January.3.12Retirement Planning
Money Matters with Nimi

Will you outlive your assets?

Mrs Gomez is 72 years old. She has always been a diligent, disciplined saver, and planned ahead for a secure and comfortable retirement. She is a conservative investor and retained most of her savings in the money market so that she could earn regular income. When the stock market plummeted in 2008, she sold off the last of her shares, which she had held for decades and thereafter placed all her hard-earned money in a bank deposit. Her investments had traditionally earned her about 15% per annum; this made it possible for her to take care of her monthly expenses.

Everything changed in June this year; Mrs Gomez received a letter from her bank informing her that the interest rate on her investment had been reduced to 3%. This came as a huge shock and she wondered how she would cope with such a drastic reduction in her income. As she is completely dependant on the interest on her savings, she sees her long-term capital dwindling and fears that her living standards will soon be affected. Her worst nightmare is that her money may run out well beforeshe does!

Seek professional advice

It is important to seek professional financial advice. A financial advisor will take a holistic view of your current financial circumstances, and then devise an investment strategy that is in line with your own unique situation. Taking into account your age and lifestyle, it will be possible to determine how far you can stretch your funds, given certain assumptions.

Don’t put all your eggs in one basket

Senior citizens are usually discouraged from taking risk and are more likely to be advised to hold most of their money in “safe” investments that are capital protected. Cash is a most tempting asset class particularly in volatile times, yet it holds little promise of long-term wealth creation, with inflation eating away at the principal and eroding the value of their funds. With interest rates this low, it is difficult to earn any meaningful income from your money without assuming at least some degree of risk. It is thus important to invest in a diversified manner, spreading your money across various asset classes. By doing this, you will be less vulnerable where a particular class underperforms.

Whilst stocks have historically outperformed other asset classes over the long term, for most old people the priority is to preserve what they have. Without the advantage of a long period of time, assuming such risk at this stage may not appropriate as this is sure to increase the risk and volatility of your returns over the short and medium term.

If you are uncomfortable with, or cannot afford to take any risk whatsoever, then it is important to remain in cash and hope that rates will eventually recover. In the meantime you may need to dip into the principal to tide you over the volatile period, which could well be for an extended period of time. In this regard, you may need to revisit your lifestyle requirements, and cut back on your expenses for some time.

Dividend yielding stocks

Dividend yielding stocks, that is, stocks that provide a decent cash flow, are one of the keys to a successful retirement portfolio. The inclusion of such stocks can go some way to protect investors from stockmarket volatility by compensating with dividends. Dividend yields on some stocks are fairly predictable and can be as high as 5% and more, which is higher than current money market rates. In addition, the growth prospects of some of the companies present capital gains.

A cautious investor may prefer to invest in equity mutual funds, which pool investors’ funds to invest in the stock market. They are more diversified and as such, not as risky as direct investments in a handful of individual stocks.

Can bonds help?

Bonds play an important role in any portfolio either through the purchase of individual bonds or via bond mutual funds. “Laddering” bonds involves buying a assortment of bonds of various maturities and then staggering the maturities over say one, two, and three, years. As each bond matures, it may be re-invested for another period thus helping to set a base level of income that can be relied upon to support retirement spending needs.

Consider purchasing an annuity

Another way to potentially receive regular income and address the prospect of longevity, is to purchase an annuity from a leading, reputable insurance company. Insurance companies in exchange for an amount of money should be able to provide you with guaranteed income for a specific period of time or sometimes for life. After determining how much income you will receive from your pension and other investments you might consider purchasing an annuity to make up the shortfall.

Annuities come with different terms and conditions and can be quite complex for the lay investor. It is important that you fully understand the terms and carefully weigh your options to be sure that the fees and charges are not excessive and remove the advantage of such a strategy.

Whilst low interest rates are generally viewed as being detrimental to savings and of concern to those that rely on fixed income, a low interest rate regime is expected to spur economic growth. In an ideal world, companies and businesses should be able to borrow at affordable rates thus lowering their costs of production contributing to their profit margins. As they invest in new factories and plants, and production increases, they hire more workers with a reduction in unemployment. Consumers can also borrow at cheaper rates than they ordinarily could and are able to reduce their personal debt.

As a retiree focused on capital preservation and income generation, it is easy to ignore the possibility of including bonds, high-quality, dividend yielding stocks and other asset classes in a portfolio. Yet there is the increasing prospect of having to a fund a 20-year post retirement period. By regularly reviewing your retirement strategy, and ensuring diversification and exposure to the various asset classes, you should be in a better position to navigate market volatility and ensure your capital lasts for the rest of your life.

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