If you've been investing for most or all of your working life, congratulations. You've hopefully benefitted from the awesome power of compounding from many years of owning ASX shares and set yourself up for a comfortable retirement through investment as a result.
However, investors who have a day job and a primary source of income usually invest very differently from those investors who are retired and rely on passive dividend income to pay their bills. An investing mistake is a lot more difficult to bounce back from when you don't have a regular salary to patch over your portfolio's cracks.
So with this in mind, today let's discuss how to prepare your ASX share portfolio for the transition to retirement.
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Three steps to prepare an investment portfolio for the retirement transition
Prioritise defensive ASX dividend stocks
Many investors love owning ASX shares that are growing fast and have delivered pleasing share price gains. While the likes of Xero Ltd (ASX: XRO) and WiseTech Global Ltd (ASX: WTC), for example, have done very well for investors in recent years, these stocks are arguably less suited to a retiree.
That's because their share prices tend to be relatively volatile, making regular sales a little difficult. Not to mention, they don't tend to pay much in terms of dividend income (in Xero's case, none).
As such, if one is approaching retirement, one might consider transitioning away from growth shares and into more defensive dividend payers that supply a more reliable paycheque.
Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL), and Washington H. Soul Pattinson and Co Ltd (ASX: SOL) are all examples of stocks that have managed to keep their dividends flowing throughout the economic cycle.
Maximise your franking credits
Franking credits are great for any ASX investor. But they can be particularly useful for retirees. Depending on your own personal tax and superannuation circumstances, it's possible that you'll be able to get a cash refund for your franking credits upon retirement instead of the standard tax break.
With that in mind, it is probably a good idea for most retirees to prioritise fully franked dividend income.
Most ASX 200 shares pay franked dividends. But some popular stocks don't, for various reasons. So, if you're approaching retirement, it might be worth considering whether to swap out stocks like Scentre Group (ASX: SCG) or Transurban Group (ASX: TCL), which usually don't attach meaningful franking credits to their dividends.
To illustrate, right now, Telstra shares are trading on a dividend yield of 4.49%, while Transurban is offering 4.56%. Even though Transurban's yield is nominally higher, Telstra's full franking credits will probably make it a better income investment for a retiree (assuming these yields hold, of course).
Look to alternative asset classes as retirement investments
As we mentioned earlier, a key consideration for any retiree is that investment mistakes are harder to endure.
ASX shares are the asset class that has traditionally delivered the highest returns over long periods of time.
However, given most retirees' reduced tolerance for risk, permanent capital loss, and income volatility, it might be worth considering increasing exposure to 'safer' asset classes as retirement investments.
Cash and government bonds are usually considered safer investments than ASX shares when considering the risk of capital losses. With interest rates at decade-highs, these investments will currently pay you a lot more to hold them, too.
Exchange-traded funds (ETFs) allow easy access to these asset classes. Two popular examples are the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) and the iShares Core Cash ETF (ASX: BILL).
