Too many eggs in one basket: concentration risk in retirement, and how to diversify without a tax disaster

A surprising number of retirees are sitting on a dangerously concentrated position — a large share of their wealth tied up in a single stock or asset. The classic examples are decades of accumulated former-employer shares (often acquired cheaply through an employee share plan), a big holding in one favoured bank or blue-chip built up over a lifetime, a single investment property that dominates the portfolio, or the family business. Concentration is the opposite of diversification, and in retirement it is a serious and under-appreciated risk: when so much depends on the fortunes of one company or asset, a single adverse event — a company's collapse, a dividend cut, a sector downturn, a problem tenant or a local property slump — can do outsized damage at exactly the life stage when there is no time or income to recover. The cautionary tales are real: employees whose retirement savings were devastated when their employer failed. Yet retirees often resist diversifying, for reasons both emotional (loyalty to a former employer, attachment to a long-held "good" stock) and financial — above all, the large embedded capital gain on a low-cost-base holding, which means selling to diversify triggers a substantial Capital Gains Tax (CGT) bill that feels like a penalty for prudence. The answer is rarely to ignore the risk, nor to trigger a huge one-off tax bill — it is to reduce the concentration sensibly while managing the CGT, typically by staging the diversification over several years.

What is concentration risk?

Concentration risk is, at heart, having too many eggs in one basket. When a large proportion of a retiree's wealth sits in a single stock or asset, their financial security becomes a single point of failure — it depends heavily on how that one company or asset performs. Diversification spreads risk across many holdings so that no single failure is catastrophic; concentration removes that protection. And the danger is amplified in retirement: a concentrated loss early in retirement is far more damaging than the same loss during working life, because the retiree has no time horizon or fresh income to recover, which compounds the sequencing risk that already makes early-retirement losses dangerous. The cautionary tales — employees who held most of their retirement savings in their employer's shares and lost it when the company collapsed — are the extreme illustration of a risk that, in milder forms, sits quietly in many retiree portfolios.

How do retirees end up concentrated?

The path to concentration is usually gradual and well-intentioned. The most common is former-employer shares — decades of shares accumulated through an employee share scheme, often at a low cost, building into a large single-company holding. Others build up a large position in one favoured blue-chip or bank over a lifetime of holding and reinvesting dividends. For some, a single investment property comes to dominate the asset base. For business owners, wealth is tied up in the family business (its sale and CGT are covered elsewhere, but the concentration is the broader pre-sale risk). And some inherit a large single holding. In each case the concentration accumulated naturally, which is part of why it is so often left unaddressed.

Why do retirees resist diversifying?

Resistance is a mix of emotion and tax. Emotionally, there is loyalty to a former employer, attachment to a "good" stock that has served them well, and familiarity bias — comfort with the known. There is the "it's always done well" anchoring, where past performance breeds reluctance to sell, and there is plain inertia. Often, too, a high-dividend concentrated position is providing the retiree's income, so selling means re-deploying for income. But the single biggest financial barrier is the CGT obstacle: a low-cost-base holding triggers a large capital gain on sale, and that tax bill feels like a penalty for doing the prudent thing. This combination of emotional attachment and tax cost is what keeps many retirees holding a risk they would never deliberately choose to take on today.

Is the CGT obstacle really that bad?

The CGT obstacle deserves to be understood clearly, because it is both real and manageable. A stock held for decades, or acquired cheaply, has a low cost base, so selling realises a large capital gain. For assets owned at least 12 months, individuals can reduce the assessable gain by 50% under the CGT discount (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount), which softens the cost. But the gain is taxed in the year of sale at the retiree's marginal rate, so a large one-off sale can spike income into high brackets and affect the Commonwealth Seniors Health Card (CSHC) and Age Pension. If the retiree has capital losses, those must be subtracted from the capital gains before the 50% discount is applied (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount), so harvesting losses in the same year is valuable. The trap to avoid is letting the CGT cost prevent any diversification — the tax tail wagging the dog, leaving a potentially catastrophic concentration in place to avoid a bounded, manageable tax cost. The CGT is a genuine consideration, but it is a reason to diversify carefully, not a reason not to diversify at all.

What does staging the diversification look like?

The core strategy that resolves the tension is staging. Rather than selling the entire holding at once and crystallising one huge gain in a single year, the retiree sells in tranches across multiple financial years. This spreads the gain — using each year's lower tax brackets and the annual benefit of the 50% discount — and keeps the tax manageable. Where the retiree has capital losses from other holdings, realising them in the same year offsets the gain before the discount applies (using losses that might otherwise be wasted, and for older retirees losses that would be extinguished at death, as covered elsewhere). Timing disposals in lower-income years — for example before Age Pension age, or in a year of otherwise low income — reduces the tax on each tranche. Each tranche reduces the concentration risk while keeping the tax bill digestible, turning a daunting one-off decision into a sensible multi-year de-risking program. This staged approach is how a retiree captures most of the risk reduction without a tax disaster.

How do the Age Pension and CSHC interact with a big sale?

The Centrelink effects should be modelled alongside the CGT. A large crystallised gain is included in taxable income and so inflates adjusted taxable income (ATI) in the year of sale; because the CSHC income test is based on ATI (Services Australia, https://www.servicesaustralia.gov.au/how-we-use-adjusted-taxable-income?context=21966), a big one-off gain can breach the CSHC income limit for that year and cost the card and its concessions. Staging the sales avoids a single large gain that would trip the threshold. The assets test is broadly neutral, since selling the stock and re-investing the proceeds is one asset becoming another, though the form of the asset changes. Modelling the CGT and Centrelink effects together ensures the diversification program doesn't inadvertently cost the retiree a concession card or pension entitlement in a given year — another reason staging beats a one-off sale.

