People planning to retire this Christmas face some challenges. First, fixed deposits and safe, defensive investments will provide them almost no return.
Retirees with the option of a lifetime pension, such as some government employees, will be very tempted to choose that.
Retirees with the option of a lifetime pension, such as some government employees, will be very tempted to choose that.Russell Tym
With assured annual income of perhaps nine per cent of the lump sum alternative the pension looks an obvious choice. However, while the income is guaranteed so is the fact that the capital will be lost. So it is worth exploring other options, along with retirees who don't have a choice.
Account-based pensions set up with personal super savings are the most widely used. They can provide reliable income of say five per cent per annum and should not lose value over the long-term provided they aren't too cautiously invested.
Pension accounts can be invested wherever the retiree wishes. If they choose safe, interest-earning areas returns will be low and the account value will decline.
If they choose a good proportion of property and shares, returns should be strong and the account value should be maintained or grow.
This is the second challenge for retirees who aren't experienced investors - to learn about different investments and become comfortable with them. Inexperienced investors worry that share and property based investments are high risk.
They are higher risk than fixed deposits, but the risk we are talking about isn't of financial failure causing total and permanent loss. The risk involved is market risk, variations in value. Shares will fluctuate more, showing greater volatility, but will earn more long term.
Diversified pension accounts with around two-thirds in growth areas like shares and property have earned about seven per cent per annum for the last 10 years.
Future returns may be lower but they should at least equal the income drawn out.
The fact that fixed interest rates are so low is the reason we can be confident other investments will earn sound returns. The Reserve Bank has indicated rates are likely to remain extremely low for several years. So investors with money in the bank are seeking alternatives.
Low borrowing costs also mean people keen to accumulate wealth are borrowing to invest.
Most sound assets are rising in value. Residential and commercial properties, shares, farms and infrastructure are in demand and appreciating. This is likely to continue for several years.
Many shares will still pay four per cent annual income and commercial property funds more.
The fund that owns the new Bloomfield Medical Centre is open now and forecasting about 5.75 per cent income.
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