So you're nearing retirement? Congratulations. It must be nice to be so imminent to your (I'm sure) long-awaited golden years. But retirement can be a financially stressful time, as well as an exciting one. The loss of a regular stream of active income is something that can be hard to come to terms with, not to mention plan ahead for.
It's understandable that many soon-to-be retirees might feel like they need to change their investing practices. Perhaps you've been investing in shares your whole working life, but are planning on moving to 'safer' investments like fixed-interest bonds or term deposits to fund your retirement.
But that could be a mistake. I accept that retirees need a higher level of financial certainty and security due to the loss of that primary stream of income. Most retirees probably should be a little more conservative with their investing habits than those with years or decades left in the workforce.
However, I don't think most people approaching retirement should simply abandon the asset class that has historically generated higher returns than most others, including cash and bonds, over long periods of time.
Sure, ASX shares can be volatile. And we all know the mental trauma of going through the inevitable stock market crashes that the markets throw up from time to time. That cannot be a pleasant prospect for someone who is about to lose their main income source to contemplate.
Why buying ASX shares still matters in retirement
But I would argue that, unless you have millions and millions of dollars in the bank and can generate a generous income from term deposits alone, pursuing a conservative mix of asset classes for your retirement portfolio is the way to go for most would-be retirees.
In our modern era, most of us can expect to live well into our 80s and perhaps beyond. That means that someone who retires at 65 will have to ensure an income stream is in place for another 20-30 years if they wish to spend the rest of their lives in comfort.
That means you'll want to keep at least some of your nest egg invested in assets that will allow you to continue to compound your wealth at the highest rate possible. That would be buying ASX shares.
Now, everyone is different, and there's no one-size-fits-all retirement investing strategy to recommend. Plus, everyone has different levels of existing wealth, lifestyle expectations and risk appetite. Some people might be on an aged pension, and others might be fully self-funded retirees. So I'm not giving out specific financial advice here, just noting some facts.
But I think most people who are approaching retirement should work out a balance of asset classes. Maybe you want to keep at least three years worth of living expenses in cash and cash assets like term deposits. That will allow you to ride out any stock market crash with plenty of cash set aside.
You could opt for a 30%/30%/40% split between cash, term deposits and/or government bonds, and ASX shares.
A more conservative approach could be allocating 20% of your nest egg to ASX shares, and the rest to cash and term deposits. This might be something to have a chat about with a financial advisor, considering your own personal circumstances.
To sum it up, I don't think it's a good idea to abandon ASX shares entirely from your retirement plan. Your golden years could suffer immensely if you do.