Updated: Mar 6, 2020
Article published in the Australian Financial Review (AFR) on 27 September 2019.
Author: Alexandra Cain (journalist).
Investors planning for their retirement are flocking to instruments such as exchange-traded funds for their simplicity, diversity and low-cost nature.
While bricks-and-mortar assets remain a focus for many pre-retirees, they are also exploring options to make the most of the tax-effective superannuation environment.
Canberra-based certified financial planner Michael Miller says pre-retirees’
approach to wealth building depends on the investor’s goals.
“People who don’t want to manage a portfolio at all are using ETFs that are diversified across multiple investment markets. Other investors might be happy to select and manage their own portfolio of Australian shares, and are using ETFs to add exposure to international sharemarkets.
"This is especially the case if they are less confident choosing individual shares, or just don’t want to have to manage different international trading accounts.”
According to ETF house BetaShare’s latest review of these investments, the value of funds in ETFs achieved record highs in August to reach $54.1 billion under management, with $784 million flowing into these instruments in August alone.
But this still only represents a paltry 2.5 per cent of the $1.6 trillion in total assets under management across Australia, according to research house Morningstar.
The top five Australian ETFs are the Vanguard Australian Shares Index ETF, the SPDR S&P/ASX 200 ETF, iShares Core S&P/ASX 200 ETF, VanEck Vectors Australian Equal Weight ETF and BetaShares Australia 200 ETF. Research by ETF leader Vanguard has found retirees made up almost a quarter of Australian ETF investors in 2018.
Although funds in ETFs continue to rise, turbulence in property markets in recent years has not dampened investors’ romance with real estate. Miller says people with an eye on retirement tend to hold property assets outside the super environment to take advantage of negative gearing.
“There’s also not much benefit generating deductions against super’s low tax rates. It’s also easier for an individual to borrow than it is for a superannuation fund.”
Gianna Thomson, principal financial planner at Thomson Wealth, says attitudes towards real property investments can change once an investor reaches retirement age.
“Some investors sell property in retirement to help with their income needs. This may be because the net rental yield isn’t enough, particularly after land tax and rates are paid,” says Thomson, who typically uses financial modelling to help them make this decision.
“I recently did this for a client. Their net rental income was only 1.75 per cent after all property expenses, which isn’t much better than the return from a term deposit,” she explains.
Gen Advisory’s Managing Director, Michael Lukman, says while it’s less common than a direct property investment, retirees are also gaining exposure to real estate by buying units in property funds as such real estate investment trusts listed on public markets like the Australian Securities Exchange.
“Similar to a managed fund, the unitholder’s money is pooled together and invested in a range of property assets across commercial, retail, industrial or other property sectors. REITs can provide investors with exposure to the property market in a way that is more diversified than buying a single property,” he says.
Aside from property assets, investors are exploring ways to make the most of the advantages of the super environment.
“Since the $1.6 million cap on the amount that can be held in a pension account was introduced, people who want to save more have been looking at where else they can hold retirement savings tax effectively,” says Miller.
“This may mean investing in the name of a spouse or partner with a lower taxable income, using an investment bond or investing via a family trust,” he adds.
Lukman says in his experience, the closer a person is to retirement, the more defensive his or her savings and investment strategy tends to be.
“Accordingly, Australians who are at, or close to, retirement age generally gravitate towards making voluntary contributions to their super funds and investing in interest-bearing accounts,” he says.