Years ago, anyone who had a work pension had a had a defined benefit pension. They didn’t have to worry about investment risk. Then came the defined contribution pension. You either invested in the With Profits fund or a Managed fund. At retirement, you purchased an annuity and that was the end of any concern over investment risk. Then came the ARF where your investment journey carried on into the decades past retirement.
The investment journey has also expanded past just having two funds to pick from and all life companies have dozens of investment funds to pick from. We have also seen people become wealthier in Ireland and people generate wealth over their working lifetime. This money is invested to maintain the real value and some more.
But is there a point in your life when you no longer want to worry about investment volatility and what is going on in the markets?
When I am doing lifelong cashflow analysis for clients, we have three distinct stages of retirement:
You have just retired and are still active, enjoying not being constrained of having a certain amount of annual leave days. It tends to be an expensive time for people as they travel a lot. Work may be done on the house, new cars purchased. There is also a lot of living ahead of you, and for most, you need to capital markets to grow you money so you can enjoy the decades ahead.
This is the point in your life when warmth and comfort is more important to you than travelling around the place and enjoying yourself. Your expenditure becomes more predictable as it is mainly utility bills and housekeeping. You may have stopped driving too so you will not have any major expenses (except home care, which we will get to later).
There is no fixed age when this is going to occur, it is all dependent on your health. If you and your spouse remain healthy, the likelihood is that you will continue to enjoy retirement and that means spending money. It is therefore harder to ascertain how much money you need and you may continue to keep assets invested.
Care home costs are very expensive and can cost up to €10,000 a month depending on the home you choose. They say people don’t last longer than five years in a home, so that is up to €600,000 in care home fees. If you had to plan for that end of life cost, you wouldn’t be able to afford the fun part of retirement.
Luckily in Ireland, we have the Fair Deal scheme. If you can afford your care home fees, you pay for them until you can’t. At that stage, you can apply for the Fair Deal and the State will cover the difference between what they calculate you can afford and the cost of the home.
This safety net means you do not have a large lump sum for the last few years of your life. Afterall, not everyone needs to go to a care home or even home help, so having to put away such a large amount of money for something that may never happen is not a good use of money, especially if it prevents you from enjoying life when you are in active retirement.
Inflation is the silent risk. It is always there, eating at the real value of your money. It does come into the public conscience at times like now when it gets very high. Add in the low interest rates being offered by the banks and people are suddenly aware that the real value of their money is decreasing.
But there is risk in other assets too where not only the real value but the actual value of your money can fall in the short term. The thing is, time isn’t your friend as you get older as you no longer have the time for markets to recover so you can make your money back.
If you are in the passive retirement stage of life when life is a lot more predictable and you can be more confident whether that you have enough money for the rest of your life, do you need to be worrying about market volatility?
This is not and all or nothing scenario, you can of course keep some money in investments, especially if you have been invested for decades already but do you really need to be exposed to that level of risk when you don’t need the money anymore?
Steven Barrett
10 April 2023