How to protect your super fund when you're approaching retirement

It can be difficult to balance potential superannuation returns with a lower tolerance for volatility. Here are some tips for managing this situation.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When it comes to superannuation, many people don't think of it as a conventional 'portfolio' so to speak. Rather than simply a basket of ASX shares, a super fund is your retirement fund, a 'golden ticket to your golden years' of a comfortable, stress-free, work-free life.

As such, many people approaching retirement, even those with ASX share portfolios, aren't comfortable with the level of volatility the share market inevitably brings to investments, whether that be in or out of super. That's despite shares offering the highest potential growth of any asset class (if historical performance is to be believed), even if that comes with high volatility.

Thus, most 'balanced' superannuation portfolios acknowledge these sentiments by investing in a range of asset classes, not just shares. These usually include fixed-interest assets (bonds), property and cash. This exchanges lower volatility for lower returns, theoretically speaking at least.

But for those people with retirement just around the corner, a 'balanced' approach might not fit the risk profile these investors want to enjoy.

Luckily, reporting in the Australian Financial Review (AFR) this week provides some tips on protecting your super fund without sacrificing returns unnecessarily.

Protecting a super portfolio

One strategy those approaching retirement can use to help shore up their super funds is to employ the use of annuities. Annuities are similar to a pension, in that they provide a guaranteed stream of income in exchange for a lump sum investment. This income might not offer the same kind of bang for your buck as a well-picked portfolio of ASX dividend shares, but it also comes with that invaluable 'guaranteed stream' that no dividend share can offer. Many ASX companies offer products like these, including AMP Ltd (ASX: AMP) and Challenger Ltd (ASX: CGF).

The AFR tells us that an investor approaching retirement could also consider investing in corporate bonds. Corporate bonds are not as 'safe' as government bonds as, unlike a government, a company can go broke. However, government bonds offer next to no real return (a 3-year Australian government bond offers a current yield of 0.12% per annum at the time of writing). In contrast though, the AFR says some corporate bonds, such as those from Lendlease Group (ASX: LLC), offer far higher yields, in one case 2.3% per annum.

Finally, the AFR says that keeping a chunk of funds in cash or cash-like investments can help mitigate volatility. Having a 'cushion' like this enables an investor to ride out a market crash until the markets recover without having to sell down shares at the worst possible time.

Foolish takeaway

Like most things, there is no right answer for constructing the perfect super portfolio to fit your needs. But with adequate forethought and planning, the chances of successful, happy and comfortable retirement are far higher.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Retirement

A young couple in the back of a convertible car each raise a single arm in the air whilst enjoying a drive along the road.
Retirement

How to invest your first $10,000 in ASX shares towards an early retirement

Your first move could be an important one when it comes to building a retirement portfollio.

Read more »

Superannuation written on a jar with Australian dollar notes.
Superannuation

3 essential tips to maximise a superannuation fund at any age

Some simple changes can make a big difference...

Read more »

A couple sit on the deck of a yacht with a beautiful mountain and lake backdrop enjoying the fruits of their long-term ASX shares and dividend income.
Retirement

How to retire early using ASX shares

Want to retire early? Take a look at this guide.

Read more »

Smiling elderly couple looking at their superannuation account, symbolising retirement.
Retirement

If I were a retiree, I'd buy these 2 ASX shares straightaway

Retirees may do well with these investments in their portfolio.

Read more »

Couple holding a piggy bank, symbolising superannuation.
Retirement

The best ASX 200 retirement shares to buy in May

Bell Potter thinks these shares could be top options for retirees. Let's find out why.

Read more »

Retired couple hugging and laughing.
Retirement

2 wonderful ASX 200 retirement shares I'd buy in May

I’m very positive on these stocks for retirees.

Read more »

Happy couple enjoying ice cream in retirement.
ETFs

How ASX ETFs could help you retire rich

These funds could be helpful for investors looking to retire with a nice nest egg.

Read more »

A couple are happy sitting on their yacht.
Retirement

Want to retire rich? I would invest $1,000 a month into ASX shares

$1,000 a month could go a long way if you have time on your side.

Read more »