20 September 2016

Looking for growth whilst managing risk?

Investment growth whilst managing your risk .... here's how to achieve it

Investments with the potential to beat inflation tend to be located in companies rather than bank vaults. So you will need at least some exposure to the share market if you want to enjoy returns that outperform the relentless, year-on-year rise in living costs.

Of course, no one wants to see the income from their investments go down during a ‘market correction.’ And watching the indexes rise and fall is not everybody’s idea of fun as they consider their retirement lifestyle.

So how do you get the benefits of growth while shutting down the risk of lower income? The trick is to invest in shares in such a way that your gains are locked in. With Lifetime Income, we achieve this by carefully controlling the way your retirement fund is managed.

Specifically, we use a concept called the ‘ratchet.’ Here’s how it works.


Introducing the "ratchet"

Imagine a couple – let’s call them Brian and Susan. They’re aged 65 and 63 respectively. Over the course of their working lives they have managed to put away a nest egg of $350,000 for their retirement.

Brian plans to keep working part time for the next five or six years. So they don’t need to access all their savings – in fact, they’d quite like to see them grow.

With Lifetime Income, they can invest a lump sum and defer income drawdown until Brian turns 71. So they take $150,000 of their savings and invest this portion in the Lifetime Income Fund, where it can take advantage of share market gains.

In the first two years they enjoy good returns and the value of their Lifetime Income Fund investment ratchets up to $163,000. But then the markets turn wobbly, and Brian and Susan’s fund drops to $155,000 in year three and $152,000 in year four.

But there’s no need to panic, because Lifetime Income’s ratchet protects their future income from the fall in value.

The Fund has locked in the value of the future income from their investment at its highest point - $163,000. They can rest easy during any temporary downturns, knowing that their gains are locked in.

And so it proves. In year five, the markets recover, sending the value of Brian and Susan’s Lifetime Income Fund investment up to $160,000, and then up to $168,000 in year six.

When the time comes for Brian to finally start enjoying full-time retirement, he and Susan can start drawing down a larger monthly payment than they would have received six years earlier. The Lifetime Income ratchet has pushed their investment higher, and then preserved the gains. (You can read more details of this hypothetical case study here.)

The bottom line is that the value of your Lifetime Income Fund may grow but the income from your investment will never go lower than your original capital invested. It’s a one-way bet.

Risk is not your enemy

Many Kiwis learned a painful lesson from the share market crash of 1987 – but it was the wrong one. Risk is not your enemy. It can be a very good friend if you take advantage of the additional features Lifetime Income provides to mitigate any downside. The higher returns that shares offer will become essential in a low interest rate world, which is the environment we’re now living in.

We can all benefit from a little risk. Even in our 60s and beyond.