Will I outlive my money?
This is a question that many people need to ask themselves these days. Life expectancy has increased dramatically over the past three decades and retirees can live another 20 to 30 years post-work. It can be a difficult balancing act to avoid having your money run out because you didn’t plan realistically about how long you may potentially live. (Of course, there are ways in which to avoid living longer than your money: Don’t live so long! Spend less! Save more! But none of these reasons are very palatable.)
Typically, at 65, it was expected that people, on average, might live for another seven to nine years. But today, average life expectancy is around 80, and in parts of Asia, such as Japan (82 for males, 87.2 for females) and Hong Kong (82 for males, 85.6 for females), it is even longer. Thus, retiring at 60 or 65 means a person might need to live off of savings for nearly 20 or more years. Add to that the potential of inflation – albeit these days it is very low – and the need to both accumulate more and to invest better and for longer is of paramount importance.
The “Rule of 100”
The Rule of 100 was the quintessential formula used to provide easy guidance to those planning for retirement. It provided an easy way to calculate the proportion of investments that should be in equities, i.e., stock markets, bonds, fixed income and money markets (cash). The Rule of 100 works by subtracting a person’s actual age from 100 and using the remaining figure as a baseline percentage of how much of a portfolio should be invested into equities.
For example, a 30 year old would be advised to invest 70% in equities, whereas a 60 year old would be directed to invest 40%. During the 1980s and 1990s, this worked reasonably well, as interest rates were high, equity markets were volatile, and inflation was high, but falling.
However, in the last 10 years, and especially since the global financial crisis of 2008, the Rule of 100 has proven not to be such a reliable indicator of how investors should allocate money. Indeed, many have tried to extend the measurement by 20 or 30 years, thus we were getting the “Rule of 120 or 130”. This, however, has proven to be too simplistic also.
New advice for a new day
Given the need to improve and extend the returns achieved from savings and investments, people need to consider very carefully how to both increase the levels of risk taken, and also ensure portfolios are actively managed. This means there is a need to take a greater interest in what and how you invest.
Equities are often regarded as being the core of any long-term investment portfolio. They can be widely invested across multiple markets, and offer a variety of risk levels, depending on both experience and requirements. Usually, the largest proportion of your equity portfolio would be in the major stock markets in the US and Europe. But being a resident of Asia possibly means having the largest proportion of your assets outside of your home market, thus not necessarily in the same currency you will be using when retiring. This can sometimes be regarded as increasing the risk element, but for people in Hong Kong, where the local currency is “pegged” against the US dollar, investing in US dollar denominated investments poses little currency risk.
Another area of investment advice includes the use of modern techniques, including investment vehicles and products, such as hedge and other alternative investment funds, private equity products and exchange traded funds that were less available in the past. Each of these can be available to both individual investors and professional investment managers. Clearly, in the absence of professional experience, it is often best for the professional investment manager to be charged with the responsibility for selecting and managing assets that use these products. Each of them have both advantages and disadvantages, they can improve returns in portfolios, but also, if incorrectly selected and used, can impact returns negatively.
The essential advice to be given to those approaching retirement is to prepare to invest for longer than you might expect. Don’t automatically assume that by being in “safe assets”, such as government bonds or cash deposits, your money will provide an income for life. Yields on both of these are so low these days, they need to be viewed very cautiously. But also, don’t be 100% invested in “risk assets” either. Balanced portfolios, with ever changing proportions according to market conditions, are probably the best way to go.BM