Signposts of financial success post 65
IT was back in September that I started this column series to identify the behaviours of financially successful people.
I started with those clients in their 20s and then moved through the subsequent decades considering the various ‘‘markers’’ at each point.
If we assume that you have now made it to age 65, then you are entering what I term the active postpaidwork phase. You will notice that I have avoided the use of the ‘‘r’’ word.
Today the concept of a traditional retirement, complete with a gold watch, is largely a thing of the past. I now more often see a phased transition from fulltime employment to an active retirement which includes a mix of paid and voluntary work. This phased transition from full employment to full retirement allows for both economic and emotional adjustment.
This is a time when the habits and behaviours previously established (both money and health) either start to pay ‘‘dividends’’ or the reality that we have not done enough looms large. If you are female and aged 65 then (on average) you can expect to live until age 89. Take three years off that if you’re male. This means that on average your retirement will span three market cycles, so expect and be prepared for some economic uncertainty during your retirement years.
My observations of those who navigate this phase well, is that they manage to understand both the psychological challenges as well as investment matters. There are of course entire books dedicated to this subject but in summary some of the psychological aspects are:
A What is my purpose in life now? For a number of people this transition can trigger a mini identity crisis. If you can, try to manage this phase so that you are retiring to something rather than retiring from something.
A You may need to rethink your investment persona. There are two potential traps here. There is an old saying in wealth management: ‘‘Concentrated risk can build wealth but it is diversified risk that protects wealth’’. If you have made your money by being highly successful in one particular area, e.g. manufacturing or farming, it is tempting to carry this mindset into retirement by investing in just one thing (socalled singleasset risk).
This approach may continue to work well for you, but is this the time to double down on investment risk?
Diversification means that your portfolio will never perform at the level of the current ‘‘hot’’ investment but it also means that the chance of permanent capital loss is almost eliminated. When you stop paid work, you may have just added the last dollar to your investment portfolio. For some people this experience causes them to become overly conservative and leads them to overinvest in term deposits. If you become too risk averse, then your capital might not last for the 30plus years that it could be needed.
A Who are you trying to please; where do your needs and wants sit relative to others? At times it is hard to stop being a parent, but what are the implications of being overly generous to children and others?
In addition to the psychological there are also some financial markers that identify successful people.
A They have established a dollarwealth target in advance so they feel more in control of their situation. They are relaxed because they have known for some time that they are on track.
A They know what it costs them to live. It sounds simple, but two years out from retirement successful people have already identified their expenses as they relate to basic living costs, recurring capital expenses and special activities such as travel. They then live on this amount in advance of retirement and save the rest.
A If capital is sufficient, they will often establish two portfolios. The first portfolio is organised in such a way to provide for their ongoing living costs throughout their retirement years. It may be managed conservatively but it will generally contain some growth assets (shares and property) to ensure that it can last the journey. A second portfolio will often contain the funds not required for the first purpose. Because it is unlikely that it will be required to fund living costs it can follow a more growthfocused strategy. We hope that this account will ultimately fund inheritances or, at the very least, an expensive funeral. This twofund approach also allows people to see the implications of bringing forward any advances to children.
As I have said in previous columns I don’t believe that accumulation of money is an end in itself. However, this is one of the key times in life where having sufficient money provides choice. That choice could be as ambitious as a European holiday every year, or as modest as being able to pay for the petrol to get to your favourite fishing hole on opening day.
Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.