Diversifying
in Retirement

With the cost of living slowly rising, it is easy to worry about the future and what will happen after retirement. There are many options readily accessible, including pensions, to maintain a steady lifestyle and income. But investing in different areas can maximise income and make retirement life that much more secure. Find ways to make big money, even after you stop working. Start your research here and find what options suit your needs now.

Stocks

Stocks

Potential return on $5,000 investment

Calculations based on AllPennyStock

10 years
$975
20 years
$1,939
30 years
$33,479
  • Online Brokers

  • Impersonal & doesn't offer advice
  • Investor needs to know more about the market to make smart buys
  • Usually costs around $15
  • Full Service Stockbrokers

  • Offers advice and helps with paperwork for the trade
  • Advice could still be faulty or poorly informed
  • Usually costs around $80

Investing in stocks is probably the most well known method of earning income. People trade and buy shares in different companies, giving the buyer partial ownership. There are two ways to earn money from stocks; Capital Return and Dividends. Capital Return is when shares are sold for more than they were bought (eg. buying shares for $50 and selling them for $60). Dividends are cash payments made by some companies to each investor, usually once or twice a year, and the amount depends on how many shares they have. The two main Australian exchanges are ASX and CHi-X.

The process of buying stocks can be tricky. It starts with finding a broker.

Online brokers are impersonal and only facilitate stock trades and offer little to no advice. Investors must therefore be informed and decisive about which shares to buy and how much to pay. The service will usually cost from $15. Alternatively, full service stockbrokers offer advice and assist in the logistics of trade. It is more expensive, costing around $80 but is easier and more informed. The risk with full service, however, is that they are ultimately salesmen that could also make poor financial decisions.

Saving Accounts

Saving Accounts

Potential return on $5,000 investment

Calculations based on calculator.net

10 years
$1,418
20 years
$3,239
30 years
$5,577
  • Low risk, low reward
  • Withdrawals are not limited
  • Higher interest than normal bank accounts

Savings accounts are a simple yet guaranteed way of accumulating money. Basically every bank offers them, making it one of the easiest ways to save in the long term. These accounts are separate to everyday bank accounts and money can be transferred between accounts with no limitations. It can be used as a way to control day to day spending, with the ease of mind that these accounts are very secure.

Saving Bonds

Saving Bonds

Potential return on $5,000 investment

Calculations based on Property24

10 years
$2,144
20 years
$5,392
30 years
$15,736
  • Low risk, moderate reward
  • Guaranteed a steady income and is easy to buy into
  • If investor decides to sell bonds before maturity, it is subject to market value, not the investor's purchase price

Bonds are when people lend money to the government for a fixed amount of time.

The government regularly pays the interest and eventually the whole sum at the age of maturity. Bonds are now available for purchase on ASX and can be bought and sold in the same way as stocks.

There are two types of bonds in Australia; Exchange Treasury Bonds (eTBs) and Exchange Treasury Indexed Bonds (eTIBs). eTBs have a fixed annual interest rate that is paid every six months. They also have fixed face value where the amount given to the investor at the end of maturity is predetermined and unchanged. eTIBs, however, are paid quarterly with the interest rate and face value subject to change.

Certificates of Deposit

Certificates of Deposit

Potential return on $5,000 investment

Calculations based on calculator.net

10 years
$3,144
20 years
$8,266
30 years
$16,610
  • Low risk but low reward
  • Return can eventually become quite high, especially if using a ladder system

CDs, also known as Term Deposits, are a long term investment and commitment with the bank. Most banks have a fixed interest rate for CDs which are higher than savings accounts. If a CD is cashed earlier than the fixed term, there is a penalty. It is a safe investment option since a profit is guaranteed but does not have a high return. One way to maximise return is by ‘laddering' the deposits. Rather than putting all savings into a single CD, stagger the deposits. Since interest rates fluctuate, staggering gives the chance of getting a higher interest rate.

Real Estate

Real Estate

Potential return on $5,000 investment

Calculations based on HomeLoanExperts

10 years
$5,795
20 years
$25,000
30 years
$45,313
  • Moderate risk, high return
  • Dependent on the market and the presence of a tenant
  • It becomes fairly easy to manoeuvre the housing marketonce an investor has entered

Investing in real estate can make a lot of money and be quite stable. It's usually rented out, the tenants being the main source of income. Alternatively, individuals that have insight into the real estate market could choose to buy smart. Buying land that will increase in value in future can yield a huge return.

