MANY people are familiar with investing for retirement - accumulating assets for future use - but investing INretirement tends to receive less attention.
Indeed, there is a lack of familiarity with the issues associated with post-retirement investing. These include longer lifespans, determining a sustainable income level, preparing for unexpected life events and planning legacy assets. All of these need to be considered in the context of financial market volatility and the effects of inflation.
The bottom line is that every individual's retirement assets will be expected to work harder for longer. Here are some practical suggestions for investors to keep in mind when discussing their retirement goals with their financial advisers.
How should retirees view their post-retirement investments?
Firstly, we shouldn't consider retirement savings in isolation. Often people will have a range of assets they intend to draw on in retirement. For example, in Singapore a retiree might have an investment-linked insurance policy or endowment plan, cash, mutual funds and real estate assets in addition to his or her Central Provident Fund (CPF) savings.
Given the potential range of investments in a retiree's post-retirement arsenal - and the range of needs and wants to meet in his or her new stage of life - it can be helpful to identify and categorise the types of expenses likely to be incurred and how they will be funded. This exercise can help facilitate investors' conversations with advisers to assess how their retirement needs can be satisfied with the resources they have.
To pull the pieces of this puzzle together, we can divide post-retirement needs into four key categories: Living; Lifestyle; Contingency; and Legacy.
The next step is for advisers to help retirees structure a post-retirement plan so that each category is matched by the most appropriate and effective investment mix.
The table above shows the characteristics of each category and, importantly, links each one to investor goals and objectives.
When determining which assets or investments are most suitable for each building block, it's worth highlighting some key investment issues associated with the post-retirement phase.
- Growth is needed to reduce the likelihood of outliving a retiree's assets.
Investment implication: Meaningful equity exposure is needed for asset growth.
- Preservation of wealth is more important in retirement.
Investment implication: Minimise the potential impact of market downturns.
- The preservation of capital and the security of future income over a longer timeframe are critical.
Investment implication: Small shifts in a retiree's income strategy, such as reducing the withdrawal rate by even just one per cent, can have a dramatic positive effect on the sustainability of future income.
Cash is not always king
Perhaps a significant factor that has implications across all three principles is the over-dominance of cash in retirement assets. This is the result of a lack of financial education and awareness, where the perception is that cash is a 'safe' asset to hold.
However, in terms of addressing these key principles over a 25-year post-retirement time horizon, cash is actually a very risky asset because it doesn't have the same potential to provide growth or income in the same way equities and bonds do.
As a result, an over-allocation to cash can undermine successful outcomes in the retirement phase.
Shifting retirement funds away from cash into assets with higher return characteristics can potentially have material benefits over the longer term.
For example, the UK Financial Conduct Authority has estimated that retirees wanting to draw down their retirement assets over a 20-year period could increase their expected annual income by 37 per cent by investing in mix of assets rather than just cash.
Connecting a retiree's expense categories with investment types
Matching investment approaches to the appropriate expense category can help retirees plan and invest more effectively.
When discussing retirement options with a financial adviser, viewing investment options in the context of a client's entire retirement portfolio can shine a light on areas where they might feel more comfortable in taking on greater risk to achieve some growth - because the areas that require more conservative risk levels are clearly identified and matched to appropriate lower-risk investments.
For example, the 'Living' category could have a higher proportion of bonds to generate income and protect on the downside. The 'Lifestyle' solution could have a more significant allocation to equities for greater growth potential, as well as income from dividends; while contingency assets could be invested in a strategy aimed at preservation.
One final point is that not every category necessarily warrants an equities or bonds-based solution. This is because we don't see the benefit in forcing a rigid solution in situations where it is not warranted.
For example, the family home could be a legacy investment. Investors and advisers alike need to be aware that an investment framework should allow for flexibility to apply the most appropriate overall solution.
- The writer is an investment director at Capital Group
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