5 ways to diversify your retirement income

The attractions of real estate

Living off a property’s rental income is certainly an appealing idea. However, you need to do your homework (whether you buy just one property, or several.

If you choose carefully, your rental income will continue into the future, while you hold on to the underlying asset. You can have a great investment, with potential long-term capital growth.

However, don’t forget the importance of diversification – spreading your investments across a range of assets, markets and industries. 

Other types of investing

There are plenty of other approaches you can take. Popular retirement income choices include superannuation pensions, index funds, term deposit interest, share dividends, and unit trust or managed fund distributions.

For example, international shares can give you exposure to rapidly growing markets. You might also decide to invest in developed markets, and some of the world’s most successful companies. Shares, however, are generally classified as high risk – and will fluctuate from day to day.

If you want more predictable returns, perhaps consider fixed interest assets, like term deposits or bonds.

Or if you’re keen to stay in property – indirect investment is another option. By pooling your money with other investors into a property fund, you can gain exposure to commercial or overseas property. This will often be at a lower cost than investing directly.

And if you want a truly ‘passive’ form of income stream, then consider managed funds. These can provide instant diversification – without doing the legwork yourself. 

Diversifying through managed funds

Managed funds can help you gain exposure to diverse assets, even for a relatively small investment. You’ll also get the benefit of the expertise of the fund manager who selects and manages the investments. So there’s no need to research and choose stocks yourself.

If you’ve paid off your mortgage, you’ll have developed the healthy financial habit of investing a set monthly amount. So why not keep up that discipline?

By regularly investing the same amount of money over time, you’ll be employing a strategy known as ’dollar cost averaging’. Because you automatically buy more units in the fund when prices are low – and fewer when they’re high – your average cost per unit is reduced, increasing your potential for profit.

Here are some types of managed funds which may be suitable for retirees: 

• Equity income funds 
  These aim to generate a stable income from shares in large reliable companies, and cushion against falling share prices. These funds can provide moderate long-term capital growth.
  
  
• Managed volatility funds 
  Designed to minimise fluctuation of returns by reducing exposure to higher-risk shares. A good option for more cautious investors, these funds aim for lower total risk – but with similar returns to an equity income fund.
  
  
• Fixed interest funds 
  Suitable for investors looking to invest their capital in lower risk assets. These funds aim to provide a reliable income stream, with fixed payments and less volatility than growth investments. 
  
  
• Index funds 
  A relatively low-risk investment designed for long-term growth, these funds match the movements of a chosen market index. They generally have lower fees than non-index (or active) funds. 

What to consider as a retiree

Retirees generally want to protect their savings from sudden falls in value. Many tend to opt for low-risk investments that safeguard their assets – such as term deposits and cash. Such investments generally provide stable and low returns.

The danger can be in taking this too far, and missing out on investment growth over the long-term. So when you select investments for your retirement savings, consider these aspects:

• Income 
  Generating a stable income stream to ensure a comfortable retirement.
  
  
• Capital preservation 
  Safeguarding your savings against inflation or possible economic instability. 
  
  
• Longevity 
  Some exposure to growth assets to help ensure that your investments will last through your retirement. 

Making your money work for you

Your key is to find the balance between growth and risk, and choose an investment (or investments) to match. Importantly, of course, you should also consider any potential tax implications.

Investing can be complex, and everyone has different requirements – it’s important to get expert help. To work out what’s best for you, it’s a good idea to consult a financial adviser.