Peer to Peer Lending

Peer to Peer Lending

Potential return on $5,000 investment

Calculations based on calculator.net

10 years
$2,136
20 years
$5,423
30 years
$9,216
  • High risk and usually high reward
  • Could potentially lose a lot of money
  • More control over where your money goes

This is quite a new system which makes it pretty risky. Because it's so new, there aren't many regulations to be followed as the practice tries to find its feet. In peer-to-peer lending, investors lend a small amount of money out to be paid back with interest. The loans are usually done through a third party website like SocietyOne and MoneyPlace.

Commodities & Collectibles

Commodities & Collectibles

Potential return on $5,000 investment

Calculations based on Paul Fraser Collectibles

10 years
$8,144
20 years
$13,266
30 years
$21,609
  • High risk, can be high reward
  • Difficult to predict what items will increase in value over time
  • Collectibles can be a fun hobby and should not be done purely to make money because of the unpredictability

This process works similar to real estate. It requires knowledge of the market to be able to generate a substantial return. Some commodities include precious stones or gold. Some investors choose to look into the world of collectibles. Items such as comic books, wine, art or antiques can be worth a lot more in the future. The risk, however, is that these markets are susceptible to crashes that are difficult to predict.

Annuities

Annuities

Potential return on $5,000 investment

Calculations based on calculator.net

10 years
$3,954
20 years
$11,035
30 years
$23,717
  • Low risk with a guaranteed reward
  • Is not dependent on any market
  • Can not be taken out as a lump sum and may affect age pension claims

Annuities pay a guaranteed income after retirement. They can be purchased from a super fund or life insurance company in a lump sum. The frequency, amount and duration of the payment are decided upon purchase of the annuity. There are many options and systems available to the customer, including applying an interest rate (fixed or in line with inflation) to the payments. While it is a guaranteed source of income post-retirement, it requires an upfront lump sum from either personal savings for a super fund.

Gold

Gold

Potential return on $5,000 investment

Calculations based on Buy Upside

10 years
$8,537
20 years
$25,042
30 years
$19,835
  • Moderate risk, potentially high reward
  • Profit is highly dependent on the market
  • Is difficult for retirees since they do not generate a steady income

The price of gold usually increases in the face of economic turmoil, making it a good safety blanket to supplement other investments. That being said, gold prices often rise and fall dramatically, making it quite an unpredictable market to invest in. They do not generate income and only yields a return if they are sold for more than they are bought. These sales are also done in USD so Australians need to be aware of exchange rates to maximise profit. Gold can be bought physically or through places like the ASX or Perth Mint Bullion.

Super Annuation

Super Annuation

Potential return on $5,000 investment

Calculations based on MoneySmart

10 years
$3,817
20 years
$8,056
30 years
$12,410
  • Full Service Stockbrokers

  • Low risk, high reward
  • Guaranteed savings after retirement
  • Easily accessible with many companies such as AustralianSuper and MLC

In Australia, there are laws that require employers to contribute 9.5% of their employees salary to their Superannuation fund ('super'). Supers are a really easy way to guarantee saving since the fund can not be accessed until the age of 65 or retirement. The money is also invested by the Super Fund, generating income through interest. There is also the added benefit of possible government co-contributions. When after-tax money is put towards superannuation, the government will also put in a set amount, based on the salary.

Commercial Property

Commercial Property

Potential return on $5,000 investment

Calculations based on Commercial-Loans

10 years
$1,364
20 years
$2,919
30 years
$4,663
  • Moderate risk, high reward
  • Utilities are paid for by the leasee so maintenance costs are minimised
  • Very sensitive to the market (prices are known to drop dramatically)

Similar to real estate, commercial property is an investment made with the intention of renting out the property. It is usually rented out for longer periods of time with bigger breaks between tenants (called Lessees). Commercial property tends to generate more income through rent but it can sometimes be difficult to find a lessee and an investor could go years without one. When investing, it is important to consider the location and any proposed changes to the area as these can greatly affect the property's value. Places like Balmain Private can help guide the decision.

Judgements/Structured Settlements

Judgements/Structured Settlements

Potential return on $5,000 investment

Calculations based on MyStructuredSettlementCash

10 years
$22,470
20 years
$26,764
30 years
$27,584
  • Risk factor is hard to determine, considering it is not easily accessible
  • Highly circumstantial
  • Can generate high income if successful

Settlements are a form of compensation for an injured individual. It involves a plaintiff who is injured by a defendant's negligence. If negotiations are successful, the injured person gets a steady stream of cash payments from the perpetrator. It is a voluntary agreement made between the plaintiff and the defendant to compensate for the injury. Obviously, this is only applicable to those who have experienced injury as a result of negligence and can become quite a long process with a mediator.

