Retiring Soon? You must read this .

Uncle Din is a retired 60-year-old man. He has an EPF balance of RM300,000 and a fixed deposit balance of RM700,000 .

Traditionally, EPF and FD are two popular vehicles for many local retirees to store their life savings since they are ‘capital-guaranteed’ and pay dividends and interest.

He’d like to know what he should invest in that’s low-risk and pays a greater rate of return than existing savings accounts.

He’s worried about using any investment scheme since he knows that if he loses, the loss is more likely to become permanent, because he might lack the strength or income he needs in order to compensate for his loss.

Why you need an age-based investment strategy

This is because our financial goals and risk profile change with age. For example, if you’re in your 20s, you might be able to weather higher risks. You could be single with little to lose, no family commitments and your only investment goal might be savings for marriage.

However, this time round, you have dependents and you’ll need to readjust your investment allocation to adhere a lower risk.

Life expectancy

According to Department of statistic Malaysia, Males and females who reach the age of 60 years old is expected to live further 18.4 years and 21.2 years respectively. Thus, males aged 60 years are expected to live until the age of 78.4 years old and females, 81.2 years old — an additional 3 years.

Therefore, incorporating an appropriate amount of risk into your portfolio can help you and your spouse prepare for these upcoming years without income.

The number of years you have between then and now is referred to as your investment time horizon and will likely affect the allocation strategy you adopt.

It’s also important to consider all your options and think of ways in which you’re willing to be more flexible and prepare for the certain circumcises

1. Should the market turn, could you continue to work for a couple more years?

2. Could you find part-time work to supplement your income?

3. If the downturn was strong and sustained, leading to a weak economic environment, would you be prepared if you were to lose your job?

A risk profile can broadly be defined as the amount of risk that an investor is willing to take with their money in exchange for investment returns and can be split into the following main categories:

1. A conservative investor is an individual who seeks stability when it comes to investing and is more concerned with protecting their capital than increasing its real value. As a result they are normally willing to accept lower returns in exchange for capital preservation associated with short term funds

2. Moderate investors are more concerned with relative yet stable growth in excess of those provided by conservative funds. They are willing to tolerate more fluctuations in exchange for more reasonable returns, but are still not comfortable enough with market risk to invest their funds aggressively.

3. Aggressive investors are more drawn to higher levels of risk in exchange for higher levels of capital growth. They are comfortable with volatility and fluctuations over the shorter to medium term if they can achieve their objective of substantially increasing their real capital value over the long term.

“Risk comes from not knowing what you’re doing.”

Adapt your strategy over time

The image above displays asset allocation by age for an investor whose goal is to save for retirement, with stock allocation decreasing over time in favor of assets that are more stable.

Investor.org explains that this is a popular allocation strategy because it cuts back the risk of loss, since the need to take the risk for growth declines later in life, as does the time available to achieve potential growth.

As you get closer to retirement, you should start to introduce more bonds into the mix. Bonds provide a buffer to dampen short-term market fluctuations, resulting in a more balanced investment approach

Retirees who adopted this plan would have seen the following results in their portfolios

Based on data collected from 1970 through 2020.

Source: Schwab Center for Financial Research with data provided by Morningstar, Inc. The return figures represent the best and worst total returns, as well as the compound average annual total returns, for the hypothetical asset allocation plans. The asset allocation plans are weighted averages of the performance of the indexes used to represent each asset class in the plans and are rebalanced annually.

The conservative allocation is composed of 15% large-cap stocks, 5% international stocks, 50% bonds and 30% cash investments. The moderately conservative allocation is 25% large-cap stocks, 5% small-cap stocks, 10% international stocks, 50% bonds and 10% cash investments. The moderate allocation is 35% large-cap stocks, 10% small-cap stocks, 15% international stocks, 35% bonds and 5% cash investments.

The key is determine the right mix for you, based on your age, needs, and time horizon.

#unirazak #opennote