This is from the blog of a reputable bank providing advice to retirees:
... Start by figuring out how much spending money you will need from your portfolio over the next five years. Let's say you are using a 4% portfolio withdrawal rate, which means you plan to spend a sum equal to roughly 20% of your portfolio's current value over the next five years.
You might take that 20% and stash it in conservative holdings like savings accounts, certificates of deposit and short-term bonds, so you know that you have the next five years of anticipated spending covered, no matter what happens to the rest of your portfolio.
You can then invest the other 80% of your nest egg for total return using an appropriate mix of riskier bonds, U.S. stocks and foreign shares. You will want to consider carefully what combination of stocks, bonds and other asset classes to buy, because each has its own unique benefits and risks, and also how to diversify within each of these asset classes.
In years when the markets are kind, you might cash in some of your gains and use it to replenish your pot of spending money, so it once again holds enough to cover five years' worth of portfolio withdrawals. What if the markets aren't so kind? You could sit tight and see if the markets recover. Thanks to your five years of spending money in more conservative holdings, you should be able to go that length of time without touching the 80% of your portfolio that's invested for total return.
AK71 says, "Sailing into the sunset should not be sailing into the dark." |
I want to draw attention to the words I have underlined. These are basically the ideas I have problems with.
Is securing five years of spending money without taking into account average inflation enough to provide a peace of mind for retirees? What is an appropriate mix of riskier bonds etc. and are riskier bonds even appropriate? Sit tight and see if the markets recover if things don't go well? That sounds like plenty of hope analysis to me.
I am most uncomfortable that retirees should be mostly invested and 80% in this case. What if the markets should go into a protracted downturn? Being retirees, these people are less likely to have the ability to fill up another war chest with earned income. Shouldn't they have a war chest ready just in case Mr. Market suffers from a bout of manic depression?
I don't have a Degree in banking or wealth management. I am just another retail investor sharing his concerns using what he feels is common sense.
Please forgive my ignorance.
Related posts:
1. Be cautious even as we accept higher risk.
2. A letter from a 66 year old retiree.
3. If we want peace, be prepared for war!
10 comments:
Hi AK,
Haha advice from the banker? Would you ask a barber whether you need a haircut? Lol.
This kind of advice is subjective and as with any advice, it can apply to some people. The problem is determining whether it applies to you.
Ultimately it's a personal decision as to what kind of risk appetite one is comfortable with.
Best wishes,
Eugene
Dear AK,
Well said! These bankers (well most of them) are there to rip people off, especially those reitrees who does not have a clue in investing their nest egg.
My parents put their money in some unit trusts after a banker approached my parents at XXX bank.
My parents were at the bank to withdraw their fixed deposit $$ and this banker was stationed behind the teller counters looking out for people who have some savings in their account! Next thing for all you know, a banker apporached my parents: "Dear sir, can I just take 5 minutes of your time to talk about this investment plan that we have ...."
Nowadays I asked my parents never sign on the dotted line without at least keeping me in the loop!
It is still the same practice at banks nowadays and I wonder how many people followed these bankers advices!
Rgds,
LK78
Hi Eugene,
That is a fair statement. :)
After all, it did not state the age of the intended audience. Someone could retire at age 35, couldn't he? ;p
Generally speaking, however, retirees are age 55 and above. It is a reasonable assumption and I believe they should not take on higher risks.
Hi LK78,
You are a good son to look after your parents' welfare. :)
I came across an easily understood and low risk product from a local bank before. It also offered reasonably good returns. Needless to say, I took up the offer enthusiastically but it is no longer available, unfortunately.
My blog post is certainly not to vilify banks or bankers. It is to show an example of the type of advice to retirees which I would be wary of.
Investing is a necessary skill, so teach your children as early as possible. With longer time, higher chance to grow big snowball.
Hi Ah John,
I agree with you. :)
I am doing my bit:
At what age to start investing in the stock market?
;p
Hi AK,
I came across this article too and had issues with the parts you underlined as well!
To maximise retirement income, setting aside a fixed amount for a particular number of years and investing for higher returns for the balance seems reasonable.
But one of the rules of investment is not to buy anything we do not have sufficient knowledge of. Foreign equities? In Congo or Nigeria perhaps? Since retirees have all the time in the world to learn the new markets, right?
What riskier investments? Have no fear! 'Qualified' professional are always at our service to help us maximise our returns! Or is it theirs? Oh, now I'm confused. :P
Endrene
Hi Endrene,
I guess we both know which bank issued this letter to retirees then. ;p
Well, they are the professionals. We are just ignorant lay people. Maybe, they know something we don't. :)
What's the warchest percentage should be like ? Do you keep them in cash ?
Hi Cory,
I feel that everyone, more so retirees, should have a war chest. What is the percentage of our wealth which should be in our war chest? This is a more subjective exercise.
For me, this percentage fluctuates and I think that is natural as investment opportunities ebb like the tides.
I have 4 war chests:
Savings accounts
CPF-OA
CPF-SA
SRS account
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