Wednesday, October 3, 2012

Financing your retirement.

Sharing experiences on key financial questions after retirement.

We are a rapidly increasing number of people– that group for whom financial planning is no longer relevant, but where the fruits of that planning are: or should be.

Have you noticed how little advice for this group comes from that vast body of ever keen financial planners and advisors? Most of the advice assumes employment earnings, has about a three to five year gestation, or even longer – too long for the average retiree – and seldom cater for the need to draw a regular monthly income. I suspect that many Moneyweb readers are in this age group and have a combined depth of experience that may be useful to share with others.

A story that comes to mind each time I read the insights of those no doubt well intended wealth building soothsayers is the one about the wise old woman from the Cape Flats. Listening to a bunch of her men folk jabbering on about how they were going to make money she interjected in a heavy indigenous Cape accent that defies the written word: “You! You all make plans, but God has his own plans for you!”

I don’t believe in a “one-size-fits” all financial plan. In my financial reporting days I never seriously considered offers to write an investment column because I was not comfortable with the idea of giving individually relevant investment advice through mass media. Also, I had little interest in the subject and would rather take risks for a missionary ideal than for money. My approach to my retirement funding probably reflects this, but is also a fit between comfort and risk and then a resignation to living with that without letting go completely of regular oversight. This is a more important principle than constant obsessing about risk for higher returns.

Despite FSB rules, one is horrified at the number of people who still get “caught” by scams, schemes, and poor investment advice. Redress is mostly useless, costly, time consuming and stressful. I fume a bit when I see the smug comments about the victims being caught out by their own greed. These are often desperate people caught in a trap of declining income values and increasing living costs far beyond what the CPI shows. Flinging caveat emptor in their face is callous.

Even the most immodest of the wealthy cannot claim that luck played absolutely no part in their fortunes. Likewise for many others life has thrown them some curved balls, sometimes late in life, which they simply could not return. It’s always baffled me that we can admire the former and despise the latter. Prudence and modesty are no guarantees against misfortune.

Amongst my friends and acquaintances were those hammered by trust in others, the property and stock market slump, medical misfortunes, disappointing endowment policy performances and R.A.’s not matching advisors’ promises. You can probably list a lot more. Then, of course, there are those who have retired on a monthly pension and/or annuity, spent their lump sum pay out on that dream cruise, and are now facing the squeeze of eroding incomes and higher living costs.

One that gets me into a real frenzy is Gill Marcus’s absolute disdain for the plight of retirees and the economic reality that lower rates have done little to promote growth and create jobs. For the some of the general public it has enabled debt reduction, for others it has encouraged more debt.

For the elderly investor “50 basis points” translates into a 10% or so loss, and their income from this source has more than halved since June 2008. It has forced many into riskier asset classes and a faster erosion of the remaining interest earning capital. Compound interest works in reverse too. If you draw a fixed monthly income above your interest yield, the remaining capital declines exponentially.

A good way to start is to examine your current needs and the capital needed for your expected life span – already a calculation fraught with unknowns. But a gross monthly income starting at say R15 000 to last 20 years or so will need at least R2m on current average investment yields and to keep pace with official (not individual) inflation.

Of course being and staying debt free is a great comfort, unless it is amortized debt close to the end of its term. Then most of the interest has been paid anyway, and it may be better to use that money for some interest yielding instrument. That calculation is easy to make or obtained from the financial institution owed.

I have spoken to many retirees including those with inflation adjusted pensions, and the thing that strikes me most is how often their financial situation deteriorates over time despite euphoria at the time of retirement. So, perhaps after a “gap year”, you may need to explore all means of generating alternative income for as long as possible. Here too, it’s a question of balance between the existential, emotional and financial. An acquaintance of mine was so panicked by his state that he slaved miserably filling vending machines for 12 hours a day and then passed away leaving a R3m estate.

Maintaining your own bond free or largely unencumbered home is as much an existential decision as a financial one. But it represents both capital and potential income. Having, or applying a significant part of retirement capital into properties for rent is a questionable cause. I’ve had a number of tenants in my life and when they are good they are mostly so-so. When they are bad, boy are they a long term legally protected headache! It takes a special breed to be a landlord. If you are not up to it but still want exposure to property, then rather invest in a property fund, trust or company. Syndicates by and large are unfortunately highly risky.

Declining interest rates require shifting classes to make up for lower cash yields. If you have a living annuity try to keep the monthly return prudent and become active in switching the RA portfolio assets when allowed to. In most cases it can be done once a year at no cost. Whatever you do, be as informed as possible to let advisors know that they are not dealing with an ignoramus.

In my approach I divested from fixed assets completely and while I shifted significantly from cash to equity, Unit Trusts and ETF’s, I believe I have kept a fair balance between classes. ETF’s give some flexibility between income and capital preservation by being able to augment income with timely unit sales.

You could, of course, rely on someone else to achieve asset balance through investing in an asset allocation flexible fund.

The most important thing is to find a suitable mix that you can be comfortable with over a reasonable period. It is more important to avoid agitation every time something happens in one or other asset class than to try and get maximum yields from your retirement funding.

Nothing can destroy one’s retirement serenity more than concern about provision. Most retirees will ultimately be faced with a race between their longevity and the life of their capital. It’s coming to terms with that reality that is the only source of contentment, even if it means making a pact with the universe that one’s last cheque can bounce.

But there are other equally if not more important existential and emotional factors that can destroy a peaceful retirement. I’ll examine these in future articles.

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