William Godsave of Credo, our wealth management partners, outlines four of the key questions you should be asking yourself when constructing your investment portfolio in retirement, to ensure that you are setting yourself up for the best chance of financial success.
Many people look towards retirement as a time when they can stop working full time, pursue their passions, and spend more time with the family. However, the reality is that people reach retirement with mixed emotions, and the transition from receiving a steady “income” to relying on their asset base to see them through potentially many decades of retirement, is a scary thought.
So, what questions should you be asking when investing in your retirement?
Question 1: What level of investment return do we need to achieve our objectives?
It’s difficult to put together an investment portfolio without knowing the answer to this question. Investment returns are there to help you meet your goals, and are not just a figure to look at with positive, and sometimes negative, emotions.
However, this question is much more difficult to answer than you might think, as it touches on some of the most fundamental aspects of retirement planning:
- Can we define and quantify our retirement and legacy goals?
- How much are we going to spend throughout retirement?
- How long will our retirement last and how may our outgoings vary over time?
One way to help answer this question is to model and stress test your retirement trajectory under different situations and growth rates using specialist tools. For those with relatively simple circumstances, excel could work for you too. Whatever the method you use, avoid what we hear from most people which is: “I am spending 5% of my portfolio so a 5% return is sufficient” – don’t forget about inflation, tax, and fees!
Question 2: What is our risk tolerance and is the required investment return achievable?
The second question is then how achievable this target rate of return is based on our risk tolerance.
A conservative investor who needs a 10% per annum return to meet their goals may need to revise their objectives, or undertake additional planning to lower the required return.
At the other extreme, an investor who does not need any growth in their investments (as their guaranteed income matches their expenditure, for example), can take a very different approach to investing and risk management, and may in fact be investing primarily for future generations in mind.
Calibrating expected returns with risk tolerance (both of which people often get wrong) as early as possible in the process is essential.
Question 3: How should we construct our investment portfolio?
Your overall asset allocation (which is the decision around which types of assets to hold and in what proportion), will determine the long-term success or failure in meeting your goals much more so than specific stock or bond decisions.
The decision around asset allocation should therefore be your starting point and primary focus – the goal being that you blend the assets in a way which is optimal for your target return, risk profile, and preferences. Typically, a combination of the following elements are included:
- Equities: for long term capital growth
- Fixed Income: for stability, certainly, and liquidity
- Alternatives: to provide a differentiated source of risk and return to lower portfolio volatility.
Don’t fall into the trap which we see most often and drives the mainstream media, which is starting from trying to identify the “best” funds or stocks to put in your portfolio; that can come much later on.
Question 4: How do we balance legacy goals with retirement needs?
For many people in retirement, the two central goals will be to have enough money for your own retirement needs, whist passing down assets to the next generation in a tax efficient manner.
These two objectives are often conflicting as passing more wealth to the next generation during your lifetime means less for you to use in retirement. The investment strategy is often different too, with a more conservative and income orientated approach often adopted for retirement needs.
In general, your priority should be to ensure that your retirement needs are secured first, before thinking about the next generation’s. Only once this has been established, which may not be immediately on retirement, should consideration be given to meaningful gifting.
This process may require ongoing reviews to understand your financial position and have the right balance between retirement goals and estate plans at different points of your retirement.
Are you retired or approaching retirement?
If you are already in retirement or approaching retirement and would like more information about the areas highlighted in this article, please contact us at credo@pkf-l.com.
