Do You Have Adequate Retirement Reserves?
Expats often reach out and ask me questions about their personal situations and whether or not they have adequate retirement reserves. Apart from the planning aspects this gives rise to another question, if you are currently reliant on income from investment reserves are your reserves sufficient? Should you be moving them to areas where they will be better protected?
There is no simple or standard answer. We are all different; no two financial retirement strategies can be identical. Most schemes will have consistent themes running through them and there are sometimes common investment structures which are used by similar people as solutions. Even then they can deliver different results depending on when you initiated them.
There are different types of reserves which we have access to and which can affect our retirement in different ways. Firstly, quite often we have a fixed pension, which sometimes increases annually. This fixed pension can form the basis of your core retirement budget in that you know what income it will generate and at what frequency.
There are also assets which offer part protection from inflation in that their income will likely increase as time moves on. The most common of these is rental income from property. Rental income usually trends with inflation so that the income will increase as well as the capital value of the property. However, you must remember that property assets are illiquid, sometimes taking months or even years to sell, and so careful planning is required.
Lastly there is the investment pot which generally consists of savings, cash from the disposal of assets or inheritances, which can vary in value as time moves on and markets change. Remember that the only constant in life is change and that the amount you may withdraw from these investments is usually variable.
The worst factor and possibly “the nemesis of financial planning” is inflation. Our cost of living increases each year with the rate of inflation. However, this again varies for each of us and statistical numbers are only really a guide. Our personal cost of living increases in line with our individual spending habits. Contrary to some thinking, inflation does not retire when you do.
So, given that our first two types of income are relatively stable there is only the investment pot which you can use to equalise the shortfall required between the types of income you generate and the income you actually need to generate.
One factor which affects most expats is the exchange rate between the currency of their income and the currency of their expenditure where they live. If you retire in Thailand, for example, and you have pension income in a base home currency and perhaps property investment income in a third currency there will be possible significant variances between those currencies and the Thai Baht. This is beyond the control of anyone and cannot really be influenced.
There are a few who say they will never retire and that they will work until they drop. Whilst this is perhaps partly true, in that they may slow down over a period of time in semi-retirement, the actuality is that they are surely running away from reality and hiding their heads in the sand because they have made no provisions. Failing to plan, in truth, is planning to fail.
We tend to assume that current realities will remain unchanged, yet the only constant is change. Are you comfortable today with what you have, based on your current cost of living, exchange rates, inflation and investments? Do you think your pension will last in retirement? Experience shows that these factors are highly variable. Have you seriously thought about these realities, or are you hiding your head in the sand?
Given that you may have some income which will assist you in retirement the third factor is critical in that you will need to use it wisely and ensure that it fills the required gap between any shortfall you have in income and your cost of living. For some there will only be an investment pot to generate all their income requirements; they will not have any pension provisions at all. This is thus the key to successful retirement income and management.
In most cases you can estimate the amount of income your investments need to generate a year or so in advance. It is thus wise to have that amount in very liquid assets which are not likely to diversify in value too much. Even if bank rates are low it may be better to accept a lower rate of return on that part of your portfolio which you need to use for expenses in the near term.
In choosing a suitable investment vehicle for their long term requirements many expats insist that they must have access to 100% of their portfolio at any time. Why? If you only need access to say 20% of the investment over the first several years why would you wish to give up higher returns for instant access? This is even more so when the content of the portfolio can be changed and moved between many different asset classes and types. Even more so when say 75% or more of the investment portfolio can be accessed at any time regardless. If you initiate such a portfolio and choose an independent consultant as the manager the firm you appoint can be changed immediately if you become unhappy with their management.
In managing your investment pot it will also be very wise to ensure that you have asset allocations aligned with the access required and the longer term holdings in areas where volatility is not as key as the holdings will likely be there for a longer period.
For example we have already discussed an amount in bank fixed interest for the short term. There will likely be a medium term segment which would be suited to bond fixed interest. The longer term could be invested in equities or other longer term holdings for enhanced returns where volatility will be evened out over the period.
Every case is different and the best way you can start to plan and feel good about the longer term is to engage a professional consultant who can assist in all aspects of these arrangements. He will not only be able to assist in the management of the portfolio but also assist you in making comprehensive plans for the long term future.
Questions to the author can be directed to PFS International Consultants at: [email protected]