The three milestones that matter in retirement
Australia has no compulsory retirement age. While some occupations may have age based limits for safety reasons, you…
All investments come with costs and, whilst these can’t be ignored, there are other key considerations to make when choosing the investment that’s right for you. These include aligning the investment with your goals and taking on a level of risk that you are comfortable with.
Some investments are better suited to achieving certain goals than others. The key is to match the timing of your goals to the type of investment.
As a guide, ‘growth’ assets like shares and property, held either directly or in a managed investment are more suited to meeting medium to longer term goals. For example, over shorter periods, share markets can rise and fall in value often quite markedly and quickly.
More ‘defensive’ assets like cash – for example, a term deposit – don’t experience changes in capital value and can be better suited to achieving short term goals. However, as the returns are generally lower, this type of investment on its own may not always be ideal for meeting longer term goals.
Look at your need for ongoing income returns and/or longer-term capital growth to achieve your goals as well as your appetite for risk. Some investments are better suited for providing regular income than others. If you’re aiming for capital growth, using some growth assets like shares or property might be appropriate.
But consider whether you can dip into those growth assets by selling some but not all of your investment. For example, you may only be able to tap into the funds you invested in a rental property by selling the entire asset and this may take some time, thereby limiting your ability to access cash quickly. With shares or units in a managed investment, you are more likely to be able to sell off a slice of your investment when you need extra cash.
All investments carry some degree of risk and this is usually reflected in the potential return your money can earn. Lower returns are usually associated with a more secure, lower risk asset, meaning there is relatively less risk of losing your upfront capital. The higher the likely return, the greater the degree of risk that is likely to be involved.
Your comfort level with risk is a very personal thing. It depends on your unique set of circumstances, including your age. For example, younger people, with longer-term goals and a long working life ahead of them, may have a higher tolerance for risk (as there is longer to potentially recover any market downturns). Older investors and especially retirees, tend to be more risk averse as they have fewer opportunities to replace the capital that may be lost when investments markets dip.
A factor that can be easily overlooked when choosing investments is the cost involved.
Costs are not the only consideration when choosing an investment that’s right for you but they do matter because, to make money, your investment has to deliver returns over and above the associated costs.
A rental property for instance comes with upfront costs including stamp duty, legal fees and pest and building inspections. There are ongoing costs too, such as council rates, land tax, insurance and repairs and maintenance.
Shares and managed investments have a different cost structure. They tend to have lower and fewer upfront costs. For example, brokerage fees apply when purchasing directly-held shares and these fees can be reduced if an online broker is used. However, there are minimal, ongoing costs.
Managed investments, where the underlying assets could include varying proportions of shares, property, fixed interest or cash, may charge entry fees in additional to an ongoing management fee called a “management expense ratio” (MER). The MER is usually a percentage of the value of your investment and it represents the price paid for the fund manager’s professional investment expertise.
Source: BT