What are the special cases to watch for?

Some situations change the calculus. Pre-CGT shares that the retiree acquired themselves before 20 September 1985 are generally exempt from CGT (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/list-of-cgt-assets-and-exemptions), so there is little tax reason to retain such a concentration and it can be diversified freely. Inherited shares are a crucial and commonly misunderstood case, though: if you inherit shares the deceased had acquired before 20 September 1985, the pre-CGT status does not carry over to you — you are taken to have acquired them at their market value on the day the person died, holding them thereafter as a post-CGT asset (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/inherited-assets-and-capital-gains-tax/cost-base-of-inherited-assets). So only the growth since the date of death is taxable, often a much smaller gain than the holding's full history. The hold-until-death option — keeping the concentrated stock so it passes to beneficiaries with a transferred or stepped cost base, deferring the CGT — is sometimes raised, but it leaves the concentration risk in place during the retiree's life, so the live risk must be weighed against the deferral benefit; usually, for a genuinely catastrophic concentration, de-risking beats deferral. And a concentrated business or single property has its own, less liquid, diversification challenges, harder and slower to unwind than listed shares. The right approach depends on the specific holding, its cost base, and the retiree's circumstances — but the underlying principle, reduce the concentration and manage the tax, holds throughout.

What should you do with the proceeds?

Redeploying the proceeds completes the process. The freed capital should go into a diversified portfolio — a spread of shares, exchange-traded funds, or managed funds, or a diversified super or pension investment option — reducing the single-stock risk that prompted the exercise. If the concentrated holding was funding the retiree's income through dividends, the diversified replacement should also meet that income need. Where contribution room exists, moving proceeds into the tax-advantaged super or pension environment may be worthwhile. And the redeployment should suit the retiree's risk profile and stage of life (covered elsewhere). The goal is to convert a fragile, concentrated position into a resilient, diversified one that can weather the failure of any single company or asset.

What does diversifying a concentrated holding look like in practice?

These two cases show diversifying a concentrated holding. They are illustrative only and not personal advice.

Geoff, 67, retired, holds $600,000 of shares in the bank he worked for, accumulated over a 35-year career through the employee share plan at a very low cost base. It is about 70% of his investment wealth, and he is reluctant to sell because "the bank has always looked after me", the dividends fund his lifestyle, and selling would trigger a big CGT bill. On these facts, Geoff has a serious concentration risk — 70% in one company — compounded by emotional attachment and the CGT obstacle. On these facts it is generally rational to acknowledge the loyalty and then reframe: this isn't about the bank being a bad company, it is about not betting 70% of his retirement on one company's fortunes. A staged diversification fits — selling in tranches across several financial years, using the 50% discount on each gain (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount), timing sales in lower-income years, and harvesting any capital losses to offset the gains before the discount, to keep the CGT manageable and avoid breaching the CSHC income limit in any one year. Each tranche is redeployed into a diversified income-producing portfolio that maintains his dividend income. Over a few years his concentration falls from 70% toward a prudent level, his retirement is far more resilient, and the tax is spread and managed rather than a single shock. The CGT cost is real but bounded; the concentration risk it was protecting against could have been catastrophic.

Margaret, 72, inherited a large parcel of shares in one company from her late husband, who had held them since the 1970s — they were pre-CGT in his hands. They now make up most of her portfolio. On these facts, Margaret has a concentration risk, and a common misconception is that the shares are "tax-free to sell" because they were pre-CGT. They are not. Because she inherited them, the pre-CGT status did not carry over; she is taken to have acquired them at their market value on the day her husband died, and holds them as a post-CGT asset (ATO, https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/inherited-assets-and-capital-gains-tax/cost-base-of-inherited-assets). The good news is that only the growth since his death is taxable — a stepped-up cost base, so the embedded gain is usually far smaller than the full rise since the 1970s, and the 50% discount applies. On these facts it is generally rational to confirm the date-of-death market value of her specific parcel, recognise that the tax cost of diversifying is modest rather than nil, and then diversify relatively freely into a diversified, income-appropriate portfolio, since the tax barrier that traps Geoff is far smaller for her. Margaret's case is the easier one — but the lesson is that "inherited pre-CGT" does not mean "tax-free", and the actual, usually modest, gain should be worked out rather than assumed away in either direction.

For retirees with a concentrated single-stock or single-asset position, recognising and unwinding the risk is an important piece of retirement risk management. The work is to identify the concentration (what proportion of wealth sits in one stock or asset), assess the single-point-of-failure danger (amplified in retirement), address the emotional barriers with a reframe, quantify the CGT cost and the embedded gain (checking carefully for inherited assets, where a date-of-death cost base usually applies), design a staged diversification (selling in tranches across years, using the 50% discount, harvesting losses before the discount, and timing in low-income years), model the Age Pension and CSHC interactions, plan the redeployment into a diversified and income-appropriate portfolio, and balance the risk against the tax — neither paralysed by the CGT nor triggering an unnecessary one-off tax shock. Concentration is a risk that accumulates quietly and well-meaningly, and the CGT cost of unwinding it is exactly what keeps so many retirees holding a risk they would never deliberately take on today. The staged approach resolves the tension: it reduces the catastrophic risk while keeping the certain, bounded tax cost manageable. Helping someone see that their "great stock that's done well for 30 years" is in fact a concentrated bet on a single outcome — and helping them de-risk it sensibly — can be one of the most valuable conversations in their retirement.

Sources

• ATO — CGT discount
• ATO — List of CGT assets and exemptions (pre-CGT assets)
• ATO — Cost base of inherited assets
• Services Australia — How we use adjusted taxable income (Commonwealth Seniors Health Card)