Financial Planners often talk about your “investment horizon” as a way of describing how long you plan to hold your portfolio before you either cash it in or change the investment objective (from building up funds to spending them, for example).
In the perfect world of investment theory, your investment horizon doesn’t change; you select a retirement age and stick to it.
In theory, as you move towards retirement, your goal should become more apparent. After all, if you have planned to retire at 65, then it should be pretty clear what you need to do when you are 63 or 64. Shouldn’t it?
In a world of fixed retirement ages and final salary pensions, this used to be the case. But we don’t live in that world any more.
Nowadays, in a world where income in retirement is substantially dependant upon investments and where many people have control over when and how they retire, we find that the fixed retirement plans we made in our 20s and 30s become increasingly unclear in the run-up to retirement.
Many people don’t want to stop work on a specific date, and the removal of fixed retirement ages has made it difficult for many to do so. And if our investments fall in value in the run-up to retirement, we can choose to carry on working until they recover their value.
Some people find that they just like work (my dad still hasn’t completely retired – he’s 90!).
So, as we get closer to retirement, our investment horizon becomes increasingly unclear. Our investment portfolios need to reflect this lack of certainty.
A gradual shift towards an investment or pension portfolio which can finance your spending in retirement is much more appropriate than the old-fashioned handbrake turn from investments to annuities which used to be the standard approach to retirement income.
According to the old textbooks, once you got your client to retirement, you worked out the amount of income the client needed, decided on how to give that income to them, set up the portfolio and then walked away.
But retirement isn’t just one phase of life. Longer lifespans have meant that we have to divide up retirement into phases:
“Go, Go” Years. When we are happily spending our retirement savings and are enjoying good health.
“Slow Go” Years. We’re still happily spending, but don’t have the energy we used to have. Our discretionary spending becomes less regular, but the amounts can be more significant. It’s not unusual to take the whole family on holiday to celebrate a big birthday, for example.
“No Go” Years. Usually, the health of one member of a couple declines, and discretionary expenditure falls sharply.
Also, longer life creates new challenges.
The Bank of Mum and Dad might need to reopen its doors when children have health scares, get divorced or want to set up a new business.
So, as we move towards retirement, we have to reset our investment horizon and then reset it again as we move from one phase of retirement to another.
Your retirement income plan should be sufficiently flexible to cope with the gradual move from one phase of retirement to the next, and your investment adviser should be able to work with uncertain and changing investment horizons.
Can you see your investment horizon clearly in retirement? Share on X