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The Best Investments for Retirement Income in Australia

The Best Investments for Retirement Income in Australia


4 min read

Retirement can mean a lot of different things to different people. For some, it’s when they hang up the boots and stop work once and for all, finally getting to travel around the world or pursue their passion projects. For others, it’s something they’ll put off as long as possible, preferring to extend their career into their twilight years, either through a love of work or fear of not having enough retirement savings. Or, it can be a mix of the two where you aim to reduce the amount of hours you work and enjoy a gradual retirement process.

Whatever retirement means to you, it’s important to understand where to invest to ensure that you can fund that type of retirement you want. According to the Australian Bureau of Statistics (ABS), the average age people intend to retire is 65.4 years, and ATO data from the 2021 financial year shows the average super balance of a 65-69 year old is around $450,00 for men and $403,000 for women. That’s a considerable sum to manage, without factoring in other assets and investments you may have as you enter retirement.

Understand Your Risk Tolerance

As we age, our “risk tolerance” tends to decrease. In our younger years, we’re willing to take on more investment risk knowing that we have time to recover from potential losses. But as we approach retirement age, we no longer have the luxury of time to recover from market downturns. That said, life expectancies have increased substantially over recent decades. A new retiree can still have a long term investment horizon of several decades, which makes exposure to some growth assets important to keep up with inflation..

It is important for retirees and those nearing retirement to prioritise the investments held in the tax effective environment that is their superannuation if a reasonable level of wealth has been built up.

Typically, when retirees manage their superannuation, their primary objectives are to preserve their capital and generate income. They aim to prevent their investments from decreasing in value significantly, while ideally utilising dividends and distributions to supplement their income without significantly depleting their balance.

What are the Best Investments for Retirement Income in Australia?

In retirement, you should consider investments that are both stable and generate an income. Common ones include:

  • High dividend paying Australian shares, (Such as bank shares, and mining companies)
  • Credit, Mortgage & Bonds Funds
  • Term deposits and high-interest savings accounts.

Investing in Bonds in Retirement

One of the safest investment options to consider for retirement is bonds. Bonds are essentially loans made to governments, corporations or other entities. In exchange for lending the money, the bond issuer pays interest to the bondholder. Bonds can be a great way to generate income in retirement because they can provide a known, steady stream of interest payments over a determined time and are generally less volatile than stocks. After recent increases in interest rates, bond funds are more attractive now than over the last decade.

Investing in Term Deposits and High-interest Savings Accounts

Generating income through high interest savings accounts and term deposits became a whole lot more enticing since central banks globally started raising interest rates in early 2022. The several years prior had been an anomaly where the interest earned on a bank account could be as low as 0.1% p.a. Even a 12 month term deposit would earn you a measly 1%. In contrast, in 2024 you can earn up to 4.0% p.a. in a bank account and above 5.0% p.a. on a 12 month term deposit. And that’s with minimal risk to your capital.

Investing in Credit and Mortgage Funds

Mortgage funds, which are organisations that pool together investors' capital and lend that money to land owners, property investors, builders and developers, are now yielding anywhere from 7-12% p.a. depending on the level of risk in the fund. They’re also in a great position to further increase their yield as interest rates continue to increase. That’s a big increase on the returns investors were getting 2 years ago!

An important thing to note here is that, as with any investment, the higher the potential yield the greater the risk. Mortgage funds with a higher exposure to property development may provide a greater return, however developers are typically at greater risk of being unable to pay their debt (think of the building companies that have fallen over recently).

Investing in Australian Shares in Retirement

Australian shares are known for paying much higher dividends than their international peers. The yield of the ASX200 is typically around 4.2%, and this doesn’t include the franking credits that come with it. Franking credits are very important to consider given they can add 1.0-1.5% to income for Self Managed Super Funds in the pension phase. Australian Banks are also popular high dividend paying stocks, averaging a consistent ~4%+ yield per year plus franking credits.

When considering shares in retirement, the inherent problem with listed stocks is the volatility and variability in the underlying share price, which can cause total returns (dividends + franking credits +/-capital gains or losses) to vary from year to year. Typically 1 year out of 5 is negative for the ASX200. In return for this volatility, investors have received capital gains over the long term that can help portfolios keep up with inflation.

Understanding Asset Correlation

Asset correlation is a way to manage portfolio risk and understand your personal risk tolerance better. It’s about how different investments perform in relation to one another. Typically, investing in a combination of uncorrelated assets such as bonds and shares help limit the risk of losses across a portfolio. Simply put, when shares go up, bonds typically go down and vice versa. This has not been the case over the last few years given interest rates were close to zero and bond funds could not go much higher in price so had much more risk to the downside. How much exposure do you want to assets that may see your capital go up, compared to those that will limit the downside of your portfolio if shares go down?

Talk to BlueRock’s Financial Planners and Wealth Management Advisors to Set Yourself Up for Retirement

Having a plan for the type of assets you want to invest in, whether they generate income or not, is the most crucial step towards securing the retirement you desire. It’s essential to figure out if you require extra income to sustain your standard of living and to adjust your portfolio according to your risk tolerance. As this is an ongoing process with many moving parts, the Investment Advisors and Financial Planners at BlueRock are here to help guide you through. Get in touch below for a free consultation to discuss your wealth management situation.

Disclaimer: The information in this article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.

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