Martin Hawes: Making your money work for you in retirement
After a lifetime of working for money, money is supposed to return the favour when you retire. Most retirees are naturally cautious about sending their own money off to a new career and so they should be.
Your money has plenty of job opportunities. And while those opportunities come with employment terms and conditions it's possible to narrow down the job search based on a handful of contractual details.
Work options for money can be lumped under a few simple ‘asset class’ categories, where each describes a different level of risk (or, in employment terms, the chance of getting fired).
Professional investors have a habit of breaking down those ‘asset classes’ into more complex sub-groups: for example, investment consultancy firm, Mercer, lists 15 different asset classes in its annual summary of NZ investment returns.
However, from a retiree perspective the broad outlines of the core asset classes they invest in serve as a good starting point to consider the career risks their money may face.
Let’s consider a few obvious candidates:
As it used to be in real life, a job in the bank offers money the most secure career opportunity. But while your money is unlikely to be made redundant, don’t go expecting a promotion either.
In effect, cash at the bank provides a minimum wage return that may not even keep up with the cost of living: on the plus side, the job will always be there and your money will put something on the table each day.
Bonds, also known as fixed income, can provide a wide range of potentially exciting career choices for your money from working with the world’s largest governments to a niche job in a small company.
Despite the diverse range of underlying risk factors, all fixed income securities represent a promise from the issuer – be that the US government or Fletcher Building – to pay back the money it borrowed from you plus interest.
Bond ‘coupon’ (interest) rates will vary depending on the perceived credit risk of the borrower. In general, though, bond returns are often higher than term deposits when the credit risk of the bond is higher than the bank issuing the term deposit.
Somewhat confusingly, the capital value of bond investments can also go up or down in tandem with fluctuating interest rates in the rest of the market.
Overall, your money can look forward to a fairly safe, middle-management career in bond markets – subject to regular performance reviews and little chance of making it to executive ranks.
Employment conditions in the share market are slightly looser than for bonds. Shares are not backed by a promise to return either capital or interest: instead investors have a claim on the value of a particular company at any given time plus a proportion of whatever dividends that company may choose to distribute.
The share market is not known for job security. However, your money will probably never be bored with a career in equities where the chance of rapid promotion regularly vies with redundancy.
Unlike cash, bonds and equities, property is usually classed as a ‘real’ asset: you can see it, touch it and vacuum it.
Most NZ retirees are also pretty familiar with property having owned at least one during their working lives. Many others also own residential or commercial rental properties to support their retirement income.
On the upside, property can offer regular income plus the prospect of capital gain. Real property, though, comes with real responsibilities such as council rates, maintenance, tenancy management and increasingly complex tax reporting. Capital gains are also not guaranteed while rental returns – perhaps more so for commercial property – are directly tied to the state of the local economy.
Property promises your money a trade or manual labouring job rather than a white-collar office career. It’s a hands-on approach that can be rewarding or exhausting depending on your temperament.
While not strictly an asset class, the Lifetime Income Fund is a unique workplace for your money. Lifetime invests your money in a balanced fund of shares and bonds and uses insurance to guarantee you an income for life. Retirees would struggle to replicate this kind of income guarantee by sending their money to work anywhere else.
Retirees have to think carefully about where to employ their money but, importantly, they don’t have to choose just one job – and probably shouldn’t.
The Mercer annual digest of NZ investment returns, for example, vividly shows the fluctuating returns of its 15 different asset classes over time. In 2008, NZ cash was the fifth most-lucrative asset class with a return 8.8 per cent but was the bottom-ranked performer in 2016 with a return of 2.5 per cent.
It seems your money may in fact work best if it does multiple jobs as part of a portfolio career.
Martin Hawes is an authorized financial adviser and an independent director of Lifetime Retirement Income. Lifetime Retirement Income is managed by Lifetime Asset Management Ltd.
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