The Biggest Risk to a Comfortable Retirement
Risk. We fully empathise with you that it can be a frightening concept.
After all, you’ve worked hard for this. As you approach retirement, your time in the sun beckons. The fruits of decades of commitment, discipline and sacrifice will be yours to enjoy.
Risking the tree that bears the fruit becomes a difficult thought. What if something goes wrong? What if all the effort is reduced to a marginal retirement and possibly a financial burden on the rest of the family?
Here’s the critical point that people forget: that tree still needs to be watered.
The most frightening thing about retirement isn’t the risk of fluctuations in investment value, but rather the prospect of guaranteed failure. It might sound counterintuitive, but many times the “safe, low risk” investment is the one that results in you running out of capital.
Once you realise that the strategy sold to you wasn’t sufficient, it’s probably too late to fix it. Simply put, it is almost impossible to save the situation by that stage.
This is part 2 in the Comfortable Retirement series – read part 1 here to understand the critical questions you should be asking about your retirement.
Let’s talk about investment horizon
The rule of thumb is that you shouldn’t invest in equities (shares) unless you are willing to hold for at least three years and ideally five years. The reason for this advice is because markets move through cycles. You don’t want to be in a situation where you bought near the top of a cycle and are forced to sell near the bottom for whatever reason.
Wealth creation requires an investor to hold through the cycles. Nobody can force you to sell shares when the market turns negative. Astute investors stick to a strategy and wait for things to improve again.
When you retire at the age of 60 or even 65, modern medicine means you still have years of life left. To be safe, we plan for our clients to live to the age of 90.
Even if we assume 75 years of age as a more conservative view on lifespan, that’s a ten-year investment horizon assuming retirement at age 65.
Put differently, at the age of 65, you could still live through at least two more market cycles. On this basis it would be a terrible mistake to put all your money into a money market account because there is “no risk” in doing so.
There is enormous risk. You just need to know what it is.
The tree still needs to grow
The chart below shows the returns of equity markets vs. income funds over an extended period. There are painful periods for equity markets with significant sell-downs, yet the long-term view is absolutely clear: equities must be the cornerstone of any long-term portfolio.
As noted previously, statistics tell us that a 65-year-old should still have a long-term view. The most important risk isn’t the rate at which the retirement tree grows. It is the risk of not growing at all. Your retirement tree is done a terrible disservice by having its growth stunted. Eventually, the fruit withers away and the tree starts to die.
In financial terms, this means you reach a point where the income (fruit) no longer meets your needs. At that stage, the tree needs to be cut away to provide for you. With the impact of inflation, onerous asset management fees and low investment returns, this can quickly result in an outcome where the tree simply cannot be saved.
The only way to prevent this happening is to ensure that the tree is growing while it continues to bear fruit. This requires some attention to be spent on the tree itself and some to be spent on producing the fruit.
We are investment specialists
Unfortunately, it is a dangerous strategy to rely on advisors who use generic risk profiling tools to advise clients, rather than proven investment strategies backed up by data and accomplished asset managers.
Is tax important? Absolutely.
Is estate planning critical? Without doubt.
In our view, these are simply tickets to the game. Every advisor should have these tools in the toolbox. The difference at Heritage Wealth Partners is that we have these tools and more.
As investment specialists who offer access to exceptional equity structures that offer offshore and local exposure, our focus is on the fruit and the tree.
If there’s no tree, there is no fruit. Let’s talk about the real risks to retirement and plan for them accordingly. The right answer isn’t to hide every cent away in a money market account at the age of 65.