Which companies should a retiree buy?

For all those investors a fair way from retirement, taking a long-term approach to investing is the way to go, but that same approach can create a dilemma for those about to retire, or those already retired.

While some market commentators have suggested a rough rule of thumb is that you should hold your age as a percentage of assets in cash and cash equivalent securities. That makes no sense for say a 40-year old, who still has on average another 40 plus years to live and needs to grow their capital base to provide for retirement in 20 years’ or so time.

However, those close to or in retirement are likely to have less tolerance to volatility and sudden large market dips. What most really want is a steady, reliable income stream, with a very low risk of losing their capital. The problem is that cash and fixed income assets generate very low returns – term deposits are lucky to pay you 4% these days, and that’s before tax. There are still plenty of high quality companies on the ASX that pay fully franked dividend yields above 4%.

So those about to retire and retirees still need to hold some growth assets such as Australian and international shares, although the proportion as a percentage of their total investment portfolio should be lower than say a 25-year old.

But having your total growth assets invested in the big four banks for example, is just asking for trouble. Any event, such as rapidly rising unemployment, that could see a share price crash in one of them, is likely to see all of them fall dramatically. That is why retirees and those about to wave goodbye to full time work should consider diversifying their growth assets into companies such as Woolworths (ASX: WOW), Wesfarmers (ASX: WES), CSL (ASX: CSL), Telstra Corporation (ASX: TLS) and Coca-Cola Amatil (ASX: CCL).

While these companies certainly don’t look cheap, they may fit the bill for those willing to pay more for security and peace of mind, the option of future growing earnings and in most cases, decent dividends.

Foolish takeaway

If you’re a retiree and someone suggests you invest all your assets into one sector of the market, you might want to seek a second opinion.

Interested in our #1 dividend-paying stock? Discover The Motley Fool's favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2013-2014."

Motley Fool writer/analyst Mike King owns shares in CSL, Coca-Cola, Telstra and Woolworths. You can follow Mike on Twitter @TMFKinga

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.