Is there ever a time when it is too late to start investing? You may have a tidy nest egg at your disposal, but the fear of losing funds that cannot be replenished by future income often holds people back from taking a gamble.
Many financial advisers, however, believe that certain, low-risk investments should not be dismissed as you make your way through life’s later stages.
It is important, though, to calculate your future expenses to check if you can cover them before investing a cent.
YourLifeChoices Retirement Affordability Index is a useful calculator of the living costs you are likely to have when you stop working. Devised with the help of The Australia Institute, the table can be used to calculate if you will have anything left over after you have covered your expenses.
If you are lucky to have enough spare change, then depending on how old you are there are likely to be some investments that are a safer bet than others.
The next step is to estimate how long you will live. In its April report, Older Australia at a Glance, the Australian Institute of Health and Welfare (AIHW) revealed that “half of older people had some degree of disability, but three-quarters reported their health as good, very good or excellent”.
Your health and your age will determine your ‘dependency’ and that is the key to timing any investment, according to My Longevity chief executive David Williams.
Mr Williams describes three life stages during retirement. On average, if you are 65 now, you can expect to have 10 disability-free years and live to 86 years of age. At the other end, an 85-year-old will likely have just two disability-free years and live until 92.
You can calculate your longevity using Mr Williams’ SHAPE analyser.
“This kind of personal planning also enables you to contribute much more effectively to developing and committing to a financial plan,” he explains.
Armed with an estimate of future living expenses and how long it will be before costly medical bills bite, you are now ready to speak to a professional about investment options.
In your 50s:
Balance is the most important element when investing later in life. With less time to make up for potential losses from failed high-risk plays, not putting all your eggs in one basket is crucial.
Russ Mould, investment director at AJ Bell, says that “for most investors in early retirement, a balanced portfolio of stocks, shares and bonds will meet their investing needs”.
He recommends a portfolio that spreads risk across different countries with about a third of it in international shares and a quarter invested in local stocks. Almost half the portfolio should comprise government and corporate bonds, with less than 15 per cent in emerging markets, Mr Mould says.
While the latter may seem bold, high-risk investments often deliver higher returns than slow and steady cash or bond investments.
In your 60s:
Avenue Investment portfolio manager Stephanie Douglas believes that seniors should set aside seven years’ worth of savings to pay for living expenses. Any funds above that could be invested in shares, she says. Her rationale is that seven years allows investors time to recover from a stock market rout.
She recommends exchange-traded funds (ETFs), which are a basket of sector-specific stocks that track with their market. They are a relatively cheap way of buying into shares.
Outside of ETFs, investing in dividend-yielding stocks will largely produce an ongoing income. Some advisers suggest that if you want to rely on this type of equity you should buy into stocks that grow dividends each year, rather than ones with a high but flat payout.
In your 70s and beyond:
This is the stage of your life when you will likely have more health costs than before, whether for medications or services such as osteopathy.
It is also a time when you may begin to sell investments to generate income for expenses. Spending less to make sure you have enough money to last means you should reduce the withdrawal rate from your interest-bearing savings.
The investments to hang onto the longest are those that are lower in risk and are safely returning higher dividends.
Before making any decision to buy investments, seek guidance from your accountant or a professional financial adviser.
Would you invest in the stock market? Which investments have served you well and which investments to stay clear of would you recommend?