One of the most important choices investors make when planning for retirement is what professionals call strategic asset allocation (SAA) – the framework that determines how much to invest across major asset classes such as equities, bonds, cash and property. There is no one correct SAA, just the correct one for you, and finding the correct SAA depends on your risk tolerance, time horizon and investment goals.

Investment decisions are usually complex and will change over time as you move from growing wealth to protecting it and eventually drawing down on it. Hence, one of the wisest investments you can make is to seek qualified financial advice that is personal to your own circumstances. This column is not personalised advice and the comments are general in nature, but what is widely agreed is that a stable and happy retirement likely rests on two investment foundations: diversification and liquidity.

Diversification reduces risk by spreading exposure across different asset classes, industries, and regions. For many New Zealanders, a managed fund or KiwiSaver scheme with both local and international holdings provides simple, low-cost diversification.
Liquidity is equally vital. Retirement inevitably brings unforeseen costs – health scares, home repairs, or family support. It is important to balance long-term growth assets with medium-term liquid assets and maintain a separate emergency fund to prevent forced selling and protect the longevity of your retirement nest egg.

Why invest in property in retirement?
New Zealanders have long been captivated by property investment. The appeal is understandable: property is tangible, familiar, and historically rewarding for most. Homeowners understand the asset class, and with leverage, returns can
be amplified. Property can generate income while still appreciating in value, providing both cash flow and capital gains. This combination of leverage, income and growth (and an advantageous tax code) explains much of property’s enduring popularity.

Property offers the satisfaction of ownership and being in control. You can renovate, raise rents, or sell when you want. It offers a feeling of inflation protection – rents and values often rise with prices – making it a comforting anchor for retirees. Rental income appears steady and predictable. For some, this autonomy feels more reassuring than holding “paper assets” in managed funds.

This emotional connection and familiarity can, however, obscure the risks and limitations of relying too heavily on undiversified and illiquid property assets for a comfortable retirement.

The property risks few investors talk about
The key points of difference against property when compared to investment funds are liquidity and diversity. Property, like equities, performs best over long periods – often a decade or more to ride out market cycles. Retirees or near-retirees usually have shorter horizons and a greater need for cash. Property is illiquid and indivisible: it can’t be easily sold in part to release funds while selling takes time, incurs costs, and may not happen in weak markets. For those needing quick access to capital, that rigidity can create an “asset-rich, cash-poor” situation – wealth on paper but limited liquidity for daily needs or unexpected costs.

Property is not diversified, owning one or two rentals – often near one’s own home – limits diversification and ties financial wellbeing to a single market. Local shocks, natural disasters, or government policy changes can impact both your home and investments simultaneously.

Practical considerations also matter. Lifestyle and energy levels influence whether retirees want to manage tenants, maintenance, and rising compliance costs. Even with a property manager, oversight is required, and fees reduce returns. Hence why many retirees prefer the simplicity and transparency of managed fund portfolios, where income can be drawn easily, and reporting is clear.

Additionally, the exceptional property price gains of previous years have occurred in the low-interest, post-GFC environment or during the Covid recovery. The multi-decade boom in New Zealand property has run parallel to a multi-decade downward trend in interest rates, which may now have run its course. The takeaway: future capital appreciation may be significantly lower.

Finally, flip-flopping regulation and rising cost pressures continue to reshape the property landscape. Policy changes (and policy reversals) on interest deductibility, ring-fenced losses, tighter rental standards, and changes to immigration and housing policy have reduced investor appetite. Next year’s election could also bring about another shift: the introduction of a capital gains tax (CGT).

A looming policy shift
The opposition Labour Party recently proposed introducing a 28 per cent CGT on investment properties from gains made after July 2027. Although not yet law, the political momentum toward taxing property gains appears to be growing.

Under the proposal, KiwiSaver, managed funds, shares, and business assets would be excluded. CGT would be focused on long-term property capital gains. Whether CGT becomes law is a political decision for next year’s election, not an investment decision, but any long-term investor understands the impact would be material: a $200,000 capital gain on an investment property would attract a $56,000 in CGT, cutting the after-tax return by more than a quarter overall.

Such a policy would make property less attractive relative to many asset classes, including diversified investment funds. Assuming they retain their existing tax settings under revised CGT rules, managed funds and KiwiSaver portfolios will continue to compound within the portfolio investment entity (PIE) structure. Over time this policy change will widen the after-tax performance gap between property and financial investments, especially those financial investments focused on income stability like bonds and cash, rather than capital appreciation.

The advantages of diversified investment funds
By contrast, investment funds built from shares, bonds, and cash, offer retirees flexibility, diversity, and liquidity – attributes critical to a simple and carefree retirement.

Managed funds allow investors to sell units or draw income without delay or complexity. They provide instant diversification across asset classes, sectors, and countries, reducing exposure to any single market. Professional investment managers relieve investors from day-to-day oversight and ensure that performance, costs, and tax treatment are transparent.

Tax efficiency is another advantage. Most managed funds in New Zealand operate under the PIE structure, where income is taxed at your prescribed investor rate and capital gains on New Zealand and Australian shares are generally untaxed (and are not likely to be captured in any update to CGT policy either). This structure simplifies administration and enhances compounding returns over time.

As circumstances change, managed funds can be rebalanced to match evolving needs. Younger investors, 15 or 20 years away from retirement will likely emphasise growth through equities, while retirees can shift that investment mix toward some growth but with a focus on fixed income and cash to generate steady income with lower volatility. This flexibility is central to sustaining income over a 20- to 30-year retirement horizon.

A balanced approach for a resilient retirement
Property can still play a role within a broader retirement strategy. It offers a tangible asset backing, rental income and some inflation protection. But retirement income should not depend on a single asset class – least of all one as illiquid and regulation-sensitive as residential property. All your eggs in the property basket exposes investors to illiquidity, concentration risk, and policy uncertainty.

For those approaching or already in retirement, the prudent course is likely to prioritise diversification by spreading risk while liquidity ensures access to cash when needed. Managed funds, supported by sound advice, enable both and provide the best chance of sustaining income, managing risk, and preserving your nest egg throughout retirement.

Matt Hardwick is business development manager for Octagon Asset Management.

This article has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. This article does not contain financial advice. Some of the Octagon portfolios may own securities issued by companies mentioned in this article.

Octagon Asset Management is the investment manager for Octagon Investment Funds and the Summer KiwiSaver scheme.