No silver bullet

Beware of too high cash allocations in post retirement savings. This can be a problem for an investor who needs growth and doesn’t take a holistic view of their investment portfolio. Saving for retirement and managing wealth in retirement requires specific objectives and skills.

Business development manager at Grindrod Asset Management, Marc Thomas, says that when investing post retirement funds, you need to have two things – a target total return and an above inflation income – as an income objective. Thomas says it is wrong to plan for retirement only as a specific date. A personal finance question asked around retirement is how much is enough. Thomas says that retirement is not a specific point – and it is wrong to plan only for this point. Retirement planning is much more – and a time in which you need an income stream. Saving only enough is not only a small part of the plan, but it also assumes that we would know how much is enough. Guestimates are rife, and useful, but in reality – how do you know if it is enough until you have gone through retirement? In addition, investing doesn’t stop at retirement, “you need to invest through retirement,” says Thomas. “A 40 year old who is planning for retirement is investing for another 50 years.”

Critical points to consider:

1. Why are you investing?

In the case of retirement Thomas says this is to have an income in retirement. And income must grow with inflation every year. You are investing to have an asset (capital) that will fund (income) your liabilities (expenses).

2. How should you invest?

A retiree could invest according to what Thomas calls the Bucket Theory – where you have three ‘buckets’ of funds. A short term bucket for day to day expenses, usually in cash, a medium term bucket that can be converted into cash and a long term bucket where you are aiming for growth. A closer look at this may reveal a total asset allocation picture that is not consistent with the overall goal. For example – in your short term bucket cash will be the main asset held, the medium term bucket will also hold cash, and the long term bucket – usually invested in a balanced fund – would also hold some cash. Checking overall asset allocation could reveal that a large portion of the total portfolio is invested in cash. An adviser, and the retiree, need to ask if this is the ideal asset allocation for their needs and if it will deliver a growing income stream.

In the past fixed income assets were used extensively in retirement portfolios. This worked while these assets were returning above inflation numbers. However, today, relying on fixed income assets for retirement funding is not ideal as they cannot keep pace with inflation.

Thomas says that the new way of thinking around investing in retirement is that the cash flow of assets must match the cash flows of the liability. These are assets that have dividends and a dividend yield that grows. “The question to ask,” says Thomas, “is how is the dividend yield growing. It is the dividend per share growth that is important.”

When looking for these investments you need to take into account the dividends, the dividend policy and the payout ratio. For some investors this might be a slightly different approach. Take as an example the share Sasol. A value investor might consider this share a good buy for long term growth. A retired investor, looking for income, would look at this share and ask is it paying dividends and will it continue paying dividends and at what rate. If the dividend policy could change, despite the fact that the share price could grow, the share might not be suitable for a portfolio investing for an income stream. “It’s a different way of looking at the problem,” says Thomas.