Whenever you’re considering an investment, one of the key questions you first need to answer is: How long am I looking to invest my money? This is sometimes referred to as your investment horizon, and will help determine suitable investment options.
For example, if you’re planning to invest your money for 12 months as you save for a new home, the safety of a term deposit or similar cash investment will likely be more suitable than investing in ASX-listed shares that could rise or fall during the year. But if you were investing with the goal of funding your children’s tertiary education when they leave school in 10 years, term deposits or other cash investments are unlikely to provide the highest return over 10 years.
As a general rule, an investment portfolio weighted towards conservative investments, such as cash and fixed interest, will suit shorter investment horizons. Conversely, an investment portfolio weighted towards growth assets, such as Australian and international shares, will suit a longer investment horizon.
Looking over the horizon to retirement
Investing for retirement is something with which we’re all familiar through our superannuation. And understanding our investment horizon is just as important for our super as it is for any other investment
For those in their 20s and 30s, retirement seems a long way off. Investing in growth assets such as Australian and international shares is often considered appropriate. While there may be volatility in the short term as markets rise and fall, over the longer term, capital growth can be expected.
For many of the 7 million Australians aged over 50 today, however, they may see their investment horizon fast approaching. Super funds once invested in mostly growth assets are often switched to a more conservative weighting with a higher proportion of cash and fixed interest as the date for the work retirement party draws nearer.
But is viewing the investment horizon for our retirement savings in terms of the date we go from contributing to super to drawing income from it the right approach?
Let’s look at some key statistics.
The life expectancy of a 65-year-old woman today is 86.8 years. This means she will spend more than 21 years, or 25% of her life, in retirement. And for a couple aged 60 today, there’s a 50% chance one will live past age 90.
By age 85, 56% of Australians will depend on the age pension to live. With this in mind, it’s important to remember that the age pension provides 80% less than the average Australian wage for a couple and 72% less for a single person.
So, rather than our investment horizon for our retirement savings being our retirement date, we need to look much further ahead if we are to continue financing a comfortable lifestyle in retirement. Switching super to the most conservative option in the years leading up to retirement may not necessarily be the best option … given those investments will be relied upon to produce an income for many years to come.
Before making any investment decision, you should seek professional advice from your Wealth Adviser. They can help you determine your investment goals, your investment horizon and an appropriate level of risk and from there, find suitable investment options. To learn more, contact me today.
The advice on this site may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial, tax and/or legal advice prior to acting on this information.
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