Posts Tagged ‘retirement’

Through the course of your financial life, your investment management style will change. This does not negate the original asset allocation model that you designed when you began investing. Rather, as you age and evolve so does your investment plan. This means that retirement investing will also be an evolution of your original investment management style.

To explain this better, consider your goals at the start of your investment career. It is quite likely that the resources available to invest were less abundant, meaning you were more likely to invest $100 per month than have $1,000,000 to invest. As such, you would probably need to accept greater risks for your $100 per month than you would if you had $1 million straight away.

However, once you reach that retirement goal, you may opt to retire now that you have the financial resources to do so. And if that goal was, say, $1 million, it is extremely unlikely that you would draw the full $1 million to spend on that specific day. Instead, it is more likely that over the course of your retirement years, the $1 million would be drawn in incremental amounts so that most if not all of the resources are exhausted by the time you die.

Essentially, most of your savings will remain invested. Your goals will have changed from one of capital growth and accumulation to one of capital preservation. It is also quite likely that your objective would be to earn a decent income from your investments while preserving as much of the capital as possible so that you are drawing little from the capital and more from the generated income.

With the shift in post-retirement investing goals, objectives, risks and so on, so will there be a shift in your asset allocation model. Compared to earlier years where growth and accumulation were key, retirement investing will typically involve a greater fixed-income component to your portfolio. For most, there will still be a growth element, which can almost always be achieved with growth funds of some sort. Not only do growth funds allow proper risk spread and greater holdings given the costs, but it allows more time and attention to be focused on the portfolio’s core, which matters most – and that core is the now larger, greater income component.

This shift in retirement investing will turn the former “equity” investor into more of a “bond” or “income” investor, a change that is not always easily accomplished by many investors. The danger is that a lot of investors who do not understand how income investments work will end up in low-interest paying term deposits, meaning greater capital erosion and reduced lifestyle.

Knowing that there will be a fundamental shift in your retirement investing needs and being well aware of the dangers that such a shift will pose, it makes sense early on to establish and develop a relationship with an advisor you can trust and with whom you can work well. This does not necessarily mean that 100% of your assets should be invested with this advisor if you insist on managing your investment portfolio independently, but you could outsource the areas of your planning in which you have either little interest or little knowledge.

Ultimately, there is no question that there is a difference between pre- and post retirement investing. Not only will the asset allocation model evolve since its inception at your investment start-date, but the core investment goals will also evolve as will your lifestyle. This can present some dangers as the bulk of your portfolio in terms of percentage will shift from high equity holdings to lower equity holdings and from low income holdings to higher income holdings.