Equipment Leasing

Equipment Leasing

Potential return on $5,000 investment

Calculations based on calculator.net

10 years
$1,364
20 years
$2,919
30 years
$4,663
  • Moderate risk, high reward
  • Viable for businesses/companies/individuals that have the ability to buy and maintain equipment

Equipment leasing involves lending out any equipment for a fixed monthly rate. Lenders generate constant income with this process as they ‘rent out' equipment to struggling businesses. After the lease contract is over, the borrower has the option of buying the equipment at market value, terminating the lease or renewing it. This option is more for pre-existing businesses or companies that have the resources to be able to start lending out equipment. There is, of course, the chance that the equipment is not leased so there is no income. Maintenance costs are also the lender's responsibility which could be costly.

Stocks

Long Term Care Insurance

  • Moderate risk, moderate reward
  • It can be very expensive so if it doesn't seem like it will be necessary (i.e. if there is no family history of needing long term care, it may be better to put funds elsewhere)
  • It is more of a safety net rather than an investment strategy

Long term care insurance should be considered when creating a retirement plan. People usually opt for this to ensure that long term nursing care is available post retirement. It is often used in cases where the family has a history of Alzheimer's, dementia or other debilitating illnesses that will need extended periods of nurse care. It protects any retirement savings from being drained in the event of necessary long term care. This is common in the US and France but Australia is yet to adopt these strategies. Insurance companies are hesitant to create a specific Long term care insurance option before the government has implemented the necessary groundwork for it to be viable.

Reverse Mortgages

Reverse Mortgages

  • High risk, moderate reward
  • Should only be used when absolutely necessary, otherwise the costs are way too high to justify
  • Affects pension eligibility and can drain life savings

Reverse mortgages are fairly high risk. The investor's home is valued and a loan is issued accordingly. Different companies have different amounts available for loan but it generally floats around 25% of the house's value. The approved loan can be taken as a lump sum or issued as a steady stream of income. Like any other loan, it accumulates interest which needs to be repaid in full after the home is sold or the client passes away. The interest is higher than an ordinary home loan and can greatly affect pension eligibility and life savings post retirement.

Private Partnerships

Private Partnerships

  • Moderate risk, high reward
  • Greatly affected by market fluctuations
  • Needs a lot of money before entering into this investment

Partnerships allow two parties to enter into a business agreement, letting both of them benefit from the income. In a general partnership, each party is equally responsible for the business and provision of resources. In a limited partnership, however, they do not make managerial decisions. The partners do not receive dividends, rather they have direct access to the income of the business. These benefits are proportionate to the individual's contribution to the business. A private limited partnership is one where there are no more than 35 partners in a business (both limited and general). In the US, private limited partnerships do not need to be registered with the Securities and Exchange Commission.

Private Stock Offerings

Private Stock Offerings

  • Moderate risk, can be high reward
  • Needs knowledge of the market or the investment won't be worth it
  • Must be done with financial advice or knowledge

Private stock offerings are most beneficial for small businesses that are usually in their start up phase. If someone is looking to start a small business to supplement retirement or aged care, start up funds are very important. Private stock offerings are when business owners sell stocks to private investors before putting it on the public market. The intention behind it is that private investors may want to buy shares in a promising business with the expectation that in future, the reward will be high. If an investor is looking to buy small business shares, knowledge of the market is a must. It is much more likely to yield a high return if the investor is intuitive and can predict what businesses will take off.

Private Limited Liability Companies

  • Moderate risk, can be high reward
  • Needs knowledge of the market or the investment won't be worth it
  • Must be done with financial advice or knowledge

This is very similar to private limited partnerships. It limits shareholders to 50 and does not allow them to trade shares publicly. The advantage in this is that each shareholder is only liable for the amount that they have invested. If there is a sudden market crash, there is little risk of personal assets being jeopardised. These shares also persist after the owner abandons the business.

This is very similar to private limited partnerships. It limits shareholders to 50 and does not allow them to trade shares publicly. The advantage in this is that each shareholder is only liable for the amount that they have invested. If there is a sudden market crash, there is little risk of personal assets being jeopardised. These shares also persist after the owner abandons the business.

Secured and Unsecured Notes

Secured and Unsecured Notes

  • Very high risk, can be moderate reward
  • Security, collateral and financial status of the borrower can change in value and the investment is lost
  • Should not be the only method of earning income after retirement

When investing in secured and unsecured notes, the investor puts money into a company for it to be loaned out. The interest rate and time period is predetermined and is paid to the investor on a regular basis. The amount invested is paid back in full at the end of the loan period. Secured notes are loans where the borrower's assets are used as collateral. The assets decrease the risk to the lender which means that the lender earns less interest. Unsecured notes don't involve collateral so the interest rate is usually higher. The risk with both is that the collateral (or lack of) might not be worth the loan and the investor will ultimately lose a lot of money. Also if the company or individual that.