Retirement is expected to be a time where one can stop investing and start enjoying the fruits of one’s labour. However, with life expectancy increasing, and inflationary factors at play, retirees are often facing prospects of a longer retirement period.
This requires that their savings need to last longer and that the investments provide for inflationary increases in things such as medical aid costs.
There is a definite need for a mind-set adjustment about ensuring a solid long-term investment strategy after retirement.
Its all an Age Thing
Often retirement plans are about age-related things. Some financial planners are now encouraging people to look at planning up to an age of 100. It also matters what the plan for your investments must include, such as leaving sufficient value for a spouse or for your family.
So if you retire at the age of 65, you’re still looking at a 35-year investment horizon. And if you’re 80, you still have a 20-year investment horizon. So the problem with that is that your main objective of investment should simply be to beat inflation.
At this point in time, one of the few asset classes that provides sufficient return to beat inflation is that of growth assets and offshore. Cash can’t do it, If you’re any form of taxpayer, then cash is likely going to fall short.
Inflation- a Critical Factor Retirees Must Contend With
When it comes to investment options, retirees are often fond of tax free or fixed deposits or alternatively bonds, which are considered safer investments. However fixed deposits, like cash, can battle to achieve an above inflation return after tax.
So even as a lower level taxpayer, at a level of around 18% tax, this removes a large portion of your return, which reduces income to close to the inflation rate, and thus a neutral return.
Bonds can also be quiet volatile as interest rates and inflation have an impact on bonds. So if you inter-trade your bond, you can actually have capital loss and severe capital losses if you’re in an environment where interest rates go up or inflation spikes.
How to Protect Against Inflation Risk While Maintaining a Balanced Portfolio?
The only real asset classes that can beat inflation are equities and property long term. While property has been very volatile of late, so one’s got to get that exposure to beat inflation. But there’s a few things that should be taken into consideration:
- What is the purpose of the funds that the retiree has, is it more than just retirement funding?
- What is the income they’re planning on drawing
- and do they have intention to transfer wealth? In other words, on their death, must capital be transferred?
These factors will determine what the portfolio should look like.
As an example; If they’re only drawing only 1-3%, for instance, of their total wealth, then you can sit with an investment in cash, especially if cash is sitting at an 8.5% interest rate because you would be reaching all your objectives over and above inflationary factors.
However, if there is a requirement for wealth transfer to the next generation, your investment term actually extends. This will then require you to take exposure to growth assets to basically beat inflation.
How should retirees adjust their investment mix as they transition into retirement?
The most significant challenge for retirees is that their inflation increases with age. Medical expenses start spiking. Care costs are expensive. Food and transport costs escalate and if travel plans are included in your retirement, inflation is certainly the big enemy of retirement.
One Strategy is to divide your cash reserves, into several investment groupings or portfolios. This could include the following:
- An emergency cash fund for available cash for emergencies
- Shorter term investment for a limited period – of perhaps 2-3 years to provide income as required.
- The balance would then be split 50-50 with half going into a stable investment fund, something like an off-shore investment mixed with a low equity fund
- Finally the balance into more of a medium and high equity portfolio.
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This may make your portfolio slightly more a bit complicated, with more investments in a single portfolio, however this could assist in meeting all of the criteria that you’re trying to match.
It provides short-term cash requirements, gives you that medium term up to the five-year span that you need to generate decent growth, and then plus your high equity kind of component, which is your five-year plus type of investment.
Caution on Off-Shore Investments
While off-shore investments provide good returns, one should be cautious about when these investments and withdrawals take place.
With the Rand often volatile, this can have devastating effects on returns if one buys with a weaker currency and then sells when the currency strengthens.
The timing is critical and investors should get solid advice on timing and watch currency fluctuations carefully before considering to withdraw funds.
Click Here if you missed Retirement Strategies Part1 and Retirement Strategies Part 2
