Oran Hall The senior years require a change of investment strategy
Senior citizens fit well into the pre-retirement and retirement phases of the life cycle, which are markedly different from the earlier phases in terms of the ability to take risk and the need to generate income and liquidity. The focus shifts, then, from accumulation to preservation.
Ultimately, people desire to be financially independent. How well they succeed in realising this goal is a function of how effective they are at accumulating financial resources initially and at preserving their wealth in the two last phases of the life cycle.
Although it is true that some people can look to pension income in the retirement years, it is also true that pension is generally not at the same level of salary. The gap is often filled by social security payments such as receipts from the National Insurance Scheme and from investment income and savings.
Early planning for these periods is key, so it is best to start planning and implementing the plan quite early, perhaps as early as when the working years begin. Planning for the retirement years should generally move into high gear about 15 years before retirement.
Generally, the pre-retirement phase begins 10 years before retirement. Therefore, full-throttled preparation for retirement should commence five years before the pre-retirement phase or in the last portion of the establishment phase. This phase and the early career phase are the accumulation phase in which capital growth is the primary objective.
The early career phase generally ends at about 35 and the mid-career or establishment phase ends at 55. In these two phases, especially the second, instruments like equities and real estate are attractive. Of course, money market securities, bonds, and preference shares have a place if we choose to focus on the traditional investment instruments.
The pre-retirement phase, also called the late career phase, is an interesting one. It is generally when employment income is at its highest and when many types of expenditure are likely to have been eliminated or reduced significantly. Think of mortgages and educational expenses. All things considered, this is the period when disposable income is at its highest, so there should be more funds to invest.
But with preservation of capital being the primary investment objective, there should generally be a switch of strategy as equities, for example, assume a less important position in the portfolio, and bonds and money market instruments assume a more important role.
Laddering – a strategy in which the maturities of bonds are spread out to avoid too many issues maturing too close to each other – becomes important and is more effective when it starts in the pre-retirement phase.
The main advantage of this strategy is that the instruments provide liquidity periodically and reduce the need to sell when funds are needed. Given how the markets operate, the time funds are needed is not necessarily the time when market conditions are favourable. Additionally, advantage can be taken of higher-yielding new instruments, although the opposite is also true.
Regardless of the phase and the investment strategy, it is worth finding a place for unit trusts and mutual funds, which are quite versatile as they are able to match a wide range of investment strategies and are an effective means of diversification.
Senior citizens should pay close attention to their life insurance policies that carry cash values or are unitised and thus have investment values. Make sure they remain on the books because they represent real sources of additional income.
There are several hindrances to people not having the desired lifestyle when they become senior citizens. Among them are not having sufficient savings, delaying the preparation for their golden years, changes in personal and family circumstances and changes in financial circumstances. Sometimes some of these situations are out of the hands of the individual, but action should be taken to soften such blows when they present themselves.
While it is important to live and live well, it is also important to plan for the inevitable. When that occurs, the assets left behind should go into the hands of the people and causes for whom they were intended in the shortest possible time and at the lowest cost and, hopefully, with little fuss. Thus, it is important to have an iron-clad estate plan in place.
There are several estate planning tools: wills, trusts, joint ownership of assets and inter vivos gifts – those given to beneficiaries while the giver is alive.
If you are a senior citizen or close to being one, even if it is late to prepare for life in the later stages, it is still worth having a go at it. Better late than never.
Have a good September. It is the month when senior citizens get the most focused attention.
Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com