In a recent interview with ABC Radio the chairman of annuity provider Challenger Ltd (ASX: CGF), Mr Jeremy Cooper, suggested that $1 million of superannuation could potentially not provide an income stream any greater than the aged pension!
The statement will come as a shock to many investors given the general consensus that millionaire status should be adequate to provide for a comfortable retirement.
Mr Cooper’s statement is based on the current 10-year bond rate of 2.3% which – on the assumption that a superannuant entering his or her retirement stage moves their portfolio to cash – will yield an income stream not all that different to the $1,300 a fortnight received from the pension.
It is of course exactly because of this somewhat dire situation of record low interest rates that investors, particularly those operating self-managed superannuation funds (SMSF) have looked to solid dividend-paying stocks such as Telstra Corporation Ltd (ASX: TLS) to provide a much needed boost to the yield achieved from their portfolios.
It’s understandable that investors have moved up the risk curve in their chase for yield, however, the problem for investors is that investing in shares comes with added risks which aren’t present in fixed income.
These risks include:
Company specific problems such as low commodity prices that have meant investors in “blue-chip” companies such as Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP) are down around 20% and 15% over the past 12 months, compared with a 6% rise in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Market Crashes. As highlighted in the exclusive link below, gut wrenching bear markets are part-and-parcel of investing in the stock market. While markets do ultimately recover, for retirees a slow, drawn-out recovery could force them to draw down on their asset base in order to provide the income necessary to cover their living costs.
Mr Cooper is right that bonds and bank deposit accounts are unlikely to be the saviour for SMSF investors and this situation has led to a ‘chase for yield’ by many market participants.
While it is arguably a necessity, the strategy is not without its risks and investors need to be considered in their stock selection and alert to the potential downside risks in their portfolio.
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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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