How to Build a Retirement Investing Strategy That Works
The most common reason for using the wrong fund is that people don’t have a strategy to begin with. They help out with super, because it’s required, invest in an ETF, because their friend told them about it, and then hope that somehow it will be sufficient when they retire. A true retirement investing strategy begins with a goal, backs up to a plan and is not simply set and forgotten in its initial state for 30 years.
Follow these steps to create one that will stand up.
Start With a Number, Not a Feeling
Before choosing a single investment, work out roughly what retirement needs to fund. A simple starting point is the 25x rule: estimate your expected annual spending in retirement and multiply it by 25 to get a rough target portfolio size. It won’t be perfectly precise, but it turns a vague goal (“I want to retire comfortably”) into something you can actually plan around and measure progress against — ideally with a retirement calculator rather than a rough guess on the back of an envelope.
Choose the Right Structures, Not Just the Right Assets
A 5-year investor would be in a much different spot from a 30-year investor. The longer time frame you have, the more short-term volatility you can withstand and the greater your long-term returns are likely to be — which is typically a greater allocation to shares. Near the end of retirement, most plans transition slowly over time to preservation of capital, and a market decline immediately prior to retirement does not negatively impact the entire plan.
Select the right structures – not the right assets!
Investing in retirement is not just about the assets you purchase, it’s where you invest them as well. That in Australia typically refers to a balance of three primary structures:
Concessional taxed super – for the long-term and only available at preservation age, in most cases.
- Super holdings will have more limited flexibility and tax treatment – whereas earlier, shares and ETFs could be held outside super.
- Property – for those who desire it is the same, but concentrated and illiquid, and a familiar, popular choice for a lot of Australians.
The right combination is dependent less on which asset has historically done best, and more on when you’ll need the money.
Diversify and Ensure that costs are kept low.
The two surest factors to invest in the long-term are diversification and fees. Diversifying investments between asset classes, industries and countries helps minimise losses from any single bad result. Meanwhile, you are losing money at the same compound rate as you are gaining at the returns: 1% annual fee difference is a significant amount that a long-term portfolio can lose in decades. One of the cheapest, and easiest, ways to do both has always been by owning low-cost, broadly diversified index funds.
Schedule Contributions and Rebalance Automatically
Inconsistency is more likely to cause the failure of strategies than poor asset selection. Routine deductions, such as from a super or any investments outside of super, will overcome the impulse to time the market and the tendency to miss a payment when finances are tight. When coupled with a regular annual review to realign with the desired allocation, the plan doesn’t become a full-time pastime.
Avoid setting and forgetting, but rather check your progress.
If you don’t know if a strategy is effective, then why use it? It’s good to review your numbers once or twice a year, preferably with a good retirement calculator and not just counting on a finger and thumb, so you can see if you’re on track or if you need to increase or decrease your savings, timeline or expectations. This can be easily done with the help of free tools like The GLOW Method retirement calculators, without the need for a financial planning degree or a spreadsheet – it’s the difference between a strategy that gets reviewed and slips quietly off course.
Common Mistakes That Derail Otherwise Good Strategies
No clear target – If there is no number to shoot for, then you don’t know if you are on track or not.
- Trying to time markets – switching between funds or assets because of a short-term gain, not a plan, or because of a perceived downturn in one investment but an upturn in another
- Failing to account for fees – which can make a significant difference on long-term compounding year after year
- Not rebalancing – not keeping a distance between the target allocation and the allocation resulting from the markets movements
A strategy that you have used since your 30s may require modification as you get to your 50s – and calling it “set and forget” forever is not an option.
Bringing It Together
There’s no need to complicate a retirement investing strategy that works. It must have a clear objective, investments aligned to your timeline, a sensible structure and low costs, regular payments, and a periodic review of whether or not it is working. Those fundamentals need to be mastered, reviewed from time to time and the rest is largely patience.