RETIREMENT IN STYLE

I got to do some serious thinking about a stylish retirement recently.  Not because I was bored but because I was flat on my back suffering the ills of a mysterious virus.

Not enough of us focus to style because we know it comes with the accompanying cost and mostly we think style now and retirement later.  But at age 65 I’m associated with a few baby-boomers – not all of whom are people trying to squeeze the last dollar of government benefits out before they die.

I can’t corroborate the evidence but I once read that we do around 60% of our investing post retirement – if we want to live a stylish retirement, leave legacies for our children and play a hand in our grandchildren’s education then it seems to me that we’ve got more investing to do and I sure have more education to do for my clients.

Worthy goals and ideals but surely motivating.  World art exhibitions, International orchestras, great jazz musicians, Opera in Italy, shows on Broadway, New York at Christmas – not to mention the odd rugby and cricket tournament.  From our little end of the earth this takes planning and dosh – the price to pay for being so far from the great continents but also distant from the sectarian wars and accompanying atrocities.

So what do we do differently at age 60/65 from an investment perspective.  Well firstly if you haven’t done anything up until now – I’m sorry but Levin’s your lot.  There’s no Tate galleries, Parisian night sky or New York snow for you.  But those with a million or two or more need to consider time and purchasing power and first class estate management.  Lets consider time first – Actuaries now tell us that the average couple reaching retirement at age 60 – there is a 50% chance that one of the partners will make age 90.  That’s coal miners, timber workers, school teachers and politicians – for most city workers and business ownsers therefore the likelihood of living beyond that timeframe is likely – In short – plan on a minimum of 30 years – a third of your life.  Over a 30 year retirement with costs escalating at 3% (inflation) the cost of living will increase by 2.5 times.  If we only had the bank in which to invest this would be a real problem because when I last looked at deposit rates (less tax and less 3% inflation) I’m eating capital.  As a comparison as of year end 2013 Morningstar/Ibbotson found these annual index returns, assuming the reinvestment of dividends (in the case of stocks, and of interest in the case of bonds) for the period 1926 through 3013 inclusive.

                                Large Company common stocks                                                10.1%

                                Small company common stocks                                                 12.3%

                                Long term, high – quality corporate bonds                                  6.0%

(using the government methodology for calculating the CPI – that cost of living was 3%)

Therefore the real returns of the three asset classes adjusted for inflation

                                                                Large stocks                                       7.1%

                                                                Small stocks                                       9.3%

                                                                Bonds                                                   3.0%

(This is what i call 'historical probability')

So as a serious investor – it’s a no brainer.  A diversified portfolio of international equities with major tilts to small and value companies and I turn my 2.0 million into 3.0 million in under ten years (subject to tax and fees)

So I live for 30 years – take an equivalent 100K inflation adjusted income and double my starting capital every 10 years at 7% real or increase it by 50% at 3.5% real.  That’s a legacy the family will want to know about and one which will require serious estate management with seriously professional trusteeship.

So what about the grandies, the outriders and the loose cannons.

Unfortunately all families have them (the outriders – skimming around waiting for the main chance, the loose cannons – spending derelicts who’s short tem gratification is only exceeded by the speed with which they can make the next online order)

Managing this state of affairs is serious stuff when big dosh is involved – it will cost.

But doing it properly will prevent or reduce legal challenge and certainly enhance the legacor in the eyes of all the legacees – perhaps create the opportunity for multi generational wealth to be perpetual.  Someone has to break the cycle.  The great farm holders have done it with land.  The great industrialists with business. Both have subsequently invested broadly and geographically – in the great companies around the world. We know where to invest – but do we have the inclination to do the same or is Westpac the soft option which might look good to start with as a bank balance but will end in ignominious decline well before we depart this earth. And the cycle is repeated.