Investment volatility is the risk of the value of your investment moving up and down. With high quality investments, their values should move up more than they go down.

Investments which are expected to produce higher long term returns (such as shares) tend to experience higher levels of short term volatility.

On the other hand, investments which are expected to generate lower long term returns (such as bonds) usually experience less volatility in the short term.

This can be seen in the charts below which show the range of historical returns for various asset classes over various periods, as well as their long term average returns. As you can see, the longer you hold your investments the less they are affected by volatility. For example, the range of returns for Australian shares in any single year has been -42.4% to 71.3%. However, the range for 10-year periods has been 2.6% to 18.2% p.a.

Note: Investors who redeem their investments after a fall in value turn a notional loss into a permanent loss. If they are high quality investments, this is usually a poor decision, because high quality investments should recover from falls in value.

How you can manage investment volatility

Investment volatility can be managed using three prudent principles of investing:

• Only invest in high quality investments
• Construct a properly diversified portfolio
• Regularly review your investments to ensure they continue to maintain their quality.

^Luke Sheehan is an Authorised Representative of Australian Unity Personal Financial Services Limited (AUPFS) ABN 26 098 725 145, AFSL 234459. This information has been prepared by AUPFS. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current laws and their interpretation.

This information has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Because of this you should, before acting on it, consider its appropriateness, having regard to your objectives, financial situation and needs

The post What is Investment Volatility? appeared first on BJT Business Advisors.

Go to the column which matches the average annual earning rate your investments should achieve.

Move down that column until you reach the average annual capital drawdown rate (far left hand column) you will be making on your savings

Your drawdown rate is the amount of income & capital you will withdraw from your investments each year, divided by the amount you have invested, multiplied by 100.

The number you arrive at in the table estimates the number of years your money will last.

Example of how to calculate your drawdown rate

Let’s say someone has $600,000 in retirement savings and they require an income of $54,000 p.a. Their drawdown rate is:

$54,000 ÷ $600,000 x 100 = 9%

If their earning rate is say 4%, then their money will last around 15 years.

Tips to ensure our calculator has as much relevance as possible

• If you want your retirement income to increase with inflation, you can take that into account by subtracting the expected rate of inflation from the earning rate of your investments. We expect inflation to average around 3% p.a., so if your investments earn on average say 7% p.a., then you would select 4% as your ‘real’ earning rate.
• If you will qualify for the Centrelink Age Pension you shouldn’t include it when you calculate your drawdown rate. For example, let’s say a homeowner couple aged 65 has $400,000 in savings which earns 7% p.a., (that’s about 4% after inflation) and they require $42,000 a year income. They should initially qualify for age pension of around $22,000 p.a. (indexed). So, to calculate the life expectancy of their retirement savings, they should use a drawdown rate of 5% (i.e. [$42,000 less $22,000] ÷ $400,000 x 100). Given the real earning rate of 4%, this means their savings should last about 41 years.

Of course, our ‘Money Life Calculator’ is just a guide. To accurately assess the life expectancy of your retirement savings you should talk with the team at BJT Private.

We have access to a sophisticated software system which takes into account all of the variables and calculates taxation and Centrelink benefits each year of your retirement.

Strategies to help you stretch the life expectancy of your retirement savings

• Increase your contributions to super before you retire (including using the ‘Transition to Retirement’ rules to create additional tax advantages)
• Arrange your finances so you pay no tax in retirement
• Increase the return you generate on your investments
• Arrange your finances to qualify for higher Centrelink benefits
• Retire later
• Work part-time in retirement
• Lower your income requirement in retirement
• Sell your home for a less expensive home
• Decide to leave less or nothing to your estate

For the majority of retirees, the most appropriate solution usually involves many strategies. As your financial adviser we will be pleased to model different scenarios for you to ensure the right combination of strategies is employed for your situation and lifestyle needs.

Luke Sheehan is an Authorised Representative of Australian Unity Personal Financial Services (AUPFS) ABN 26 098 725 145, AFSL 234459. This information has been prepared by AUPFS.

This information has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Because of this you should, before acting on it, consider its appropriateness, having regard to your objectives, financial situation and needs.

The post How long will your savings last in retirement? appeared first on BJT Business Advisors.