Investment strategies for a delayed retirement
Scott Keefer provided input to the following article written by Fiona Harris for Morningstar.
Investment strategies for a delayed retirement
Delaying retirement calls for a back to basics approach to investing and a shift in attitude and expectations.
"Clients are definitely reconsidering options to be more certain that they have sufficient assets to sustain the cost of living they require," A Clear Direction Financial Planning principal financial adviser Scott Keefer says.
"A lot of clients are playing it year by year, but we do have clients [delaying retirement]," HLB Mann Judd partner Michael Hutton says.
A survey recently conducted by Mercer of 519 working Australians aged 40-65 reveals just how many people are facing the retirement age dilemma.
Some 42 per cent of the survey's participants said they will have to delay their retirement as a result of the downturn. This number jumped to 60 per cent for those aged over 60.
In practical terms, this means working longer. About 33 per cent of respondents said they could have to work up to four years longer. Meanwhile, 19 per cent said the impact of the downturn could mean an extra six years in the workforce.
"That's a fairly significant change to lifestyle," Ascent Private Wealth principal Gordon Thoms says. "That's a big change to have to work for another four years."
So is this possible? Can a pre-retiree get their retirement back on track in four to six years?
"Four to six years is an OK horizon," HLB Mann Judd Sydney partner Michael Hutton says. "Particularly if you're not drawing on assets plus you're putting money back and investment markets are behaving themselves."
Hutton calls it the "triple whammy" effect - but in a good way. He says by working longer, investors can save extra money. Also, they will need less money in retirement because it will be shorter. Finally, investment markets are on the way up, so investors can capitalise on the upswing.
Thoms agrees that a four to six year time horizon presents a good opportunity.
The key is having a long-term investment strategy, investing in quality assets, achieving good diversification and not paying too much for this diversification. It's pretty straight forward really.
"It's not the most riveting story," Thoms says.
Making the money back
While financial planners interviewed were optimistic about investors' chances of recouping their losses by delaying retirement, the two wild cards are the amount that has been lost and how the investment portfolio is structured.
According to Keefer, the key factor is the value of assets an investor has lost.
"Let's say it is a balanced investor [with] 70 per cent growth assets and 30 per cent defensive assets whereby they have lost 18 per cent over the past 21 months (Nov 2007 - July 2009). So $500,000 at the top of the market has now become $410,000. But the other aspect to remember is that unless the portfolio has been rebalanced they now probably have a 40/60 portfolio with $240,000 of growth assets," Keefer says.
He says if the long term average return from the growth assets was consistently achieved of 6 per cent above inflation or 9 per cent per annum, it would take about four years for the $240,000 of growth assets to grow to $340,000.
Add inflation to the equation and it would take six years.
"If the investor re-balanced so that they went back to their original 30 per cent defensive, 70 per cent growth asset allocation they would have $287,000 of growth assets," Keefer says. "If we experienced the long term average returns from growth assets the time period would be a little bit less."
Stick to your strategy
As long as your investment strategy was sound in the first place, it is important to stick to it.
This may be hard advice to swallow, when in the eyes of many investors, their portfolio has not delivered.
"I have not had anyone change strategies because of the downturn in markets however clients have understandably questioned the suitability of the approach," Keefer says.
"The trouble with changing is that by switching alternatives now they risk jumping from the frying pan into the fire."
Investors are also being tempted by other performing asset classes and products such as capital guaranteed products which suit many investors sentiment for wealth preservation.
Further, at the moment a lot of asset classes and products are being pronounced as making comebacks. Many seem that way because of the lows they are coming from, so it is a time to be cautious.
But the word from the experts is to keep it simple.
"Avoid complex investments," Hutton warns. "Where things have fallen off the rails, that's where the wealth was really destroyed."
He says the only investor who might consider straying from their strategy or adding another type of investment into their investment mix are those who want to be more aggressive to try and boost returns.
This would be suitable for someone who is relatively young, who has a relatively solid income stream, which is comfortable with market volatility and doesn't need to touch their money for 10 years, Hutton says.
But by working longer, this could also enable you to take on more risk.
"If they are able to continue to work this might actually allow them to take on a little more risk with their investments to hopefully get better performance and rebuild the paper losses,' Keefer says.
"If continuing to work is not an option, a careful consideration of the risk of seeing further losses in their account needs to be had and an appropriate asset allocation chosen."
Generally speaking, the more tolerant an investor is in experiencing volatility in growth asset prices, and the greater ability they have to work past their planned retirement age, the more growth assets they should hold Keefer says.
Also, the more stretched they are to meet the level of assets they require to draw the desired level of income, the more growth assets they could consider.
"I would suggest they have a slight tilt towards higher income yielding investments such as Australian shares but with a broad diversification across asset classes to protect against volatility in one particular asset class," Keefer says.
Retirement is not an end date
"We don't see retirement age as being a drop dead date," Hutton says. Rather, it is more like the start date of a 20-25 year portfolio.
"Some people see retirement as being a conservative investment portfolio," Hutton says. "But now that the government has crunched the amount you can put into super, we are talking to people about being more aggressive with their super."
Thoms says as long as you are drawing down in pension phase and are drawing minimum pension payments, there is still the opportunity to accumulate post-retirement.
"People will still be invested in growth strategies beyond the age of 60," he says. "We would argue that if people can sensibly accumulate prior to retirement and if they can be invested in an allocated pension, people can retire and still get their money back."
Surviving with less
Keefer says a rule of thumb in assessing how much income is required to sustain the desired lifestyle, is at least 70-75 per cent of the pre-retirement cost of living needs.
"The Age Pension provides a safety net as a level of protection but many would hope to live on more than the Age Pension in retirement.," Keefer says.
Further, a couple less than $891,500 in assets outside of their home, can also qualify for a part pension, meaning they will need to drawdown less from their allocated pension account or eat into the capital value of their assets.
One tip Keefer says to be sure your financial assets do not expire before you do, is to draw on just the income generated by assets to avoid eating into the capital value of the assets.
"I use a 5 per cent draw down rate as a basic rule of thumb. So if a client requires a $50,000 annual income in retirement they will need to have $1 million in assets to sustain that draw down."
Keefer says another alternative could be to move into a lifetime guarantee product whereby a provider will take a retiree's assets and provide a guaranteed income to the retiree. But this strategy does have its drawbacks.
"Unfortunately putting one of these options in place now may be locking in to an arrangement at below average rates of return and therefore below average levels of income based on the amount of assets contributed."