Retirement is no time to get overly conservative.
Longevity ain't what it used to be. It's, well, longer than it was.
According to new research by the Department of Work and Pensions, today's 20 year-olds are twice as likely to make 100 than their parents and three times more likely than their grandparents. Thus lots of today's 60 year-olds are going to live into their nineties or better.
Inevitably, this must change the way older people invest. If not, argues MGM Advantage, the retirement income specialist, "pensioner poverty" will increase.
The standard advice for retirees and people approaching retirement has long been to swap "racy" equities for "risk-averse" investments such as government bonds and annuities. The argument sounds reasonable enough. The idea is that older folk can't afford to risk their nest egg because they aren't earning any more and it's therefore better to be safe than sorry. Problem is, the above are also low-return assets.
Take annuities. MGM Advantage's research shows that, because annuity-holders are living longer, conventional fixed-term annuity rates fell by nearly 8% on average in the 18 months between June 2009 and December 2010, and the trend shows no sign of abating. And take sovereign bonds. Actually, better not. Right now, they are highly volatile and long-term yields are all over the place.
Another problem with the standard approach is that conventional investments probably won't deliver the necessary for 100 year-olds. MGM Advantage's sums show that the current level of annual household expenditure where the main occupant is aged 75 or over is more than £16,000. That means the household would have to find about £400,000 before inflation between the occupant's 75th and 100th birthday.
The retirees that don't retire
The conventional wisdom also belies the facts. It still assumes retirees are, well, retired whereas many are starting all over again and loving it. National statistics show that a third of workers aged 65 or over have no idea when they will stop working, and probably don't care. In short, they're still earning and that means they are in a good position to take a few risks with their extra income.
Also, most 65 year-olds can expect to live another 20 years or so provided they look after themselves and thus gain the benefits of compounding. On that note I firmly believe the best investment of all is vigorous daily exercise because one's health underpins all that post-retirement work.
Generally though, as thought-provoking research by professors David Blake and Douglas Wright at Cass Business Schools Pension Institute points out, most of today's assumptions about the correct investment strategy for older people date from the mid-60s. That's when we first got what might be called pension and retirement mania. It was a different era when many workers would spend their entire working lives under one employer and were grateful for the privilege.
Also, age hasn't got much to do with it. "You can't just use a specific age as a mechanical trigger to determine when to shift out of pension assets into an annuity," says professor Blake. It all comes down to "human capital" -- an individual's capacity to earn at whatever age.
Another little-understood factor, it seems to me, is older people's refusal to go quietly into the night. They're leading much more active and adventurous lives, travelling widely, volunteering for worthy projects, taking short-term contract work that often pays well.
A strategy for the ages
So why not an investment strategy to match? Jane Fuller, co-director of the Centre for the Study of Financial Innovation, recommends buying shares in income-producing companies and in businesses operating in the very areas older people patronise. That's industries producing generic drugs, hearing aids and mobility devices, organising concerts and cruises.
To these, I would add well-run companies in health foods and natural medicines, and rest homes. All of the above are growth industries because their market is growing. Corporate bonds, often shunned by older investors, should also be on the shopping list. As fellow Fool Cliff D'Arcy pointed out recently, bonds have done better than equities in some countries over the very long term.
The professors suggest maintaining a ratio of 25-50% in equities at retirement, far higher than the 5-10% that many financial advisers suggest. This makes a lot of sense. Assuming a woman leaves permanent employment at 60, she may expect to live to her mid-eighties or longer, which gives plenty of time for a growth fund to deliver significant compound returns.
For the same reason, MGM Advantage suggests investment-backed growth annuities rather than fixed-term ones. These provide a minimum income plus the opportunity to grow the pot.
We shouldn't get too carried away however. As a cautionary measure, the Cass research suggests a progressive trading out of equities by swapping a small amount each year for annuities. Eventually though, it should come down to the quality of the asset rather than to the age of the investor.
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