MANAGING your funds in retirement should be a breeze, right? After all, there should be less drain on your expenses as the children are grown up, your home loan is paid off, and you are virtually debt-free.
But not so fast. There are a few things to consider if you are about to retire and face the prospect of living another 20 to 30 years.
You could take what seems a simple approach of keeping most of your savings in cash and withdrawing sums regularly for your living expenses.
But have you considered how long your kitty would last you? You will have to contend with inflation and assets with minimal growth.
For this article, Executive Money approached two financial advisers for their take on how they would structure a retiree's portfolio. The assumptions are that the client is debt-free and that any children's education is fully funded.
The hypothetical retiree has a sum of about $2 million, and household expenses of $100,000 a year or about $8,300 a month. The retirement age is assumed to be a relatively young 55.
If that sounds a trifle lavish, Ipac senior vice president Roy Varghese has also worked on a scenario of a retiree with $1 million in assets and with two alternative assumptions on income withdrawal.
The upshot of all this is that if you reach your retirement years with a substantial kitty - $1 million is fairly substantial - congratulations! But you can't afford to sit in cash. With about 20 or even 30 years in retirement, injecting growth into your assets becomes a must, unless you scale down your living expenses.
This is arguably the time when you would do better to consult a professional financial adviser. That is because retirees toe a fine line between capital preservation and growth. They may not have the luxury of time and a regular income to tide them through a market downturn.
At the same time, the prospect of two to three decades in retirement risks a depletion of the savings pot due to inflation and drawdowns. You will also have to decide on whether you intend to keep your capital value intact throughout your retirement - or at least a good portion of it - and draw mainly income from the portfolio. Or, you could plan your withdrawals such that the savings are eventually depleted.
Ultimately, of course, the variables are yours to control. Delaying retirement by a few years could put you in a stronger financial footing. Continuing to work in retirement will also make a big difference to how long your assets will last you, as you could reduce your income withdrawals. A higher assumed rate of return, which inevitably involves taking on more risk, will also make a significant difference. Here is how two advisers approach the issue.
Daryl Liew
Chief investment strategist,
Providend
Mr Liew proposes to split the hypothetical retiree's $2 million in funds into two portfolios. The conservative portion will be mainly invested in money market and fixed income instruments and will serve as the pot from which income is drawn. The balance of the funds will be invested in a balanced portfolio where the equity exposure is capped at about 60 per cent.
'Over the years you will find that the conservative portfolio will dwindle due to the drawdown while the other portfolio should increase in value. Money will then be transferred from the balanced to the conservative portfolio from time to time.'
Mr Liew's calculations factor in an inflation rate of 3 per cent. The balanced portfolio is expected to grow at 6 per cent a year, and the conservative pot by 4 per cent. Transfer of cash to the conservative account is expected to occur every three to four years, but the actual timing of transfers will depend on the portfolios' returns and the clients' annual expenses.
Mr Liew expects this retirement fund to see the client to his 80th birthday. If one assumes a more aggressive portfolio with a return expectation of 9 per cent, the fund could be stretched to the client's 91st birthday before it is depleted.
'Note however that this is a more aggressive approach and it raises the client's overall risk level. This means that should market conditions turn unfavourable, there may be a chance that his capital will be depleted earlier than anticipated.'
For clients with more assets - at least $5 million - the firm is able to structure a portfolio of direct bonds to deliver a perpetual income.
Roy Varghese
senior vice-president,ipac
Singapore
Mr Varghese has drawn up four scenarios to illustrate the firm's approach. If the objective is to try to keep the capital intact, perhaps with the aim of leaving it to one's heirs, then the retiree must be prepared to take on an equity exposure, involving higher risk, early in his retirement.
'It is very dangerous to go into a low risk mode very early in retirement. Inflation can become a serious source of capital erosion ... You have to get a moderate return.'
With a start capital of $2 million, and an income drawdown of $100,000 a year, a portfolio yielding an expected return of 6 per cent per annum (inflation plus 3 per cent) would be depleted by age 84.
The scenario is markedly different, however, if the expected return is 8 per cent.
In this case, the money need not run out. In fact the capital at age 90 is expected to grow to $6 million.
A portfolio with an expected return of 6 per cent is likely to be 25 per cent in cash, 40 per cent in global fixed income, 10 per cent in global property; and 25 per cent in global equities. Mr Varghese advises keeping two years of living expenses in a cash account. Every couple of years, money will be moved from the investment portfolio to the cash account for daily needs.
For an expected return of 8 per cent, the exposure to global equities is expected to be about 65 per cent.
An alternative $2 million portfolio could be put together, he said, consisting of a $1 million investment property collecting a rental yield of 3 per cent or $30,000 a year. The balance of the portfolio can be invested in liquid assets including dividend yieldings stocks.
Two other alternative scenarios involve a starting capital of $1 million. If the annual drawdown is $48,000 or $6,000 a month, and the rate of return is 6 per cent, money is expected to run out at age 85. If the annual rate of return is 8 per cent, the retiree could draw a larger income of $60,000 a year and the money could last a few years longer, running out at age 89.
