Retirement spending & investing: A primer on risks

A RETURN assumption of six to seven per cent per annum seems respectable for a retirement portfolio.

But did you know that the timing of a bear market when you are in retirement could wreak havoc on your savings? JP Morgan Asset Management publishes a Retirement Insights series, which incorporates Singapore and other Asian numbers into its analyses.

A recent paper, "Timing Retirement'' addresses issues around investing and spending in retirement, rather than saving for retirement.

There are six key risks that should be addressed, it said. These include risks relating to longevity, withdrawal rate, housing, inflation and sequence of returns.

"A portfolio that has been receiving regular savings, invested with a long-term strategy, must now meet two demands - current income to meet ongoing spending needs and sufficient growth in assets to keep pace with rising costs over a long horizon," it said.

The paper is co-authored by Michael Falcon, chief executive of Asia Pacific Global Investment Management for JPAM; Tai Hui, chief market strategist (Asia); and S Katherine Roy, chief retirement strategist for JP Morgan Funds.

The sequence of return risk, for instance, refers to the risk of poor market returns early in retirement when wealth is typically at its peak.

At the same time, strong market returns in this period can act as a tailwind, and make retirement funding much easier, said the study.

Ms Roy, who was in Singapore recently, says it is important to be aware of the "levers" that retirees can wield to cushion the years of poor returns.

"If you start retirement in a negative year, you need to pull back spending because you don't want to ravage the portfolio. Make sure you don't just think about the impact of market return on investments, but also the cash flow volatility. Adding or subtracting from the portfolio is important...

"I know there is a lot of worry out there. My suggestion is to take the long view, make sure you develop a plan, evaluate what could happen and understand how to accommodate that if it happens."

Still, Ms Roy has an optimistic view of the prospects ahead for Asian savers and retirees, thanks to Asia's high savings rate.

It also helps when savers focus on a number of basic principles.

"If someone is developing their retirement plan, taking the long-term view, understanding and defining their goal and making sure they are diversifying the risks as best they can - those are really their best options. Control what you can control.

"The savings rate is great in Asia, so much better than elsewhere. Putting more of that to work and not losing ground in terms of the interest rate environment are really important."

The best time to take risk, she adds, is when one is young.

A dollar you save is going to be a lot more meaningful in your returns in building up wealth. Later in retirement, your returns will play a much bigger role in where you end up.

So taking more risk early and focusing on volatility management every time are going to be really important.

A caveat to keep in mind, however, is that long-term rates of return are expected to decline.

Based on JP Morgan's latest Long Term Capital Markets Assumptions report, a 60/40 portfolio - 60 per cent in equities, 40 per cent fixed income - is expected to generate an annualised return of 5.5 per cent over the next 10 to 15 years.

Between 2004 and 2014, the annual compounded return of the 60/40 portfolio was 6.9 per cent, says Ms Roy.

In the post-retirement years, a retiree shifts from a positive cash flow (savings) into negative (spending).

That is why the returns experienced just prior to, during and just after the transition into retirement are particularly important, said the paper.

"During these years, market conditions can have a significant effect on the viability of a retirement plan and the value of the estate that will be passed on.''

This article was first published on October 29, 2016.
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