The Senior Portfolio
Published May 2014
Written by Shawn Yap CFP
Longevity and inflation are major financial challenges for a senior. As families shrink, we must be more dependent on ourselves instead of relying on our children. They belong to the sandwiched generation—“sandwiched” between the baby boomers and the new generations.
According to CPF and Singapore Department of Statistics, we have a 50% chance of living beyond 85, one out of seven chance of living beyond 95 and 5% chance of living beyond 100. Currently, my grandmother is 87 years old and my grandmother-in-law passed on at age 93. The longer we live, the more money we need. While lifespan is unpredictable and cannot be influenced, inflation is easier to mitigate through proper investment management.
Retirement or passive income is primarily generated through equities, bonds and real estate. If income is insufficient, the assets have to be liquidated for income. So, how do you invest? If you invest too conservatively, money will run out. If you invest too aggressively, you add on risk into the portfolio and may end up losing some of your capital. A senior who starts his golden years at 60 years old would have an investment time frame of 20 to 30 years.
It is a misconception that the majority of a senior’s portfolio should be conservative. In fact, most of the equities should have been acquired over the accumulation period at value prices (either bargain or below current asset prices) providing a high margin of capital safety even in a downturn yet giving good dividend yields. Even in a down cycle, the capital value should not go below the purchase price from 10 to 20 years ago. Even if it does, dividends should continue to provide income though it may vary.
At the start of the retirement, only the funds that are required for consumption in the next three to five years need to be in liquid form keeping a time horizon approach on planning.
Now, let’s look at the different types of assets:
Equities include common shares, preference shares and private placements. Common shares can be invested either for dividend income or capital growth. Preference shares pay a fixed dividend which may be cumulative or non-cumulative. If the issuer defaults, preference shareholders rank above common shareholders but still below bond holders. Private placements are not listed on any stock exchanges. They have the highest risk, lowest (or no) liquidity and typically have high entry levels.
Another unique class is the Real Estate Investment Trust (REIT). REITs are like unit trusts listed on the stock exchanges that invest in real estate (residential, industrial, office, retail, healthcare, hospitality, etc.). They are designed to pay out at least 90% of yearly income as dividends, a good choice for seniors. However, the fluctuations can be as high as shares.
The bond universe is rather diverse and ranges from conservative to aggressive. On the most conservative side are the money market instruments with maturity of less than a year that can be a good alternative to bank deposits.
On the other side of the spectrum are the higher risk bonds like emerging market and high-yield bonds that have equity-like volatility. In between them are a whole range of bonds including the ones that can be converted into shares. However, individual convertible bonds are available only to institutional and accredited investors. In fact, bonds are easier to diversify and manage through the use of unit trusts rather than buying them individually and tracking all the maturity date.
3. Real Estate
There are different phases to invest in a piece of real estate. You can enter in the land acquisition, development or retail stage. Generally, the earlier the stage, the higher the risk, so is the return. For a senior, the last stage is suitable for generating a monthly income.
If you have two or more properties, you can live in one and rent out the rest. It is good to diversify into different sectors like commercial, residential and retail. Instead of taking a passive approach, you can optimise your real estate portfolio by monitoring the net yields.
If you have only one property, you can always find ways to monetise your home. One way is to simply rent out one or more rooms. Think out of the box. Some house owners (landlords) increase their income with a minor renovation, a partition perhaps, to create extra rooms for rental. Sometimes, renting a room to two sharing tenants instead of one can also increase your yield. The second way is to move in with your children and rent out the whole house. In this way, you still retain some (not all) privacy while enjoying the company of your children and grandchildren. You can either help to care for your grandchildren rent-free or even pay your children a (small) rent.
Life annuities can also be used to overcome longevity. They pay a monthly income for as long as you live. The CPF Life is an example, although it may not be inflation proof.
Another out of the box idea is to migrate to another country with a lower cost of living. Housing costs and retirement expenses may be lower. Of course, other factors must be considered as well.
A good medical plan is definitely on top of the list as any major health crisis could easily wipe out a huge chunk of assets. Another item to consider is coverage for major illnesses. In case of a stroke or any diseases that cause a disability, extra expenses may be required to provide sufficient access to daily essentials such as a renovation may be needed to install safety equipment like handles and bars, lower the bed, modify the floor levels to be wheel chair friendly. Mobility aids such as a motorised wheelchair can cost thousands of dollars. If the health condition is severe and permanent, a long term care plan could provide some financial support for nursing care which can range from a few thousand up to 5000.
Lasting Power of Attorney (LPA) is a powerful tool especially for singles and surviving spouses. You can appoint one or more persons to act and make decisions on your behalf when you are unable to do so. It may be due to any mental incapacitation such as dementia or stroke. This can avoid mismanagement of your investments and protect your assets from unnecessary losses. The LPA is so versatile that it can customise any personal affairs from lifestyle decisions such as types of healthcare and living arrangements to financial affairs like what and how to invest. You should appoint those who are both reliable and competent to care for you.
The Senior Portfolio needs to consider the following based on time horizon investing principles:
- Wealth preservation – so that the accumulated capital has enough longevity for covering the retirement horizon. It needs to stay ahead of inflation and have a passive income stream created.
- Income generation for Lifestyle needs – Asset allocation inside the portfolio is determined by the individual needs of how much income needs to be generated from the accumulated capital.
- Reserve for Medical Emergencies – Supplementing a comprehensive hospital and surgical plans should be additional reserves that may look at Long-Term Care needs in the event of a medical condition.
- Philanthrophy needs – Significance is often derived by contributing to others in the society whether it is immediate family, grandchildren, causes or charitable organisation that one supports. It is different strokes for different folks!
Life is a journey and retirement is an achievement. Do plan ahead so that you enjoy it to the fullest.
This article first appeared in the May 2014 issue of Financial Planning magazine published by the Financial Planning Association of Singapore (FPAS).