I am often asked by my clients what currency their investments should be held in as Australian expats seeking to retire in Australia. For most expats, this can be quite a complex decision, particularly if they’ve been working abroad for some time, perhaps being paid a salary in US dollars, purchasing groceries in Singapore Dollars and traveling throughout for work throughout the region spending a wide range of currencies.
While there are a number of factors to consider, for those close to retirement and the point in their lives where they plan to start drawing a retirement income, a general rule of thumb is to hold the majority of your investment portfolio in the same currency as your planned retirement income. Put simply, if you plan to draw your retirement income in Australian Dollars when you retire, then it is likely that your retirement portfolio should be held largely in Australian Dollars.
When it comes to investments, currency risk in retirement is one that can and should be managed.
Currency risk is in fact one of the greatest risks to Australian retirees.
Let’s look at just how dangerous the wrong decisions when it comes to your currency exposure can be. Assume that you’re just two years off retirement, currently working in Singapore and you’re planning to return to Australia to retire. You’ve calculated your required income in retirement and know that you’ll need to draw an annual amount of A$100,000. This meant you would need a retirement portfolio of A$2.5M (based on a 4% drawdown).
You have the majority of your $2.5M investment portfolio in Singapore Dollars (SGD) as your salary is in SGD so you thought this would be the smarter option. The Singapore Dollar appreciates considerably against the Australian dollar over the next two years from 1.30 to 1.04. Your A$2.5M portfolio is now only worth A$2M, meaning you can either withdraw less in retirement or your ‘nest egg’ is going to disappear faster than you’d like.
Of course you could always wait for the Australian Dollar to appreciate again before converting it, however it’s far more difficult to delay your retirement.
Are your investment assets positioned correctly to manage currency risk? How much currency fluctuation could your retirement strategy cope with? Speak with a qualified Adviser today to review your portfolio and retirement strategy.
To Your Financial Success!
Jarrad Brown is the trusted fee-based financial adviser for Australian expatriates living in Singapore and throughout Asia-Pacific.
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