When I first started working in the financial services industry almost twenty-five years ago it was an accepted practise that a young person should mainly invest in stocks. It was also accepted practice that as you got older your share market investing would be reduced to the point where there would be almost no shares held upon retirement.
Once retired, people had a short investment time frame and they also had a finite amount of money. Taking less risk was considered prudent because retirees didn’t have the luxury of time to ride out the share price volatility.
One Australian life insurance company even had a product that automatically moved your investments into less risky asset classes as you aged. The product used the colours of the spectrum to show the level of share market exposure of a particular fund. For example, violet was 95% equities and 5% cash and white was 100% cash.
When I started work in the late 1980s, the mortality rate of older Australians – that is, the rate at which the population died – was already in free-fall, although back then it hadn’t been recognised. The steep decline in the mortality rate of older people actually began in this 1960s.
Today the realisation that we’re all living longer is an accepted reality. In my view, between 10 and 20% of your retirement assets need to be put aside to provide for the ‘very’ long term.
In 2004 Heather Booth, an academic at ANU, and Leonie Tickle, an academic at Macquarie, showed that it’s reasonable to assume that a couple who are both aged 65 and have average or better health have more than a 50% chance of living until at least age 90.
[1]In fact, some current providers of guaranteed lifetime annuities assume that couples at the age of 65 will live for another 35 years – that is until age 100. On the other hand, a single male is expected to live another 27 years and a single female for 31 years.
One significant danger is outliving your retirement money. Spending 25-35 years solely relying on your investments to pay your living expenses is clearly a very long investment timeframe.
So what is the best way to invest taking these timeframes into account?
Well, the best way is to delay retirement as long as possible. I can fully understand why some people want to retire early. Working can be never-ending drudgery – travelling to and from work, the stupidity of colleagues and clients, the mind-numbing nature of most work, the boring meetings … our list of gripes about work could be infinite.
But those gripes would soon vanish if you became a retiree without investable assets because you outlived your money, which is possible if you retire too early.
As much as it might hurt, we are much better served if we work as long as we’re physically able.
Whatever the circumstance, these days when we fully retire we need to be ready to invest for the long term. As I’ve stressed before in these columns, our retirement assets need a dual purpose. We have to maintain and grow our capital and also generate our living expenses.
Total exposure to cash will not provide the essential capital growth we need just as exposure to one listed share leaves you too exposed to that company’s performance.
Getting the competing objectives between providing income and capital growth from an asset allocation perspective can be tricky because they’re often contradictory. No one has perfect foresight on what capital and income returns our super will earn and this means our planning needs to consider the good times and especially the bad times.
Work out what you would do to maintain your retirement if the value of your assets fell by 50%. It’s not a nice thought, but it’s important to think carefully about how you would handle such a scenario.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Paul Rickard: Our advice on weighting your share portfolio [2]
- Peter Switzer: The reasons for and against a stock market rally [3]
- Rudi Filapek-Vandyck: The broker wrap: improved performance [4]