Having Confidence in Retirement

There is universal fear and anxiety over not having enough money for retirement. The thought of not having ‘enough’ can negatively impact people’s lifestyles and drive these fears through the roof. 

One of the main reasons people don’t have confidence in retirement is because they focus on financial accumulation, without a connection to their future selves. It doesn’t matter how much wealth you accumulate, if you don’t know how much you actually need you’re always going to think that you need more.

To determine how much you require, you need to have a clear understanding of what an ideal life in the future looks like. It doesn’t have to be precise or exact, but having an idea of your future life clears the fog off your retirement. A good advisor asks detailed visualisation questions to help with this. Questions like: who’s around you? How old will you be? Have you got kids? Are you at the same job? Etc.

This is all part of the Dimensions of Wealth which is a logical, straightforward framework to help you demystify your wealth, and understand how you can use it to achieve your financial goals. This framework describes the delineation of your wealth based on its intended use, and helps you separate the essential, non-essential and aspirational elements of your finances. This framework enables us to understand and allocate your wealth appropriately, in ways that are designed to meet your financial goals.

We, at Stephan Independent Advisory (SIA), take care to look after our clients so that they can have confidence in their retirement. Here’s what SIA does to ensure that our clients have more confidence that their capital will last as long as they need it to…

We build market aware portfolios

Market Aware portfolios refer to portfolios composed of asset classes that try to capture the market return that is available. An example of being market aware is to invest into a representation of the index, like the ASX300. That means when we’re investing in Australian shares, we’re investing in the ASX300 which we consider ‘the market’. 

Being market aware means that you are largely diversified and when downturns do occur, which they inevitably do, you’ve got the confidence that the downturn is related to the entire market rather than your specific investment. By investing in the market, your chance of complete capital loss would only be possible if the whole share market lost its value (which is highly improbable).

We are guided by liabilities-driven investing

At SIA we understand that your investment strategy requires a holistic approach, one that reflects the uniqueness of your family’s specific requirements. Liabilities-driven investing is a framework that assists in devising an asset allocation for your capital that’s based on your family’s unique needs and the timeframes for meeting each specific financial goal.

We have created proprietary software based upon our unique portfolio construction methods that enables us to create a bespoke plan for your investment goals. This software, coupled with our acumen and experience, allows us to devise a tailored portfolio that takes the following considerations into account.

Needs assessment 

We work with you to define your priorities and financial objectives, mapping them out based on their individual timeframes. We then organise these into categories of essential, important, and aspirational objectives. Doing this this allows us to determine the priority, appropriate risk level, and liquidity requirements for each goal

Asset class selection

The timeframe of each goal determines the asset class we select for your investments. We match each objective with return factors, chosen for their capacity to either protect and/or fund each specific objective whilst ensuring they provide the liquidity necessary to access capital where an objective time frame is short term in nature.

Capital Demarcation

We calculate the amount of capital you need to fund each specific priority, and ensure you have the available resources to meet these goals. We then calculate the funds that need to be invested today in order to reach this future goal

Portfolio Feasibility Assessment

We then review your investment strategy to ensure its suitability against your appetite for risk within your long-term plan. Back-testing your portfolio against historic situations, and even crises, allows us to test it against theoretical crises and stressful market conditions. Our aim is to confirm that we have created a robust portfolio that meets your objectives, while still navigating volatility.

This approach means that you have the right amount of capital in the right assets, enabling you to achieve your objectives without any compromise. Liabilities-driven investing creates a roadmap for your future. We ensure you take the right roads to get there on time, and safely.

We run projections around retirement 

Throughout our time working with you, we will run projections around your retirement to work out just how much income you will need (and whether your capital will run the distance). Projections aren’t a definite prediction of the future so, with regular meetings, we can reassess your plan and situation and make changes when needed.  

Projections are based on assumptions, but at SIA we base our projections on conservative assumptions. For example if interest rates are expected to be 5%, we may project at 7% for the long term average. That way if there is an issue in the future, our clients are supported by the projections that we run.

Projections assist a client in making good decisions in the now based on outcomes in the future. If the projection suggests that we might not be able to meet retirement income objectives, then we can make changes to current spending to add longevity out of the retirement capital.

By creating a projection and reviewing that projection on a frequent basis allows a client to modify behaviour in the now. Again it’s about having an idea of, and engaging with, what the future might look like, so that you can change the present.

We manage and mitigate risk

Much like projections, Monte Carlo simulations help give clients confidence about what the future might look like. We run Monte Carlo simulations for all of our clients in order to understand, mitigate and manage potential risks.

Monte Carlo simulations are all about managing sequencing risk, which is the risk that the order and timing of your investment returns are unfavourable, resulting in less money for your retirement. 

Just because you may receive a 20% return on average, it may not mean it’s steady from year to year. For example you could accumulate wealth at 25% return each year for ten years, and then have diminished returns for the next ten. 

Monte Carlo simulations give a range of outcomes that are possible based on the sequencing and timing of returns. Using this model, we will monitor and plan for all the probabilities and adjust strategies as needed. 

We track expenditure against your plan

Once we’ve created projections and run the simulations, and taken all your goals and objectives into account, we have a fairly good understanding of what your budget is and how much should be spent year by year. 

We track what is actually happening each year against what we projected in the plans from an expenditure point of view. This isn’t to tell our clients what to do, but to hold them accountable to their own standards. By monitoring your expenditure, we can provide advice if it is above, or below, where it should be in relation to the plan we have created with you. 

The benefit of this is that if the markets are in a downturn, and changes to your plan need to be made, we will have the ability to express and provide advice as to which assets you should use to fund your lifestyle.

We plan a buffer for retirement

We plan for building a buffer above your retirement needs, so that if returns are lower than expected it does not affect your retirement. By building in a buffer, we are safeguarding your future and providing you with confidence with your retirement.  

We often avoid putting the business value, or the sale of the business, in the financial plan at all. As a wealth manager to family business, we see our role as diversifying our clients outside of their business. If we can meet their retirement needs without having to factor in the business value then that’s a real positive. 

To allow a bigger buffer for retirement, we often don’t factor in other assets the client may have like holiday homes, additional properties or art collections etc. By building in this buffer the client can be prepared for unexpected costs in the future.

We have a clear investment philosophy

We run an investment committee quarterly where we review our asset allocations, our investment philosophy, our product selections, costs, performance and risks. We also have dynamic flags that alert us to any economic and legislative market based issues. 

Dr Steve Garth, an independent investment committee member, sits with us and contributes to the formulation and ongoing review of asset allocation and investment strategies and assists with the assessment of investment managers.

We pride ourselves on good governance so that we can provide advice personally tailored to each of our clients.

Please note:

The information in this article does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

We would be more than happy to have a discussion with you to plan your future retirement.

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