Being asset rich and cash poor can cause enormous stress in retirement years when there is a need to draw a regular income from invested wealth to meet living costs. Significant wealth may have been built up in non-income producing assets such as the family home or assets that don’t yield enough income to meet regular cash needs.

To avoid such stress in retirement it is important to take a diversified approach to building and structuring wealth in the pre-retirement years. Consider the balance between lifestyle assets (non-income producing) and investment assets, which do provide an income. The portion in investment wealth should be enough to sustain living costs throughout retirement. For instance, if $100,000 of income is required to meet annual living costs this would equate to investment wealth of $2 million, if that wealth produces an average annual return of five per cent after inflation.

For investment wealth to provide the required income on a regular basis it should be diversified and include liquid and accessible assets. Liquid and accessible assets can be sold down in portions.

Investment wealth can often be tied up in residential property. 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. When planning for retirement, consideration should be given to the overall wealth allocation to residential property across lifestyle and investment assets and how this would impact cashflow.

For instance, a $2 million residential property may produce an average rental yield of $60,000 or 3% p.a. before costs. In contrast, a diversified investment portfolio of equities, listed property, fixed interest and cash assets invested with a balanced profile could provide an average annual return of $90,000 or 4.5% p.a. after costs.

The assets of a diversified investment portfolio tend to be more liquid and accessible than residential property as it is possible to sell down a parcel of shares or units in a managed fund. Care should be taken to include investments that are not locked away and can be sold on market at any point in time. Adding an exposure to equities, especially Australian equities, due to the franked dividend income can also be very useful in retirement years.

Finally, the structure of investment wealth in retirement is also important. In retirement, superannuation is the most tax effective place for wealth to be invested as it is a concessionally taxed environment. Once a pension is commenced, income earned on that pension account becomes tax free. Individuals can have up to $1,900,000 in a pension account which equates to an annual five percent draw down of $95,000. Building a strong superannuation balance should be a key part of retirement planning.

In pre-retirement years thought and planning should be given to the balance between lifestyle and investment assets. It is important to build investment wealth that can sustain a comfortable lifestyle in retirement by ensuring that wealth is well structured to make the most of tax-free pension limits and is then invested in a diversified, liquid and accessible manner so cashflow is available to meet lifestyle 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.