Retirement planning akin to riding a bicycle – once you’ve mastered the skill, you never lose it
By Richus Nel, Financial Advisor, PSG Wealth Old Oak
As a recreational cyclist, I regard cycling as one of the most enjoyable and effective ways to get around. But while some cycling is for recreation, other times it can be about incremental goal setting. Every hill, every valley or every time challenge is within reach, if you are willing to do the necessary conditioning or preparation, which is a precondition for success.
This makes for a ready comparison to the investment and retirement industry. Start with small achievable targets and learn to ride the ‘investment bike’ over many years, long before retirement. The more you ride, or the earlier you begin, the better you’ll become and the less frequently you will fall, crash or get hurt.
Technology and research make for a better ride
Cycling has changed dramatically over the years, with accelerating technology making bicycles lighter and faster. The post-retirement industry has followed the same trend through research that today can provide investors with knowledge to assist them to achieve additional income if a shortfall is identified.
We have compared these learnings with the various elements of cycling below, to help you consider the journey and to connect how good cycling principles can be applied to reach a sustainable retirement as well.
* Lighter and faster cycles
In cycling, lighter means faster and it seems to be the ultimate competitive advantage. Wealth creation is always in a ‘tug of war’ between risk and reward against an investment horizon. One can only retire once financially independent. A common mistake many investors close to – or in retirement – make is shifting focus to wealth preservation and choosing to reduce risk instead.
Recent research by Investec shows that:
* A minimum of 60% exposure to growth assets goes a long way to having sustainable income at a drawdown of 4% of retirement capital per annum.
* Expenses are under a magnifying glass and passive investments are a common appearance in diversified portfolios. Added volatility from passive investments can reach a point where the likelihood of running out of capital in a post-retirement strategy, is unacceptably high.
* Keep in mind that income drawdowns can only be increased annually, depending on the portfolio returns in prior years, and you can only increase the Rand income amount, not the percentage.
* Route planner
Cyclists do not use a road bike to do specialised off-road cycling; the right bike is needed for each different terrain. Dealing with volatility can be compared to off-road cycling. Skillful, well-trained riders (investors) use volatility to their advantage. They keep just enough momentum through the obstacles, to avoid a crash. Anyone withdrawing from the race during ’bumpy times’ (much like selling your investments in times of fear) also risks losing money. The right balance between risk and return can now be scientifically proven.
Volatility can be better managed by not overpaying for assets, sticking to quality instruments, and applying active asset-allocation strategies that have effective cross industry/geographic diversification.
* Track record
When looking for a good bike, I suggest that you do good research and choose a manufacturer with a solid track record. The same goes for investment management and the financial advice you take on board.
* Brakes and helmets
Bicycle racing has always been a dangerous pursuit. The possibility and seriousness of a crash depends on the speed travelled at the time of impact and the protection of the rider (e.g. helmet, hand or knee guards, etc.). In the investment world, speed can be compared to the level of equity exposure and concentration risk of a portfolio. The levels of injury sustained during a crash is different for a pre-retirement and post-retirement investment strategy.
The amount of time available for recovery for a post-retirement investor is much shorter. Therefore, a strong focus on scientific asset-allocation and portfolio diversification is essential for the ‘post-retirement cyclist’ as well, to continue to stay protected, even when you have reached your destination of retirement.
Hybrids – EBIKES
Hybrid bicycles, with battery assisted motors are now available. Similarly, post-retirement products are enhanced to a point where retirees can choose retirement hybrid products. This is a transparent combination of market-linked living-annuities and guaranteed annuities. This option is now easy to understand, cost competitive and to my mind, one all retirees should take note of when planning their post-retirement strategy, given each client’s unique circumstances.
Finally, retiring is not a ride in the park. Getting on the wrong bike or riding too fast in post-retirement (or too slow in pre-retirement), proves costly. Following the rules of riding a bike, using the right equipment and planning the journey can keep you on the road safely.
Should you be willing to apply this approach to your retirement journey, investing in the necessary time and advice needed to stay on track, you will likely arrive at your planned retirement destination too.