Some years ago, as my wife and I contemplated the transition to full retirement, we decided to take charge of our future and opted to manage our own pension. One of the primary reasons for this was to ensure that the assets reflected our very conservative nature; that is 100% shares. This may sound contradictory to many but after more than 45 years in the financial services industry I had learnt some very important lessons.
The word ‘risk’ is bandied about but many do not truly understand the investment risks associated with retirement. Still today, the definition of investment risk remains the volatility of share prices. So, leaving our future hostage to an industry still wedded to this outdated dogma did not appeal to us. We refuse to accept volatility as a problem; our primary risk is not losing money, as most people see share market volatility, but outliving it.
When discussing whether we could afford my ceasing full time work; the consideration was not how much money we had but how much income we needed. We looked at the three assets available, cash, property and shares, considered their income prospects both present and future, and opted for shares.
The income they generated would meet our immediate needs without having to rely on selling thus maintaining the integrity of our asset base. Also, over the long term I knew that the dividends from a diversified portfolio of shares had and would grow in a relatively stable way and being linked to the productive efforts of the nation, they would be superior to the income from other sources.
The dividends, during the 80’s and 90’s whilst I was still working, were being reinvested. When I quit the industry and wound down my business in 2007/8 it was simply a matter of redirecting the dividend stream from reinvestment to pension mode.
With nearly a decade behind us now and the Global Financial Crisis (GFC) to add some spice we can now look at our strategy being tested in real time. As painful as it was to watch our portfolio almost halve in price, the income only dropped by 20%. However, as we held enough in cash to cover 2 years pension withdrawals, we simply followed our parents’ example who, when times were tough, simply tightened their belts. Please note that I use the word price above as the value of the companies clearly did not fall by that amount. These sharp movements in prices always remind me of the quote that most people know the price of everything and the value of nothing!
Today, too many retire with too little, too early and leave themselves exposed to the disaster that is cashing assets to produce income when prices have retreated. As we drew down on our cash buffer the dividends replenished the account which avoided us having to cash any of the holdings. In fact, with cash available, we were able to take advantage of the turmoil generated by the GFC to modestly enhance our future income by purchasing additional shares.
By focussing only on the income and not the prices of our shares we have avoided much of the angst associated with the GFC. Also, as longevity appears to be a potential genetic advantage that we enjoy I need to be sure that the asset base remains intact and the income stream will continue to grow for decades to come.
I have watched as my parents, in-laws and many of their peers were reduced to living totally on the old age pension because they had initially relied on bank deposits in what they thought was the ‘safe’ option. The nail in the coffin (no pun intended) as far as I was concerned was watching as the two respective family homes were sold as neither widow (the husbands having pre-deceased their spouses) could afford to maintain them.
As the probability is that my wife will outlive me; we will continue to invest solely in shares, the conservative option, as I am determined that she will continue to live with dignity.
Author: Peter Thornhill is a renowned speaker, author and principal of Motivated Money Pty Ltd. His latest investment book can be found on www.motivatedmoney.com.au/
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