With people living longer, the number of years Australians spend in retirement is increasing. As a result, superannuation investment portfolios need to last longer and meet income needs throughout a retiree’s lifetime. For many there is also a strong desire to protect their capital and leave a financial legacy for the next generation.

Setting a solid investment strategy is a crucial part of retirement planning and can help investors achieve the goal of sustaining their lifestyle throughout retirement and preserving family wealth if they wish.

Quality long-term investment portfolios should have an appropriate asset allocation based on investment objectives. This starts with understanding risk tolerance, which is the level of risk an investor is willing to accept to achieve their desired return. To determine the acceptable level of risk, consider; the investment timeframe, how you feel about market volatility and expected annual drawings.

Investing in equities (which are higher on the risk scale) requires an investment timeframe of five years or more, to allow the portfolio to ride out market volatility. A timeframe of five years or less requires a more conservative approach, with a larger allocation to defensive assets, which are typically lower on the risk scale.

Expected annual drawings are an important factor in constructing a portfolio. For instance, if 5% is expected to be withdrawn each year for the next 20 to 30 years the portfolio needs to generate an average long-term return 7% to 8% per annum (assuming long-term inflation runs at 2% to 3% per annum) where the aim is to preserve the capital invested.

Achieving a higher return would require a larger allocation to growth assets than defensive assets.

As an example, Balanced portfolios, which typically have an allocation of 60% to growth assets (equities, property, infrastructure etc) and 40% to defensive assets (term deposits, bonds, cash etc) produced an average return of 6.8% per annum over the 20 years to the end of 2024.

Diversification across asset classes is important as it can lower the risk of investing. Focusing on one investment category is risky and can make portfolios more susceptible to market downturns. It’s important to have an allocation to assets that are negatively correlated, that is, their returns move in opposite directions.

For example, retirees often have a large allocation to Australian equities, in particular blue-chip stocks, due to the attractive dividend yield and franking credits. Broadening out a portfolio to include exposure to other asset classes like international equities, global infrastructure, listed property, or fixed interest would reduce the reliance on one particular asset class, lowering investment risk and smoothing out returns.

Using managed funds or exchange traded funds (ETF’s) is also a good way to diversify within an asset class.

During retirement, investment portfolios should have sufficient liquidity to meet cashflow needs. This means having an allocation to high yield investments that pay a regular income to replenish cash as well as having daily priced investments that can be sold down quickly if needed. Portfolios with large allocations to illiquid assets such as residential property or unlisted assets may impact cashflow and limit the ability to meet living costs on a regular basis.

While residential property can provide attractive capital growth over the long-term, the rental yield is typically low and it’s not possible to sell down portions to provide cashflow. While this may be ok during wealth building years where employment or business income is meeting living costs it can create cashflow problems in retirement.

In retirement, investment portfolios should reflect the objectives of the investor, be appropriately diversified, and have sufficient liquidity to meet income needs.

Lindzi Caputo is a financial adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696. This article contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you.