If you are relying on income from your investments to support your lifestyle, then you’re probably very aware of the risks inherent in investment markets.
A young person who is regularly adding to their investments can afford to ‘ride out’ market volatility. Even the recent Global Financial Crisis, in which some investors lost 50% or more of their capital, will seem like a blip in the context of a 40-year investment plan.
But for those drawing income from their investments, the picture is very different. Recovering from a 50% loss requires a subsequent return of 100% on the reduced capital, and that required return becomes greater if you are drawing income! In fact for many retirees, a loss of this magnitude can be almost impossible to recover from.
For example, suppose you are drawing income of $35,000 a year from your capital of $500,000, and normally earning an investment return of around 7% per year. Your capital would last indefinitely (as you are only drawing your earnings). But suddenly the GFC hits, and your balance reduces from $500,000 to $250,000. If you need to keep drawing $35,000 per year, instead of preserving your capital you would now run out of money in only 11 years*.
On the other hand, investing only in assets with little or no chance of loss (such as cash) can be risky too. In August 2008 (the year of the GFC), typical rates on cash management accounts were 6.25% pa – whereas at time of writing (March 2013) the typical rate had gone down to 1.9%**. Earning 6.25% pa, our investor’s capital would last around 36 years. However at 1.9% that goes down to around 16 years – a 20 year reduction, and considerably less time than most people will spend in retirement!
A major part of our business is helping people to manage their retirement assets prudently, so they can support the income they need to draw long-term – while still reducing the risk of major losses. If you’d like to find out whether you’re on track, send us an email by clicking on the “Enquire” button below. We will give you a call to confirm a few key details about your current situation, and assess whether a meeting might of value to you. Your first meeting with a Profile planner is at no cost and obligation-free. We will give you a detailed quote based on your personal situation and needs before proceeding further, so you can assess the costs and benefits of our services before you engage us.
* This example is for illustration purposes only and is not a projection or guarantee. It takes no account of any fees or taxes.
** RBA statistical tables: F4 Retail deposit and investment rates, Cash management account rates for balances over $50,000, September 2011 & March 2013