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How to ensure your retirement savings outlast you

| Personal Finance

Leaving a legacy, passing on an inheritance, ensuring there’s enough left for your retired years. Whatever the requirement, making provision is a challenge. Keeping your capital intact for your future generations (even better, growing it in real terms) while still generating an income during retirement, is no easy task. In the ‘Go-Go’ years of the late 1990s and early 2000s when stock markets just seemed to never say die, growing your capital and drawing down a reasonable income monthly was perfectly do-able.  But times have changed.
Today, the reality is that to achieve the same objectives as before, one now has to adjust one’s retirement strategy – sometimes radically. This includes:

  1. Potentially adjusting your lifestyle, managing expenses or cutting back –
  • Prior to retirement, thereby saving more, or
  • During retirement, to reduce the amount withdrawn from your retirement savings. (The positive long-term effects from either of these is dramatic)
  1. Investing for growth! Retaining higher exposure to assets with a proven track record of out-performing inflation will equate to more equity for your portfolio!

Invest for growth, don’t de-risk
Conventional wisdom from years gone by dictates that leading up to and once in retirement, one should migrate from a wealth creation (growth) to a wealth preservation strategy. This entails reducing exposure to equity and other growth assets. In the past when interest rates were higher, this “de-risking” strategy was sufficient as income yields were high.  In the lower interest rate environments of today (and the foreseeable future) this no longer applies. This coupled with the fact that people are living longer (meaning investment time horizons are significantly extended), medical costs are increasing and real inflation looms higher.
While wealth preservation remains an important component it can no longer be the overriding determinant for a sustainable retirement strategy.
Out perform inflation
To outperform inflation (or at least keep pace with it) over the long term, one has to retain a higher exposure to equity. A cautious, pure wealth-preservation strategy is no longer enough to outperform inflation or grow capital in real terms. Inflation risk (the risk of inflation eroding your capital) increases the longer you live. But, the longer your investment time horizon, the more equity one can afford to take on to counter this.
Reduce the amount you withdraw from your investment
Simply put, the less one withdraws the longer the capital will last and vice versa. Even a small over- or under-withdrawal can impact how long your capital will last. Historically, a good rule of thumb was not to draw more than 6% of the value of your retirement savings annually. Due to the factors mentioned above, this rate is now closer to 5%. So think about cutting back on your lifestyle just a tad as doing so will have a material effect on what is left for the future!
Remember that even after retirement, investing is a long-term journey. It has never been more important to obtain good financial advice to help you work out your retirement time horizon, your appetite for risk and whether or not you’re exceeding your recommended annual drawdown rate.

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