| Let's assume you are in or approaching | | | | into account all your living expenses including |
| retirement. You have your retirement nest egg, | | | | holidays and asset purchases. Multiply that figure |
| which has been working overtime lately, trying to | | | | by 3. That's how much you need to put away in |
| catch up the time lost since the global financial | | | | 'defensive' assets. The rest of your nest egg |
| crisis decided to change the rules on steady and | | | | keeps working for you in what ever 'growth' |
| consistent returns. | | | | investments you are comfortable with and |
| Your financial adviser asked you a whole bunch of | | | | appropriate to your risk level. |
| questions and told you that you had a 'balanced' | | | | Your income or pension drawdown is deducted |
| investor profile. You weren't quite sure what that | | | | only from your 'defensive' assets. Markets can go |
| meant but it sounded like he was treating you as | | | | south for 3 years before you need to withdraw |
| 'normal' so that was comforting. He also reckons | | | | anything from your 'growth' assets. Too many |
| that because your are 'normal' he's going to stick | | | | financial advisers still use the 'risk profile' approach |
| half of your money in 'defensive' investments like | | | | to investment strategies and rebalance the |
| cash, fixed interest, bonds, hybrid securities and | | | | portfolio on a yearly or more frequent basis to |
| perhaps even mortgage funds (cringe). The rest | | | | keep the original asset allocation, crystallizing |
| of your money is not retiring - it's going to remain | | | | losses along the way if markets are in an |
| working in the share markets or other 'growth' | | | | extended downturn. |
| investments so you can lead a happy retirement. | | | | The strategy is designed to set aside 3 years |
| But are you? Is this really the best investment | | | | worth of income that you will need, allowing for |
| strategy in retirement? Something based on your | | | | what income is also generated from those |
| 'risk profile' rather than your actual needs? If you | | | | 'defensive' assets. For example, if your nest egg |
| had anything invested in the share markets over | | | | was $500,000 and you wanted to draw down |
| the last few years then you already know what | | | | $40,000 per year then you set aside $120,000 |
| your reaction was when markets fell. If you felt | | | | less what income is likely to be generated on that |
| like having a heart attack because your | | | | amount over the next 3 years (depends on |
| investments collapsed then either you haven't | | | | interest rates). At appropriate times you would |
| been taking care of yourself or you've been | | | | top up your defensive portfolio with profits from |
| feeding yourself the wrong information. The | | | | your 'growth' portfolio. More frequently in good |
| problem with basing an investment strategy on | | | | times, less frequently in bad times. The aim is to |
| 'risk profiles,' as so many financial advisers do, is | | | | always have 3 years of income set aside but only |
| that it doesn't actually match your needs with | | | | if you can do so without crystallizing losses. |
| market risk. | | | | This strategy will work for any 'risk profile' and |
| A better approach for a safe investment | | | | knowing that you have at least 3 years income |
| strategy for retirement is to first determine how | | | | set aside should provide you with greater |
| much income you want to draw each year, taking | | | | comfort and security in market downturns. |