Building Wealth At 40 And Investing For Retirement

Saving and investing for a retirement nest egg assumes a greater urgency once you pass the major, some say magic, 40 mark. Suddenly 55, 60, 65, even 70 doesn’t seem as far off.

Some rules for wealth building are constants regardless of age, such as diversify – don’t put all your eggs in one basket. 

Tracking your superannuation is another no brainer. If you are working, make sure your employer is paying your superannuation as they are obligated to by law. Be informed about the best superannuation fund for your needs and don’t be afraid to change funds if need be. Selecting a high performing superannuation fund can substantially improve your financial position.

Consistency in saving is another relevant savings/investment mantra regardless of age.  The benefits of investing consistent amounts over time, otherwise known as dollar-cost averaging, has been well recognised for many years. This approach is market neutral and avoids the emotion of trying to pick market highs and bottoms.

What are the main risks to consider?

Two critical interrelated issues of concern to more mature savers relate to risk and time.

The younger you are the more time you have for growth assets such as equities (aka shares or stocks) to do their job and grow. The inevitable market downturns can be ridden out with time, as the time of retirement when you may need to cash up is still a long way down the track and asset values will have plenty of time to recover value and resume their growth path.

The closer you are to retirement age the more relevant becomes the issue of what is known as sequencing risk, i.e. the risk that at the very time you retire your growth assets i.e. equities, 

maybe experiencing depressed values due to either unusual market forces or simply cyclical market forces. Either way, the risk is that at exactly the time you wish to cash in you super and retirement savings a large part of your portfolio (i.e. equities) will be experiencing depressed values.

The best example of such a situation is the 2008 + GFC. Many, many people, either through circumstance or choice, liquidated their growth assets because they were at retirement age or because they were fearful of the future and believed share values would continue to fall.

To put it bluntly, they cashed out low, that is, at the wrong time, and destroyed significant wealth.

→ Related story: Why Investors Shouldn’t Be Concerned About Share Prices?

What level of risk is acceptable?

The antidote to sequencing risk is to have a significant portion of low risk, low volatile assets, traditionally government and semi-government bonds. These have low-interest rates (also referred to as the coupon rate) but are highly liquid. The theory here is that the investor/retiree, prospective retiree, only cashes in their bonds to access cash and they hold their equities until markets have recovered. Of course, Australian equities languished low for a long time after the onset of the GFC whereas international shares, especially US shares,  recovered significantly more quickly – just compare graphs of the ASX S&P200 versus graphs of the NYSE  S&P 500 – indeed another argument for the golden rule of diversifying your portfolio.

In considering portfolio construction many financial planners and advisers refer to the ‘100 rule’ or its variant, ‘110 rule’. Simply, this involves deducting your age from the number 100,  or 110, and applying that result to the proportion of your portfolio allocated to growth assets /equities. For example using the more conservative 100 rule a 50-year old saver would put (100-50) 50% of their portfolio in equities and the balance in bonds; using 110 rule the same person would allocate (110-50) 60% equities. The key issue here of course is that as each year passes the saver reduces the proportion of assets in equities and increases the proportion in bonds. The nearer they get to retirement age the greater the allocation to less volatile liquid assets meaning they can access cash and choose to hold equities until values recover.

A major complicating factor in the current market is the virtually zero official interest rates making bonds less attractive than has historically been the case. Many advisers are now directing clients to corporate bonds (loans to corporations- which rank above equities) and expertly managed credit funds which are still relatively liquid – redemptions make require 3 or 6-months notice—with yields in the realm of 4% to 8%.

My final piece of advice to anyone in their forties or above is to say: “Have a plan, seek advice and take an active interest in your prospective retirement now”… that in itself will be one of the best investments you are ever likely to make. 

Main image source: Unsplash

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