Kiru Padayachee, 12 December 2022
The financial advice you may have heard throughout your investing career is that the closer you get to retirement, the more cautious your investment portfolio needs to be. However, taking too cautious an approach is what Padayachee says is the wrong investing mindset. “Capital doesn’t grow at a cautious level,” he explains. “Your income needs to grow, and if it stays flat, you’re not going to beat inflation, which is the biggest disease that we face in the financial world.”
With the choice to continue working into your 60s and possibly even 70s becoming more commonplace as the human lifespan continues to grow longer, your 60s could either be a time when your regular salary comes to an end, or is reduced according to how much time you dedicate to work as you start to wind down to retirement. Ultimately, you will reach a point where you have access to a certain pot of money that needs to pay you an income for as long as you live, and perhaps leave a legacy for your loved ones. To make a success of this, the key question that Padayachee says should be front of mind for investors is: “What risk profile do I invest that money at in order to make sure that the decumulation phase is a profitable one for income purposes?”
When you’ve reached your 60s, the hope is that you’re mostly debt-free, and, if you have dependants, you have met those financial obligations. This frees up a fair bit of your income – not only in your final years of employment, but when you stop earning and start enjoying your retirement. In order to comfortably maintain your standard of living, your retirement income replacement ratio needs to be set at a sustainable rate. This ratio refers to the percentage of your income you would’ve earned during your employed years that you would need to continue receiving in order to maintain your standard of living.
“There are different routes to ensure that income is sustained, like through annuities and discretionary cash you’ve saved through the years,” says Padayachee. Investing in your 60s isn’t just about ensuring you are comfortable and that your capital growth can beat the eroding power of inflation; it’s just as important to think about the costs associated with winding up your estate and ensuring this isn’t an expense your loved ones are saddled with.”
A good financial adviser should take retirement income planning and estate planning into account when considering this life phase to ensure your financial plan is comprehensive and takes care not only of yourself, but those you care about, too.”
“Some investors may not retire at 60; they’re still actively either in business or earning some kind of an income,” notes Padayachee. With that considered, here are some solutions worth exploring as part of your investment portfolio to ensure it remains tax-efficient, can withstand inflation, and incorporates your estate-planning needs.
For investors with a marginal tax rate higher than 30%, this is a tax-efficient five-year investment, and can become useful in your planning because your beneficiaries benefit from it through legislation, thanks to the way it is structured, says Padayachee. If you’ve nominated beneficiaries on your endowment, the money goes directly to them on your death and there won’t be any executor’s fees.”
The important thing to consider here is your investment term and liquidity. You could consider a unit trust, or a share portfolio based on how much capital you have, says Padayachee. You’d be looking to save in the medium to long term, with cash accessible whenever you need it. Ideally this would be used to support the income you receive from your retirement annuity (RA).
Yes, you read correctly: you still have the option to invest in an RA in your 60s. Some investors are still interested in this solution, as it offers long-term savings, while being tax-efficient, and has the option of being converted into an annuity source without impacting your estate should you die while still employed in your 60s.
If you are fortunate enough to have excess money that you’d like to invest once your estate planning and income needs are handled, you could look offshore for investment opportunities. This also allows you to further diversify your investment portfolio, reinforcing its resilience amid international market movements.
“A financial adviser plays an important role in leading an investor through their life’s financial journey. A good financial adviser is there every step of the way to teach and lead their client to make the right decisions with their financial affairs, for both income and growth,” says Padayachee.
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This article first appeared on Glacier Insights.