Home Articles VIEWPOINT: LONGER RETIREMENT PAYING YOURSELF IN RETIREMENT

VIEWPOINT: LONGER RETIREMENT PAYING YOURSELF IN RETIREMENT

203
0
SHARE

Research shows that 39% of retirees rate death as their greatest fear while fully 61% rate ‘running out of money’, or effectively living too long. With each passing decade, life expectancy grows by one year. For individuals, it poses the question of how to invest now to pay bills later. There’s no right or wrong. Many argue in favour of assets that pay a good dividend. Others look to income-generating funds while yet others argue for a draw-down on capital. The trade-off is building as much certainty as possible while getting the highest returns possible. Unfortunately, as retirement beckons, emotions escalate, and this triggers what are often wealth-destroying extreme behaviours such as chasing the latest Ponzi scheme or becoming ‘recklessly conservative’.

You need a strategy

There are a number of factors to consider. For example, what are your time horizons? What are the tax implications of the investment structures and growth (income vs capital)? What’s your risk appetite? And finally, how much should you budget for necessary large capital purchases or drawdowns, such as cars and holidays?

Equity markets offer the highest long-term returns but are also the most volatile, and it takes a brave person to draw confidently down during negative markets. Dividend streams are less consistent and reliable than a guaranteed product. But at what cost are those guarantees? Cash gives sub-inflation returns, and bonds not much better.

Some opt for a single strategy employing an active asset allocation and intelligent diversification. Statistically, this gives the most success for achieving your desired optimising risk/returns using capital draw-downs. Alternatively, a ‘bucket’ investment strategy has merit, combining three elements:

  • Short term: An income pool of dividends, inflation-matching strategies, interest-bearing deposits. It typically provides income for a year or two enabling you to avoid draw-downs when markets are negative.
  • Medium term: A more conservative approach to returns and risk but if markets are performing well, it enables a draw-down from this bucket.
  • Long term: A weighted average portfolio for long-term sustainable growth.

Whatever your choice, set a rational framework, try and control your behaviours, and look for an adviser offering not only technical expertise but coaching for the long haul.

Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning