Building a nest egg for retirement is a very important goal for many people. Certainly, I think that ASX shares are a great way for investors to build their wealth over the long term.
The first part of the retirement equation is actually growing a share portfolio.
I think there are three different elements that will help decide how large a portfolio will grow by retirement.
First, how much money is contributed to the portfolio. Second, the after-tax returns generated on that money. Third, how many years of compounding the portfolio is given to grow.
The ASX share market has returned approximately 10% per annum over the decades. That means $1,000 could grow into $1,100 after one year. But, it could grow into $2,143 after eight years.
A couple of risks to be aware of
In retirement, the ideal situation would be ensuring that the portfolio provides enough money to the retiree for as long as needed. Investment manager Platinum Asset Management Ltd (ASX: PTM) has explained some of the things to keep in mind.
Sequencing risk is where retirees could end up retiring just before a major downturn in the share market and economy. This could result in them eating into the capital value of the portfolio at the start of retirement, reducing the long-term money-making capabilities of the portfolio.
Another risk is longevity risk. That would be a problem where the portfolio was expected to last 25 years in retirement, but then the retiree lives for 30 years. Living longer isn’t a bad thing, of course! But, outliving the portfolio isn’t ideal.
The conclusion from the paper was that starting early, having a higher allocation to shares than conventional wisdom, and “staying the course” can hopefully lead to a preferred outcome.
How to potentially solve the problem
Every person’s financial situation and portfolio is different. For tailored financial advice, a financial planner could be the answer.
I think a good answer could be to invest in attractive, dividend-paying investments that can provide a good level of investment income, even during a downturn.
One safeguard could be to have a year’s worth of expenses set aside as cash, so that a retiree doesn’t have to dig into their portfolio value at all in a recession, even if cash flow from investments were to dry up.
But I think there are plenty of ASX dividend shares that could be pretty resilient.
Some of the ASX shares I think could provide good dividend income in the coming years include many that I covered in this article. Aside from those, others that I like include Centuria Industrial REIT (ASX: CIP), VanEck Morningstar Australian Moat Income ETF (ASX: DVDY), Metcash Limited (ASX: MTS) and Premier Investments Limited (ASX: PMV).
The post How can investors prepare their share portfolio for retirement? appeared first on The Motley Fool Australia.
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More reading
- The ASX 200 share experts are urging to buy right now
- Have ASX 200 retail shares been worth buying so far in FY23?
- Why dividends matter
- Should you really be buying ASX shares in this market?
- Experts name 2 ASX 200 dividend shares to buy next week
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Premier Investments Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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