of long-horizon, high-conviction fundamental managers with short-horizon quantitative strategies. Further, by maximising active share, this balance of managers avoids the excessive diversification that comes with investing in a set of core managers.

In-house investing takes commitment

Another matter is that of large funds bringing some or all of their investment teams in-house. Industry super funds internalising their investment teams is a new territory that is largely untested, bringing additional operational complexity without the guarantee that they will deliver better performance.

The maturity of the operation has a lot to do with how resilient it will be when performance falls short; in particular, its governance capability to assess or replace internal investment teams and determine how the fund will recover. If you decide to wear both hats, you can’t fire yourself if something goes wrong.

AMP Capital employs internal and external investment teams. Most of our external managers are near capacity or closed and have not experienced major cash outflows, implying there is no threat to their business models from internalisation, and our internal managers are well positioned relative to internal super fund managers.

For us, mature governance means subjecting internal managers to the same scrutiny as external managers, which is where we have an advantage. We continually assess our internal managers to determine whether their capabilities are institutional quality and have established processes to manage the environment.

For instance, we have a multi-manager group that manages and researches funds. This includes our internal investment teams, which are assessed against long-term success factors to see whether they are appropriate at the multi-manager level. Once a manager is selected, they are continually monitored for any significant events including changes in the team or process. Such events would lead to the initiation of a formal manager review from which a course of actions is developed to avoid a deterioration in performance.

For large funds that may be thinking about internalising their investment teams, there’s an argument that the fund will be able to save cost and pass that on as reduced fees. By using our internal teams, we believe we bring the same advantage – cost advantage, the ability to customise mandates, and access to information and portfolio managers – plus the governance to deal with situations that arise from things not performing to plan.

Conclusion

While Australian equities are a narrow market, pockets of alpha still exist, but have become more difficult to extract.

Individuals are unable to directly access many of the top quartile managers that have had success and quickly become closed to new investment. These capacity constraints mean that alpha doesn’t scale well in the Australian equity market.

A team of professionals that have a process and track record of investing in top quartile managers before they close could assist an investor in finding the alpha in the Australian equity market.

¹ Ronald N. Kahn & Michael Lemmon (2016) The Asset Manager’s Dilemma: How Smart Beta Is Disrupting the Investment Management Industry, Financial Analysts Journal, 72:1, 15-20, DOI: 10.2469/faj.v72.n1.1

Author: Duy To, Portfolio Manager Sydney, Australia

Source: AMP Capital 16 Sept 2019

Important notes: While every care has been taken in the preparation of this information contained in this website, neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information on this website, and seek professional advice, having regard to their objectives, financial situation and needs. Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice.

One of the most common images associated with retirement is finishing work and walking away with a lump sum of super money to splurge on a new car, boat, caravan, holiday, or perhaps if you’re lucky, all of the above.

But it’s an outdated stereotype. Research shows that in the 10 years from 2004 to 2014, the payment of super as an income stream increased far more quickly than lump sum payments did, and by 2014 only around 16 per cent of retiring Australians took their super in the form of a lump sum.¹

But are Australians right in their preference for income streams rather than lump sums? And is there another alternative?

When lump sums pay off

There are some benefits to taking lump sums.

Depending on the retiree’s circumstances taking a partial lump sum may be the best option if you have outstanding debts or health issues that require expensive treatment.

The Australians that do take lump sums mostly use them sensibly: they use the funds to pay off mortgages and debts. In fact, around one quarter of lump sums are used to pay off mortgages or make home improvements, while another 20 per cent are used to clear debts or buy a car.²

Lump sums can also be advantageous in the implementation of specific financial advice strategies, such as to manage cash flow from retirement accounts subject to the $1.6 million transfer balance cap.

And they can be useful where retirees are trying to reduce the impact of tax to be paid on death.

Growing future cashflows

But there are also some downsides to lump sum super withdrawals.

The biggest downside to taking a lump sum in cash is that it can then be harder to grow retirement savings into a much larger stream of cashflows in the future.

Even modest retirement savings, when invested appropriately and drawn down as an income stream, can make a big difference to the potential to live life comfortably and enjoy retirement.

For example, a single homeowning retiree with $200,000 in retirement savings may be surprised how that money, if sensibly invested, could significantly change their retirement lifestyle.

If invested to achieve an average annual return 3 per cent above the rate of inflation, they would receive $13,000 (a figure which would increase with inflation) per year for 20 years.

With the government Age Pension for a single homeowner currently worth $23,000 per year, that sum plus the cash flow from their investment increases their annual spending power to $36,000 per year – a significant 55 per cent increase in their annual income. This is illustrated in the chart below.

Source: AMP Capital, 2018

A third way

Ultimately, managing money in retirement is all about confidence, and it’s an unfortunate reality that many retirees are too uncertain about what the future may hold to enjoy their savings.

Uncertainty around investment returns, health costs and how long their money will need to last all combine to make most Australians ‘over-save’ throughout their retirement – to the benefit of the next generation, but at the cost of living retirement to its fullest.

But by segmenting their retirement savings early in retirement, retirees can invest their money in different ways to match their different needs, goals and the risks they face rather than simply investing their money in its entirety and drawing down an income.

A financial adviser can help you prioritise your goals, work out how much money to allocate to each goal and then choose an investment strategy that maximises the chances of reaching each goal.

Types of retirement goals

Retirement goals can be diverse, but most belong to one of three main categories: essential needs, lifestyle wants and legacy aspirations.  

Essential needs – include things such as food, housing, transport and bills. To meet these goals a steady cash flow, which keeps up with the cost of living is important.

Lifestyle wants – include things such as enjoying hobbies, holidays or new, big ticket items such as a car or caravan. To help fund these goals, investments should grow steadily over time and have a low probability of producing major losses.

Legacy aspirations – include leaving something for future generations which retirees with additional financial resources may aspire to do. Money allocated to these goals should be invested to deliver strong, long-term compound growth.

Taking a goals-based approach could give you the confidence to enjoy your retirement to the full.

^{1, 2} Australian Centre for Financial Studies, Funding Australia’s Future Financial Issues in Retirement: The Search for Post-Retirement Products, October 2015.

Author: Darren Beesley, BCom FIAA, Head of Retirement and Senior Portfolio Manager, Sydney, Australia

Source: AMP Capital 17 Jan 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.