The Unappreciated Investment Risk

The-Unappreciated-Investment-Risk

There are two distinct stages in an investor’s financial planning lifetime.

The first requires you to squirrel away money for the future, hoping to benefit from the magic of compounding returns. We call this the “savings stage”.

At retirement, the investor transitions to the “spending stage” of life. From this point, you will withdraw from rather than continue adding to your investment portfolio. While any habit of frugality you developed during your life will continue to be beneficial, this major change in direction can be a difficult adjustment.

In this phase of life, we’ve identified two risks facing the retired investor: one risk we believe they fear a little too much, and the other risk we see them fear not enough. 

We’ll unpack both risks and highlight why the one deserves more attention.

The Eternal Fear – Volatility

Like the pre-retirement investor, retirees also have an innate fear of market declines. 

These are periods when market prices decline, often due to a global crisis or worsening economic fundamentals.

The technical term for this has become “volatility,” which refers to the erratic fluctuations of market values around a typically rising baseline. In essence, the investor’s takeaway is that while the market has historically risen, it does not go in a straight line.

The retiree’s fear is that while the market is experiencing a temporary decline, they will need to sell investment units at a lower price to fund their living expenses. All other things being equal, this does impact the expected lifetime of your assets. It’s a factor that should be considered, but it can also be planned for.

For example, we usually advise our retired clients to retain a healthy cash buffer from which they can draw income during market declines. 

Temporary declines happen regularly without warning. The best way to earn the full market returns is to endure these periods with patience and discipline. By planning properly, we can essentially shield you from permanent damage caused by temporary declines. 

The Under-Appreciated Fear – Longevity

Over the last few decades, the average investor’s life expectancy has significantly increased. A few generations ago, it was rare for a retiree to live for longer than fifteen years while relying on their investment assets. Today, thanks to advancements in medical care, diets, and healthier lifestyles, a retired couple has a one-in-three chance of one of them living to age 95.

For the average retiree, that is over three decades of living expenses, medical care, and unexpected emergencies that need to be funded by their pensions and investment assets. 

From experience, many clients need to pay more attention to the risk that this poses to them in their quest to remain financially independent. The investment decisions they will need to make to provide for this period will require them to put aside other fears, such as the innate fear of market declines, to give them the best chance of success.

The goal is three decades of a rising, inflation-cancelling income. The risk is that they focus on short-term fears that disadvantage them in the long term. 

A Changing Landscape 

The shift in focus that increasing longevity brings into play will impact the mindsets, approaches, and rules of thumb that retirees have become used to. This stresses the importance of a comprehensive retirement income plan built on evidence and rigour.

Additionally, if you’re still in the “savings stage,” you may need to adjust your expectations for the appropriate amount to save for yourself in the future. The world is changing, and no one is safe from the need to adapt.

As the world continues to evolve in various ways, we encourage you to consider how this impacts the way you are providing for your own future. Our financial planning philosophy will always emphasise regular reviews, and in this way, we hope to make sure that our clients are always prepared for changes that others are yet to identify. 

We look forward to continuing to work with you to prepare for a longer future—an enjoyable one free from financial worry.

Charles Riches

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