How Adam Dawes would invest $2 million for two very different retirees

Back in March, we spoke to Adam Dawes, senior financial adviser at Shaw and Partners, about the biggest concern investors have about retirement - how to generate reliable income.

Asset Allocation

Adam Dawes’ masterclass on investing for a wealthy retirement

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But retirement isn't a one-size-fits-all stage of life. The type of retiree you are will affect your choices, your needs and your lifestyle.

Research from the University of Sydney Business School identified four retirement archetypes, based on how people balance their old working life with new interests - the Stayers, the Leavers, the Blenders and the Disengaged.

In the interview above, we asked Dawes to walk through each archetype and explain why different retirements call for different portfolios. We also challenged him to build a $2m portfolio for the two most popular types, the Stayers and the Leavers.

You can watch the interview, read the article and download both model portfolios below.

Download the portfolios

• The Stayer portfolio
• The Leaver portfolio

But first, understanding your retirement personality is an important step towards building the right portfolio. Let's find out where you fit.

What type of retiree are you?

The four retirement archetypes can be broadly described as follows:

• Stayers: You stay closely connected to your previous job. You might keep working because you enjoy it, or for the social contact and financial security.

• Leavers: You make a clean break from your working life. You leave paid work entirely to focus on new activities, such as community work or hobbies.

• Blenders: You mix flexible, part-time or project work with retirement. You might use your previous expertise while developing new interests. Research suggests this archetype is often the most resilient.

• Disengaged: You step away from both your past work and new interests. This is considered the highest-risk category, as these retirees can struggle to find purpose outside their careers.

Start with what you're bringing with you

For Dawes, the archetypes come down to one question.

"The easiest way to think about it is, how much do you want to bring in your old working life into retirement?"

He sees the Disengaged as the toughest group, not for financial reasons but because they leave work without a plan.

"I think with retirement, you need to have a purpose.”

The archetypes line up with what he sees among his own clients, many of whom are aged between 65 to 70 and are still continuing their working lives. That matters for the retirement portfolio construction, because still receiving income via a pay cheque changes everything. 

Let's look at our first retiree type. 

#1 – The Stayers

A wage buys you time for growth

Because Stayers still earn an income, their portfolio doesn't have to carry the full load.

"The portfolio doesn't need to be just income focused. It can be more growth focused as well because they've still got some more years to go."

Dawes uses a 70/30 split between growth and defensive assets as a starting point. With perhaps another five years of work ahead, Stayers can ride out market swings more easily.

"They have the ability to withstand market movements."

He's clear that 70/30 is a starting point, not a rule. The right mix still depends on the person and their goals - how much they travel for leisure, whether they want to spend time with  grandchildren, and ultimately, how much volatility they can live with comfortably.

The Stayer's $2m portfolio

For a Stayer with $2m to invest, a home owned outright and no debt, Dawes would split the growth side evenly: about 35% in Australian shares and 35% in international shares.

On the Australian side, he looks for good-quality dividend-paying stocks, which can be held through ETFs. He warns against doubling up, though. That's why he's included individual stocks such as Computershare (ASX: CPU), Aristocrat Leisure (ASX: ALL) and TechnologyOne (ASX: TNE) to diversify the portfolio beyond the heavy exposure to banks and miners typically found in broad-market Australian ETFs.

"Remember with ETFs, you don't buy the Vanguard Australian Shares Index ETF and then go and buy BHP and CBA."

The international side is where he looks for growth, including some tech exposure. Key selections here include the Betashares Nasdaq 100 Currency Hedged ETF (ASX: HNDQ) and Munro Concentrated Global Growth Active ETF (ASX: MCGG).

The 30% defensive side holds bonds, infrastructure and cash. On bonds, he prefers variable-rate over fixed, and examples of the way he plays this are through the VanEck Cash Plus Active ETF (ASX: MONY) and VanEck Australian Subordinated Debt ETF (ASX: SUBD), where yields should increase as interest rates rise.

"At the moment we want variable rate bonds because of interest rates continuing to move higher."

He always recommends keeping at least two years of income in a separate account, so you can keep paying yourself without selling down your portfolio. For a Stayer, that buffer can be refilled from their working wages.

#2 - The Leavers

The portfolio becomes the pay cheque

Once working life (and wages) stops for this retiree, the priorities change. For the leaver, generating income from the portfolio is the most important thing. 

Here Dawes moves to a 50/50 split between growth and defensive assets, but says the starting point is still the client's spending habits and lifestyle goals - how much income they need, how often they travel and how much they want to help family.

The biggest risk is outliving your money.

"The biggest risk is making sure that you've got enough money to last another 20 years" he says, adding that women should plan for even longer, given they tend to live longer.

The Leaver's $2m portfolio

With the same $2m, Dawes would put about 30% in Australian shares and pull international shares back to about 20%. The focus is still on good-quality dividend payers, such as Suncorp Group (ASX: SUN) and Soul Patts (ASX: SOL), with franking credits becoming more important.

The other 50% sits in defensive assets such as bonds and infrastructure. Selections include the Vanguard International Fixed Interest Index (Hedged) ETF  (ASX: VIF) and Coolabah Global Floating-Rate High Yield Complex ETF (TMX: YLDX) for bonds, or pure infrastructure plays such as APA Group (ASX: APA). 

The aim is to fund your lifestyle without selling investments at the wrong time. "When the market's down, you don't want to be dipping into those assets," Dawes says. 

Your asset allocation should change as you do

Side by side, the two portfolios show that how much income you need matters more than how much you've saved. 

Dawes frames this as the difference between being rich and being wealthy.

"Wealthy people only need 4% return on their money because they've got enough. 4% on a lot of money is still a lot of money. Rich people probably need around about eight to 12% to keep things moving along."

The higher the return you need, the more growth risk the portfolio has to take on. And neither split is meant to stay fixed.

"Remember that 70/30 or 50/50 is not a one-stop. It is a living and breathing asset allocation."

He points to one retired client who holds 10% growth and 90% defensive. "He doesn't need any more money. He's very comfortable and he's happy to do that."

Others may need more growth to keep up with the cost of living and family commitments. Either way, Dawes says the portfolio should be built backwards from the individual's needs, not from a cookie-cutter template.

Want Adam Dawes to come back for the Blenders and the Disengaged? Let us know in the comments.