There are two distinct stages in an investor’s financial planning lifetime.
The first requires you to make provision for the future, benefitting from the magic of compounding returns: “accumulation stage”.
At retirement, you transition to the “spending stage” of life: You will withdraw from your investment portfolio. While any habit of frugality you developed during your life will continue to be beneficial, this major change in direction is a difficult adjustment. We’ve identified two major risks facing the retired investor:
- The Eternal Fear – Volatility
Like the pre-retirement investor, retirees also have an innate fear of market declines, often due to a global crisis.
Volatility refers to the erratic fluctuations of market values around a typically rising baseline. In essence, whilst the market has historically risen, it does not move in a straight line.
The retiree’s fear is that while the market is experiencing a temporary decline, they will need to sell investment units at a lower price to fund their expenses. All other things being equal, this does impact the expected lifetime of your assets. This must be considered, but it can also be planned for: we usually advise our retired clients to retain a healthy cash buffer from which they can draw income during market declines.
Temporary declines happen regularly, without warning. The best way to earn the full market return is to endure these periods with patience and discipline. By planning properly, we can essentially shield you from permanent damage caused by temporary declines.
- The Under-Appreciated Fear – Longevity
Over the last few decades, the average investor’s life expectancy has significantly increased. A few generations ago, it was rare for a retiree to live for longer than fifteen years while relying on their investment assets. Today, thanks to advancements in medical care, diets, and healthier lifestyles, a retired couple has a one-in-three chance of one of them living to age 95.
For the average retiree, that is 3+ decades of living expenses, medical care, and unexpected emergencies that need to be funded by their pensions and investment assets.
The goal is three decades of a rising, inflation-cancelling cashflow. The risk is that you focus on short-term fears that disadvantage you in the long term.
A Changing Landscape
The shift in focus that increasing longevity brings into play impacts the mindsets, approaches, and rules of thumb that retirees have become used to. This stresses the importance of a comprehensive retirement income plan built on evidence and rigour.
As the world continues to evolve, I encourage you to consider how this impacts the way you are providing for your future. Our financial planning philosophy will always emphasise regular reviews, and in this way, we make sure that our clients are always prepared for changes that others are yet to identify.