3 things retirees must remember

Nov 22, 2022

Jody Fitzgerald from Morningstar Investment Management has some pertinent takeaways for retirees. They do appear counterintuitive, but are solid in reasoning.

Focus more on cash flow and not just the income from the assets.

Retirees think: “How can I earn income with my assets?”

How they should think: “How can I fund my cash flows with the assets I have?”

There's a mindset, even in retirement, to invest in assets that have a yield. Stocks that pay a dividend, for example. But thinking of income detracts from the concept of retirement. You've spent your entire working life building up a volume of assets that you can then use to retire on. So, why wouldn't you draw down on some of that capital? Why are you only living off the money that your money makes?

When you focus only on the dividend or the income that you can receive, you may actually underestimate the risk of the asset that you've purchased.

What if interest rates fall dramatically and the return from your bank fixed deposit is no longer sufficient?

Individuals like certain stocks because of the dividends that they pay. During the COVID pandemic, a lot of companies actually had to pull back the dividends. In the U.K., the regulator actually stepped in and prevented the payment of dividends. So, dividends aren't guaranteed.

Focus on your unique and individual circumstances.

In the accumulation phase, almost all individuals have the same goal: accumulate as much wealth as possible, keeping with the risk level that I can cope with.

In deaccumulation or in retirement, we all become individuals. Different lifestyle aspirations. Different ideas about retirement. Different spending patterns. Different bequest motives. Different life expectancies. Different timings of cash flows. You don't know when you're going to need cash flows for major events like healthcare related events or age care related events.

The focus on risk cannot just be age.

Just because you're a certain age doesn't mean you should take a certain level of risk.

Let's take somebody who is 60 with 30 years left to live versus somebody who is 70 with 20 years left to live. Intuitively, you might think that the 60-year-old can take more risk because they've got longer to go. But that 60-year-old could be fully funded. They might need $1 million today, in today's dollars terms, to meet their retirement needs. But actually have $2 million. Why take risk if you don't have to? The 70-year-old, on the other hand, might actually need $1 million but has only $500,000. He is going to have to take risks or compromise his lifestyle requirements.

So, there isn't a one size fits all solution. You need to take the amount of risk that's appropriate for you to meet your goals and your aspirations in retirement.

Watch the original video here.

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