Not even $1 million will guarantee a happy retirement

Bank savings won't provide most retirees with the level of income they need which is why more and more Australians are turning to the stock market.

a woman

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

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.

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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »