The Human Side Of Money presented by Client Care Lifestyle Financial Planning
Many retirement funds use what they call a “Lifestage” investment strategy for their fund members. What this means is that as you get older your invested funds move from higher equity to lower equity funds. The thinking is that members do not want the final capital value of their retirement funds possibly reduced by a negative swing in the markets in their last few years in the fund.
On the outset this makes sense, and it allows the member to feel safe about their future, however the outcome may be the exact opposite. Moving out of the market over the last few years in your retirement fund may mean that you miss out on vital years of growth and then trying to time your way back in once you stop working.
If one retires from your fund at age 65, your future investment horizon could quite easily be 35 years, especially if you have a partner or spouse. This means that unless you have a huge capital balance at retirement or your monthly needs are very low, you stand the chance of outliving your pension. The answer to this is to have your funds invested in a way that allows your capital to grow over the 35-year term. This means having exposure to the markets both before and after retirement, the longer one is invested the lower the long-term volatility.
What one should do is understand the real return (return above inflation) that one needs over the rest of one’s life to outpace inflation and meet all of one’s monthly and capital lifestyle needs through retirement. This can only be done by working with a financial planner who uses a thorough lifestyle cashflow planning model (not rules of thumb) which considers your specific planned retirement years. Ideally this planning should start long before retirement.
Lifestage investing has a place where members are perhaps less sophisticated or do not seek the help of a financial planner. It may also be useful where a member may be single and want to opt for a fixed life annuity in retirement. This allows very little flexibility however and is not as common as a living annuity.
Lifestage investing assumes we are all the same, we know this is untrue so start planning for yourself now!
Dirk Groeneveld, Certified Financial Planner
- 083 261 9287
- It All Starts With A Budget
- How many clients does your financial adviser have?
- Financial Prescription Before Diagnosis Is Malpractice
- Return on Investment vs Return on Life