Most of us will want our lifestyle to continue through our retirement years; this requires careful planning and an investment strategy to help you achieve this. A retirement plan will help you to determine what you need to do to enjoy the kind of retirement you desire. You may have joined the KiwiSaver scheme as part of your retirement funding plan; if so see the KiwiSaver scheme section, as there are some pitfalls and opportunities you should be aware of.
Whatever your thoughts on retirement, it is likely that at some stage in your life you will wish to consider planning and investing to achieve your financial goals. The investment strategy that best suits your needs will be individual to you, but is likely to be determined, amongst other things, by your investment risk profile, your stage of life, your time to retirement, your personal preferences around investing, and your previous investing experience. When Iconic Financial constructs a financial plan and an investment portfolio, these factors and many others will be taken into consideration.
You can download a PDF format example of a financial plan.
Most people would like to have a retirement income greater than what the government may offer (if anything) and what the KiwiSaver scheme will provide; you may also like to retire earlier than the KiwiSaver scheme allows. While investors currently have access to their KiwiSaver savings at the age of 65, given overseas trends, it is likely the age of eligibility will change; possibly as late as age 70. So if you wish to be in control of when you retire and how much money you have to enjoy your retirement, you are likely to need a personalised financial plan and an investment portfolio outside of the KiwiSaver scheme.
Find out how much money you'll need to save for your retirement.
Investment Risk Profile
It is important that any investment portfolio is tailored for your specific needs, and this is likely to change over time, maybe as your portfolio grows in size, or as you get closer to retirement. All investors have what is referred to as a Risk Profile, or an Investment Risk Profile. Your risk profile determines how comfortable you are with such things as market volatility; how much your portfolio returns rise and fall over a given period of time. For example an investor with a relatively high tolerance for risk (volatility) may have a risk profile such as a Growth Investor; they would expect higher returns on their money over the medium term than a Conservative Investor, but in addition to bigger positive returns when the market is rising, they would get bigger losses when the market falls.
The risks that investors can be exposed to are Market Risk (as described above), but also Default Risk, the risk that your money will not be repaid, and Inflation Risk, the risk that the return on your money over time is lower than the rate of inflation and therefore your money loses spending power, and Opportunity Risk, where your investment portfolio is limited and misses out on the growth in some sectors, for example many people who do their own investing have little in the way of global investments.
There is no right or wrong portfolio, or risk profile … just the one that is right for you. Complete an Investment Risk Profile Questionnaire for yourself to find out what type of investor you are.
The investor risk profiles we use at Iconic Financial are:
You are likely to have a shorter timeframe and require more stable returns. You likely want income with little risk your capital will go down at all. You will be prepared to accept lower returns to achieve this. To achieve this low volatility and stable positive returns, your portfolio will have a heavy weighting of cash and fixed interest investments. This may include government stock, local government stock and high quality, investment grade bonds.
You will be more comfortable with investments that are stable and have a lower level of risk. Your timeframe may be shorter and you may require a regular income from your investments. You will however want to protect your investment against inflation, and you are prepared to accept some risk to achieve this. Your portfolio will be heavily weighted towards income investments such described above, but the portfolio may include some investments in shares also. This portfolio have a lower volatility, however there is still a possibility of some shorter-term capital losses.
You want to protect your capital but still achieve some growth. You will be prepared to accept a moderate level of risk (market volatility) and the likelihood that you will have some short-term negative returns. Your portfolio will have a fairly even weighting of income and grow investment assets. This portfolio suits medium to longer timeframes.
You are interested in seeking good potential capital growth, and are prepared to accept a higher level of risk to achieve this. You are not too concerned about volatility (market ups and downs) because you have a medium to long-term investment timeframe. Your portfolio has a high weighting in shares, both in Australasia and globally. Your returns are largely achieved from capital growth. To look for these higher returns you are prepared to accept the fact that there is a high probability of shorter-term capital losses.
High Growth Investor
You are looking for high returns on your investments and are willing to have mainly growth investments in your portfolio. This will mean your portfolio is invested mainly in Australasian and Global Shares. You have a medium to longer investment timeframe and are not too worried about volatility. Your returns will come mainly from capital growth. The potential returns from this profile are higher than the previous portfolios and there is also a higher probability of shorter-term capital losses; some longer-term losses are also likely.
You are likely to be an experienced investor with previous exposure to a wide variety of investments including local and global shares, and alternative investments such as futures, options and derivatives. You know that these investments have high potential returns, but also the risks are equally high and may involve longer term losses. Almost all of your portfolio will be invested in shares and alternative investments. To reduce the risk of loss we typically use investment funds with capital guarantees for alternative investments, but that does not alter the fact that this portfolio, whilst offering potentially high returns, has a high probability and short and longer-term capital losses
Special Risk Profile
We sometimes find clients fall into a special category for one reason or another and they choose to have a custom built portfolio for their specific needs. One example is where clients bring their overseas superannuation to New Zealand e.g. from the UK. These clients will often request that their portfolio is held in pounds sterling based investments. We can achieve this while still getting a diversified portfolio of global shares. The risk profile of these portfolios is high; in particular there is a currency exposure between the invested portfolio and the New Zealand dollar. However an investor choosing this type of portfolio usually does so because they do not wish to undertake a change in currency on their portfolio.
Kiwi Attitudes Towards Investment Advice
Research conducted by Dr Matthews from Massey University in 2011 found that nearly half of all New Zealanders are prepared to accept an average level of volatility in their investments in exchange for an average return, but about one third are only prepared to accept a low or very low level of volatility. It appears that there is an acknowledgement that an average return requires an acceptance of some risk. However, this is unsurprising in light of recent publicity over finance company failures and the high risk now associated with the high returns on offer.
Acceptance of Risk
If you are currently retired you are likely to have a more conservative risk profile and a portfolio will be built to provide you with the income and stability you required. Often our retired clients will divide their portfolio, choosing a conservative or income producing portfolio for their shorter-term needs and choosing a more growth profile for the portion of their investments that have a longer timeframe. It is all individual; the only right answer is “what is right for you”.
If you are currently working you are likely to have a longer timeframe before you need to use your portfolio; you may therefore be prepared to accept a greater level of volatility to achieve greater returns over the longer term. You may also be in KiwiSaver and you may wish to balance or adjust the risk profile between the two. Remember if you have KiwiSaver it is equally important that you have chosen a portfolio appropriate to your needs, or you may find it does not perform to your expectations.
Have you taken the default option for the KiwiSaver scheme? If you are in the KiwiSaver scheme and you are some time away from retirement, it is likely that the fund will provide a sizable portion of your retirement income. It should therefore be treated as a significant part of your portfolio; you should be with the right fund manager and in a portfolio in keeping with your risk profile. At Iconic Financial we often find people have taken a default option and will find their portfolio does not meet their expectations over the long-term, so talk to us and find out what's right for you.
No Obligation Consultation at Our Expense
Contact us now, you have nothing to lose. We find we can usually add value to most people’s financial journey that’s why we offer you a no obligation meeting at our expense. It wont cost you anything to find out what benefits you will gain. Contact us today and discover how to get yourself financially sorted for your retirement.