After working hard your entire life, building up something from the bottom and having a successful career, there comes a time when you decide to go on a new and exciting journey—your retirement. But things might not always work out as planned. Your prospects for retirement are inextricably linked to financial planning and investment performance, which in today’s world look particularly challenging as you face a mountain of uncertainty.
Yet as is the case for any challenge, you will need a strategy to master it. Potentially you could consider postponing your retirement by a few months, if the impact on your wealth would be substantial. It may be that gradual retirement is also an option and potentially even more attractive from a tax point of view. In any case, in times of market uncertainty, it is helpful to think about investment performance through the lens of meeting your objectives. Our Liquidity. Longevity. Legacy. framework can help, as it explicitly links parts of your portfolio to future spending objectives.
Our five tips for those looking to retire in volatile times are:
1. Budgeting: Building a financial plan
Your priorities and your lifestyle might change once you move into retirement, in turn affecting your spending patterns and expenses. That’s why establishing an overview of your regular cash flow needs is necessary, allowing you to determine a structure for your future investment strategy of your assets. We recommend building a financial plan incorporating the following three aspects: a Liquidity strategy, to hold 3–5 years’ worth of expenses (and to help you weather uncertainty), a Longevity strategy to meet your longer-term objectives (accounting for higher health care and long-term care costs), and a Legacy strategy to pass on to future generations.
2. Liquidity: Enough cash to withstand a storm
The COVID-19 pandemic has underlined the importance of a Liquidity strategy for investors; it comprises stable or safer assets (such as cash and short-term bonds) to cover spending for long enough to get you through a personal or market crisis, as well as the capital you plan to invest over the next few years. A Liquidity strategy can help take the emotion out of investing by giving you a clearer understanding of your current needs and preventing you from selling when the market has suffered losses, because if you’ve set aside enough to cover short-term spending needs, there’s no need to sell out of the market.
3. Borrowing: Avoid cash flow shortfalls
Lifetime investment plans can be sabotaged if investors are forced to lock in losses during an equity market crash—either to meet spending needs or cover loans. Borrowing in the context of a financial plan can be a vital component, helping to ensure sufficient cash flow while reducing the drag of holding excessive cash or selling assets with high expected returns at bear market prices. Borrowing can be an even more attractive alternative when interest rates are low, as they are today. As always, it’s important to ensure a capital cushion to ensure lenders don’t need to ask for more collateral.
4. Longevity: Focus on the long term
Even if you plan to retire shortly, you still have a long life ahead as life expectancy is rising in most countries. That’s why it’s important to hold assets in your Longevity and Legacy strategies—earmarked for longerterm spending objectives, by which time the market will most likely have recovered—where the main objective is capital appreciation. Within this strategy it is important to stick to some basic principles: staying invested for the long term, diversifying both across asset classes and geographies, as well as regular rebalancing.
5. Legacy: Leave something behind
Your Legacy strategy aims to improve the lives of others beyond your lifetime. In this portfolio, day-to-day volatility, has less relevance as it is intended to grow over years or decades. As a result, you can choose strategies that can offer long-term superior after-tax performance and even take advantage of riskier and more volatile asset classes, such as private market strategies, as well as longer-term themes (such as sustainability, digital transformation, health technology, oncology, and genetic therapies) and still be confident, knowing that you've planned ahead and will leave something behind for the next generation.
Jackie Bauer, CFA, Economist, UBS Switzerland AG
Sagar Khandelwal, Strategist, UBS Switzerland AG
Michael Crook, Head Americas Investment Strategy, UBS Financial Services Inc. (UBS FS)
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