Frequently Asked Investment Questions
| Question | I’m nearing retirement, should I convert all my shares into less volatile assets to preserve my capital? |
| Answer | It is a common belief that this the best strategy but it can be very costly. You could consider moving 2 or 3 years cost of living into a capital-secure investment. |
| Explanation | Say you are retiring at age mid-60s. If you are in reasonable health, you could consider you have say 25 years that your savings can earn a return and grow. If you pull them into what you consider ‘safety’ too soon, you could diminish the value significantly. Let’s look at two scenarios where the superannuation balance is $750k, with an investment timeframe of 25 years, and an annual drawdown of $60k |
| Scenario 1 – Capital Safe Investment Return 5% | Scenario 2 – Share Market Investment Return 10% |
|---|---|
| The return in year 1 of retirement is just $34.5k, but with a drawdown of $60k, the investment is diminishing. The return in year 2 is $33.2k, and by year 20, the funds are totally depleted. | With a higher return, the drawdown each year is LESS than the return, so the investment is actually growing each year, reaching $1million after 15 years! One could increase their annual drawdowns to $75k and still have a little money left after 20 years. |
There are some points to note.
- While the cost of living reduces once people are into their 80s, and the $60k drawdown will reduce as people stop taking holidays and making non-essential purchases, these comparisons remain a valid indication of the difference in wealth retention
- The sharemarket will be volatile over a period of 25 years, but the long term average for the US market, measured by the SP500 index is actually 11%. So 10% is actually a conservative selection. Similarly, one can not always get 5% for capital guaranteed investments. During COVID for example, the rate may have been as low as 2% pa!
- As of May 2025, the single age pension is less than $29k. Even if one owns their house, this is just $574/week to buy food, services, transport, entertainment and clothes.
The major point of this exercise is to recognise that upon retirement, one still potentially has more than half the time they spent in the workforce left to live. As demonstrated in the above scenarios, this needs a more aggressive approach to investing than the ‘safe’ option.
| Question | Is it true that Australian shares pay better dividends, and I should invest all my money locally? |
| Answer | Yes, and No! |
| Explanation | Australian shares do tend to pay higher dividends that US company shares, but there is a reason for this. So-called ‘blue-chip’ shares like the mining giants BHP, RIo-Tinto and Woodside Petroleum, and well-known companies such as Telstra pay dividends of 4,5 even 6% pa. But capital growth in these companies is often very low, meaning they are poor investments. |