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We all know that, in retirement, the most important thing for enjoying living is good health - both physical and mental.
Given that, I tend to agree with Bob Hope when he said “money is not everything but it will do until everything comes along”.
The large majority of retirees have a natural instinct to build an investment portfolio that generates a reliable income stream - just like the monthly paycheck they got while working.
Also most retirees view risk as the biggest enemy to their financial quality of life and therefore go for conservative investments like bonds, money market funds and bank deposits. Are they right?
Far be it from me to dictate to any pensioner with a life’s experience of saving and spending money. We know that, as we get older, our waists get bigger and our mind becomes narrower. Many, however, living in Thailand are spared that ignominy by taking a youthful partner. As they say: you’re only as old as the women you feel.
So retirees here should be at least willing to listen when I say that, for people living off their savings, too much focus on conservative investment can be harmful. To put it simply, when you have a portfolio single-mindedly concentrating on generating a no risk income, will that portfolio grow at a sufficient rate to outpace inflation?
Retired investors should concentrate on structuring a portfolio that meets their long-term needs by keeping up with the cost of living.
If you think you have a short lifespan then none of this matters. The reality today is that, with improved healthcare, a large majority of people can expect to live at least twenty years after retirement and perhaps much longer if you have taken early retirement.
At the outset - at 65 - everything may look good, but you could immediately start losing purchasing power to inflation. Let me gives you two examples:
Ten years ago, in Bangkok, I rented a beautiful serviced apartment for 60,000 Baht a month. Three weeks ago, I called to talk to some old Thai friends and discovered that the monthly rental was now 120,000 Baht. The apartment was still beautiful, but only cosmetic changes had been made. Ten years ago, a return ticket with EVA to London from Bangkok was approximately 20,000 Baht. Today, it is nearer 40,000. I’m sure you can give me many examples of inflation in Thailand.
The reason I am making these points is to encourage you, if you have a retirement portfolio, to look again. The following example best illustrates what I am trying to say:
You had US$500,000 invested for the past ten years. This has grown in a conservative portfolio at an average annual rate of five per cent and that has become your annual income. In today’s terms, that would give you an income of just over 80,000 Baht a month.
Just think of the purchasing power of that amount ten years ago compared to today and think of the erosion in purchasing power of the same 80,000 Baht in ten years’ time.
I said earlier that retiree’s view risk as an enemy but the smart ones know that time tends to eliminate risk and therefore they are prepared to look at some equity investment in their portfolio.
Let me give you an example of the open-minded retiree who, ten years ago, also had US$500,000 to live on. He consulted a few brokers and eventually came to see that, by adding some equity content and having a balanced outlook on investment, he could protect himself against inflation.
He still wanted to take five per cent per annum from his portfolio, so he designed at the outset a portfolio to try and earn ten per cent p.a. His first year’s income was 80,000 Baht (for the purpose of this example, let’s ignore devaluation. Remember it could go the other way).
Having achieved his goals this year, his five per cent income will amount to US$38,824 p.a., giving him an income of 126,178 Baht a month. In addition, his US$500,000 capital is now be worth US$1,077,648 - all together, a plan for a happy retirement.
Are these extravagant promises? We think not.
It is all down to proper financial planning and understanding risk and how it can be reduced.
The alternative to not taking some risk is that each year your standard of living will slip a little. Is that what you worked and saved for, for all those years?