So, you’ve done well. You’ve sold the business, or you’ve cashed in your superannuation savings. Now you find yourself in the fantastic position of going into retirement with a mortgage-free house, and maybe up to NZ$1 million in the bank.

You maybe thought that if you could get yourself into that position, you could go off into retirement without a care in the world.

But what should you do with the money?

It’s certainly true that for most people NZ$1 million to fund retirement is a huge amount. In fact, most Kiwi retirees have a lot less.

So how can you manage what you’ve got?

You need an income

You need to find a way to turn this money into a steady and reliable income.

Most people have had a life of taking a pay cheque every second Thursday or have been drawing regular profits from their business. You may have had to budget and juggle, but your income for the most part might have been solid and reasonably dependable.

On retirement, however, you will need to invest a lump sum to try to duplicate that previous income. In a low-interest rate environment with risk aplenty and markets volatile, that’s not easy.

In fact, turning a lump sum of cash into a steady income to live on is the hardest thing in all of finance.

Mistakes could be costly

Not only is investment for retirement income difficult, the stakes are higher.

Retirees who make a major investment mistake don’t have time to rectify things and make up for their mistakes.

There are plenty of examples of people whose retirement dreams have turned to mush.

The cardinal rule of investing for retirement income is to diversify. This means that the investor needs to own some of all the major asset classes: shares, listed property, fixed interest investments, and some bank deposits.

To have all your money in just one asset class could be dangerous. In the past, many retirees simply had bank deposits or, perhaps, a rental property.

Exposure to just one type of investment means that your future income is entirely reliant on that one thing doing well. But all investment types are at risk of failing or produce lower-than-expected returns.

You might be retired for a long time

Retirement is now likely to be for a long time – 20 or 30 years, and maybe more. Within that time there are likely to be any number of economic events, such as inflation or a recession.

Your job is to invest in such a way that you can survive anything that the global economy may throw at you and come through smiling, with income still flowing.

Depending on the economic climate, some investments might do well, and some might suffer. For example, property usually does well in times of inflation, but fixed-interest investments are best in times of deflation. Shares usually do well in booms, but cash is king in busts.

Look offshore too

One of the risks that all investors face is some terrible, New Zealand-only event.

This could be anything like a natural disaster, a bio-security breach, or a problem with a major industry, like tourism.

New Zealand could end up in economic trouble while the rest of the world is doing well. Investments offshore would be a godsend in those circumstances.

Holding some of every type of investment will allow you to get through whatever storms the economic weather throws at you. Regardless of what happens, something in the portfolio will be a very useful asset to hold and should be doing well.

Even the banks are vulnerable

This isn’t the case with just one asset type. Even those most traditional go-to assets of retirement income, bank deposits, are vulnerable to banking failure, and, of course, they give lower returns.

Having some bank deposits is useful because they are safe and ‘liquid’, meaning you can get your money out fairly easily. But that doesn’t make them worthy of being your sole asset.

Every asset class has its pros and cons, and there’s no investment type which performs well in all seasons. You need a bit of everything.

Forget any idea of a single-asset strategy. In retirement, you need to keep your money safe and the way to do that is diversification.

Martin Hawes is the Chair of the Summer KiwiSaver Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd. You can obtain the Scheme’s product disclosure statement and further information about the Scheme at www.summer.co.nz. Martin is an Authorised Financial Adviser and a Disclosure Statement is available from Martin Hawes on request and free of charge at www.martinhawes.com

First published 28 February 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser. This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.