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Choosing the right risk profile for different stages of your life: Mark Bouris

People confused about superannuation often ask me how they can make the right decisions about their retirement savings.

As I pointed out in last week’s column, there are no secret formulas for having enough investments so you can fund a comfortable retirement.

What you should be aiming for is to be able to create an income in retirement that covers around 75% of your working life income.

That’s about the only universal formula for retirement savings, and even then, the mix depends on whether you retire as a couple, retire owning your own home, and how much investment risk you can bear in retirement.

Most retirement strategies are technical and financial. And so they should be.

But retirement savers also need to get their own personalities into the strategy.

For instance, you should understand your risk profile – preservation, moderate, balanced, growth, aggressive – which helps you decide how much weighting to give to shares, cash, property and fixed interest investments such as bonds.

Then you need to get more personal and understand the impact of your life stage on the financial picture.

With life stages comes decisions and priorities. Here is a guide, based on age, that will help you understand what you should be paying attention to:

-          Aged 25 to 35: you’re in an accumulation phase, taking advantage of higher disposable income and fewer family-related expenses. You have a long investment life ahead of you, so you can and should tend towards ‘aggressive’ asset allocations. Why? You’re young enough to weather downturns in share markets and therefore benefit from long term gains.

-          Aged 35 to 45: you should be paying down a mortgage fast, taking advantage of low interest rates to increase home equity and get ahead of the payment schedule (home owners need less cash in retirement than renters or those with a mortgage). You should be paying more attention to your superannuation and although you’re no longer in your twenties, you should keep your investments in ‘growth’ and weighted to equities.

-          Aged 45 to 55: you should be making additional contributions to your nest egg, taking advantage of tax benefits for salary sacrificing to super. Make eliminating all debt a priority, you don’t want to carry it into retirement. If you haven’t already, meet with a financial planner to begin discussing retirement options

-          Aged 55 to 65: you should shift the majority of your investment to preservation assets – cash, fixed income – and use your last working years to increase personal contributions to super. Consider a strategy for “transition to retirement” which includes a capital preservation strategy rather than chasing growth. Focus on making the right tax decisions and decide which lifetime annuity product suits you best.

Of course, life stages are not definitive on their own. But alongside your risk profile, your goals and your savings strategy, they become useful ways of ensuring your actual life is catered for and you’re always on the right track.

Include yourself in the picture, and good luck.

Mark Bouris

Mark Bouris

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.

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