Retirement does not mean stopping investing. With Australian retirements lasting 20–30 years on average, retirees who invest entirely in cash risk having their purchasing power eroded by inflation. Managing an investment portfolio in retirement requires balancing the need for income and capital preservation in the short term with the need for growth over the long term.
The Core Challenge: Income, Growth, and Risk
In retirement, your investment portfolio serves three simultaneous objectives:
- Income: Generate enough income to fund living expenses
- Capital preservation: Avoid permanent capital losses
- Growth: Maintain purchasing power against inflation over 20+ years
These objectives create tension. A portfolio of purely defensive assets (cash, term deposits) is safe in the short term but fails the growth test over 20 years. A portfolio of pure growth assets (shares) is subject to volatility that could impair capital just when you need to draw income.
Asset Allocation for Australian Retirees
Research on sustainable retirement portfolios generally supports maintaining a meaningful allocation to growth assets (shares, property) even in retirement. A common guide:
| Phase | Growth assets | Defensive assets | Purpose |
|---|---|---|---|
| Pre-retirement (60–67) | 60–70% | 30–40% | Still accumulating, long horizon |
| Early retirement (67–75) | 40–60% | 40–60% | Managing sequence risk, drawing income |
| Later retirement (75+) | 20–40% | 60–80% | Capital preservation, reduced risk tolerance |
These are general guidelines only — appropriate allocation depends on your health, spending needs, Age Pension income, and risk tolerance.
Diversification in a Retirement Portfolio
A well-diversified retirement portfolio may include:
| Asset class | Role | Example |
|---|---|---|
| Australian shares | Growth + income (franked dividends) | ASX 200 ETF (VAS, IOZ) |
| International shares | Growth + diversification | VGS, VGAD |
| Australian bonds / fixed income | Capital stability + income | VAF, government bonds |
| Cash / term deposits | Short-term spending buffer | High-interest savings, term deposits |
| Property (direct or REIT) | Income + inflation hedge | Investment property, VAP |
| Defensive alternatives | Capital stability | Some hybrids, structured products |
The Role of Franked Dividends
Australian retirees with taxable investment income (outside super) may benefit significantly from franking credits attached to Australian company dividends. As a low-income retiree, your franking credits may be refunded (rather than merely offsetting tax) — making Australian share income particularly tax-effective in retirement.
Inside super’s pension phase, the 0% earnings tax environment means all franking credits generate a direct refund into the super fund — a powerful benefit.
Managing Inflation Risk in Retirement
Over 25 years, even modest 2–3% annual inflation erodes purchasing power significantly:
- $50,000 of spending today requires ~$90,000 in 25 years at 2.5% inflation
- Purely defensive portfolios (term deposits, bonds) may not keep pace with inflation
Growth assets (shares, property) have historically provided inflation-beating returns over long periods. Maintaining some allocation to growth assets — even in later retirement — is the primary tool for managing inflation risk.
Investing Within vs Outside Super
Retirement investing happens in two environments:
Inside super (pension phase):
- 0% tax on earnings
- Tax-free income withdrawals (age 60+)
- Maximum balance $1.9 million (Transfer Balance Cap)
Outside super (personal name, trust, company):
- Income taxed at marginal rate
- Capital gains taxed (50% discount after 12 months)
- Franking credit refunds possible for low-income retirees
- No contribution or access restrictions
For most retirees, maximising the super pension environment (up to the $1.9m Transfer Balance Cap) before investing personally is the most tax-efficient approach.
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Frequently Asked Questions
How should I invest my super in retirement? A balanced to growth-oriented investment option remains appropriate for many early retirees who have a 20+ year investment horizon. As you age and risk tolerance decreases, gradually transitioning toward a more conservative option (more bonds, cash, less shares) is common. Speak with a financial adviser to determine the appropriate option for your age and circumstances.
Is it safe to invest in shares in retirement? Shares carry more short-term volatility than cash or bonds, but have historically delivered better long-run inflation-adjusted returns. For retirees with a 20+ year horizon and an adequate cash buffer (bucket strategy), maintaining a share allocation is generally considered appropriate. The appropriate level depends on your personal situation.
Should I sell my investment property in retirement? This is a significant decision with CGT, Age Pension, and cashflow implications. Some retirees sell investment properties to simplify their affairs; others retain them for rental income. The decision depends on the property’s yield, the CGT bill, how the proceeds will be invested, and the Age Pension impact.
This article provides general financial information only. Past investment returns are not a reliable indicator of future performance. For advice tailored to your situation, speak with a licensed financial adviser through the ASIC financial advisers register or MoneySmart.