Friday, July 23, 2010

Retire by design, not default

FOR most people, the 'age of retirement' is about 65. While some plan to leave the workforce earlier, others often realise they will need to continue working longer than planned. But people generally calculate 'early' or 'late' from a mile-marker of about age 65.

Unfortunately, this type of thinking encourages too many people to view retirement as a one-size-fits-all event - and that couldn't be further from the truth. Retirement is a highly personalised lifestyle change that requires careful attention and good decision-making skills. Retirees need to live on assets they have accumulated during a lifetime of work, and those assets cannot be easily replaced if any costly mistakes are made.

Planning your retirement

To get started, you need to ask yourself four basic questions:

  • What are my investment goals?
  • How long do I have to invest?
  • How long do I expect to live in retirement?
  • How much risk am I willing to take?
Your investment goals will depend on how you plan to spend your retirement. If you don't have a clear idea just yet, consider your current lifestyle and your dreams. This will help you formulate an investment goal, which you can adjust as retirement age approaches.

Next, determine how long it will be before you retire - your time horizon. Generally speaking, the longer your time horizon, the more risk you may be able to accept in exchange for potentially higher returns. If your time horizon is relatively short, you may not want to accept as much risk.

The toughest part of investing for retirement is the discipline it takes over the long term to build a large enough nest egg to enjoy happy and fulfilling golden years.

It requires you to stick with an investment strategy that exposes you to the possibility of loss, which can be a bit unnerving at times. However, there will always be risk in financial markets, so meeting your retirement goals will force you to take an honest view of your own willingness to tolerate risk, to have reasonable expectations regarding market performance and to invest consistently for the long term.

Designing your retirement

If you are nearing retirement, it may be time to do some specific thinking about what your retirement years will look like and how you will use your personal savings and other income sources to fund them.

During our working years, the primary financial goal we should all have is to focus on accumulating assets. Once we retire, the focus is on how to use those assets wisely. In short, every decision you make about your retirement lifestyle will affect your retirement assets.

It pays to think about dividing your retirement savings into three distinct pools of capital and to have the right investment strategy for each pool.

Certain expenses during your retirement will be essential for your everyday needs. Other expenses will be more discretionary - things you might consider lifestyle expenses. In addition you may have financial goals that extend beyond your lifetime, such as creating an estate for your children, grandchildren or a charitable cause.

A complete retirement strategy recognises that each of these three financial categories - essentials, lifestyle and estate - can and should have its own unique investment portfolio.


The fixed expenses of life such as groceries, housing, insurance, healthcare and taxes. Investment strategy: Consider an asset mix of 35 per cent equities and 65 per cent bonds to generate a prudent mix of monthly income and long-term growth.


Those 'nice to have' things that make retirement more enjoyable, such as dining out, club memberships, travel or golf lessons. Investment strategy: Consider an asset mix of 40 per cent equities and 60 per cent bonds to enhance long-term income and growth potential.


Creating a future legacy, such as an inheritance for children and/or grandchildren or a gift to a cause that matters to you. Investment strategy: Consider an asset mix that includes 40 per cent equities or more and re-invest any monthly income to maximise long-term growth potential.

Don't let the recent financial crisis alter your retirement plans. In fact, there are lessons to be learned,

Despite the negative outcomes we have all experienced during the past year, strategic asset allocation remains the foundation that helps lead to long-term success in reaching your financial objectives.

Don't let 2008 dampen your commitment to strategic asset allocation. Financial turbulence is an integral part of the functioning of capital markets. There will always be some form of crisis that will derail the financial markets every so often. History has shown that financial markets are resilient and will always recover strongly and continue their upward trend.

This is why it is important that, as an investor, you do not make hasty decisions that will affect the performance of your investment portfolios - financial markets will return to their normal state.

Without a doubt the recent financial crisis has taken a toll on investing philosophies. Traditional instruments of diversification - namely, emerging markets, international developed equity and US equities all under-performed US Treasuries in 2008. But the pendulum is swinging back. Many of the 'losing' asset classes in 2008 have historically performed well - and are starting to reward us again. The areas that suffered the most in 2008 are also recovering well.

The other thing that should not change, regardless of whatever financial crisis we may experience, is our lifestyle goals. Retirement, children's education, buying property, etc are long-term aspirations that should not change because we are going through a crisis. Hence, we should not overhaul our investments and put these lifestyle goals at risk. Adjustments may be needed, but strategic allocations should not change. What happens in the financial markets today or the next few months should not affect our plans for the next 10 years or more.

When it comes to investing, a diversified approach across asset classes, markets and managers will cushion us against the impact of market cycles, volatility and corporate failure, like Lehman Brothers, for instance. Investing is also about managing downside risk, as the greater the fall, the bigger the gap you need to fill to recover to pre-crisis level.

Home bias is another factor you need to remove from your investment portfolio, as most people are very comfortable with over-weighting their portfolio in their home country and overlook the benefits of global investing. For example, many people are underweight in US equities at the moment, but the valuations in the US are more attractive right now relative to, for example, Asian equity markets.

Finally, remember to stick to your strategy. Once you have your retirement goals and plans in place, it's generally best to stick with your strategy - even if the markets go down. Unless your life situation changes, you will likely be better off sticking with your strategy than moving in and out of investments in pursuit of better returns.

This doesn't mean, however, that you should set your investment strategy in stone. You should regularly evaluate your investment decisions and adjust them accordingly as your needs change and your time horizon grows shorter.

This article was first published in The Business Times.

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