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

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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.

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Returns As of 15th February 2021

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.

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