Australian investors are again focused on income as more people move from building capital to drawing on it through retirement.
Recent investment flows provide one indication of the shift. Money entering cash and fixed income-focused exchange-traded funds more than doubled from $494 million in May to $1 billion in June, while equity-income ETFs attracted record inflows.
Higher interest rates, sharemarket volatility, geopolitical uncertainty and policy changes have sharpened investors’ focus on income. This is part of a broader transition as more Australians consider how the capital they have built can support them through retirement.
From accumulating wealth to drawing income
Many Australians approaching retirement have built larger pools of capital than previous generations, supported by compulsory superannuation, rising asset values and longer working lives. Australians are also living longer, which means their portfolios may need to support everyday costs and meaningful life experiences for 20 years or more.
Once withdrawals begin, the order and consistency of returns become more important. Retirees still need to meet living expenses when markets rise and when they fall. Selling assets after a market decline can lock in losses and leave less capital available for a later recovery.
Income for a longer life
A longer retirement requires balance. Investors may need ready access to some capital for regular and unexpected expenses, income that can help with rising living costs, and enough growth exposure to help savings last. Large portfolio movements can make that balance harder when withdrawals are being made.
No single investment can meet every retirement need. Cash can provide access to money when it is needed, but may offer limited long-term protection from inflation. Bonds can provide income and defensive characteristics, but remain sensitive to interest rates and inflation. Shares can provide growth and dividends, but their capital values and distributions can vary. The right mix depends on spending needs, time horizon, risk tolerance and liquidity requirements.
Finding the missing middle
Between traditional bonds and shares sits a broad range of income-focussed investments, including credit. These assets are sometimes called alternatives, but they can serve a practical purpose for many investors by broadening income sources and reducing reliance on selling equity investments to meet regular expenses.
We developed The Missing Middle analysis to help investors understand how alternative income assets may contribute to a retirement portfolio. By comparing different portfolio allocations over a 20-year period, the analysis highlights the balance between income, risk and long-term growth. It is a theoretical study designed to show possible outcomes, not predict future results. You can read the Missing Middle analysis here.
For an investor drawing income, the path matters. Income received along the way can be spent or reinvested, while smaller portfolio movements may reduce the need to sell growth assets after a market decline. The highest-income portfolio is not automatically the right one, and lower reported volatility does not mean lower risk in every respect. The objective is to understand the trade-offs and match the portfolio to the investor’s circumstances.
Understanding the trade-offs
Credit is one part of the missing middle and, like every investment, carries risk. Outcomes can be affected by borrower performance, interest rates, underlying security values and broader economic conditions. Some strategies also offer less liquidity and update valuations less frequently than listed investments.
Manager selection is critical. Managers differ in the borrowers they finance, the security they require, their place in the capital structure, and their approach to concentration, liquidity, documentation, underwriting, monitoring and workouts. Investors and advisers should understand how income is generated, what risks are involved and when capital can be accessed.
Building a broader retirement-income toolkit
A well-constructed retirement portfolio needs to support both everyday life and long-term financial confidence. That calls for a thoughtful balance of dependable income, access to capital and growth potential, underpinned by genuine diversification.
With retirement often lasting more than 20 years, a portfolio needs to generate income for regular expenses, preserve access to capital for planned and unexpected costs, and maintain appropriate growth exposure to help savings support the years ahead. A broader range of carefully selected income-producing assets may strengthen that balance, with the right mix reflecting each investor’s objectives, risk tolerance and liquidity needs.
The focus should remain on the role each investment plays within the portfolio. Investors and advisers should look beyond labels and assess how income is generated, the quality of the underlying assets, the risks involved, when capital can be accessed and the discipline of the manager. Carefully selected credit may form part of this broader toolkit where it complements other sources of income and supports the investor’s overall retirement strategy.
Any advice is general and does not consider your personal circumstances.
La Trobe Financial Asset Management Limited ACN 007 332 363 Australian Financial Services Licence No. 222213 Australian Credit Licence No. 222213 is the responsible entity of the La Trobe Australian Credit Fund ARSN 088 178 321, the La Trobe US Private Credit Fund ARSN 677 174 382 and the La Trobe Private Credit Fund ARSN 686 964 312 (ASX:LF1). It is important that you consider the relevant Product Disclosure Statement (PDS) before deciding whether to invest or continue to invest in the fund. The PDSs and Target Market Determinations are available on our website.
