Do You Have Adequate Retirement Reserves?

Following the last Net Worth article “Boom or Bubble?” a number of readers asked questions about their personal situations and whether they had adequate retirement reserves. Much of this stemmed from the concern that, if there is a bubble which is going to burst, they may be personally affected quite severely.

This gives rise to the question, if you are living on investment reserves, are they sufficient and should you be moving them to areas where they will be better protected?

There is no standard answer. We are all different and no two financial retirement plans will be identical. They may have common themes and investment structures but these can generate different results depending on when you initiated them.

There are different types of  reserves which we have access to and they will affect our retirement in different ways. First, quite often we have a fixed pension income which may or may not increase over time. This can form the basis of your retirement budget in that you know exactly what income will be generated.

Second, there are assets which offer part protection from inflation in that their income will likely increase as time moves on. The most common of these is property rental income and growth in property values. However, these assets are very illiquid, so careful planning is required.

Third, there is the investment pot which can vary in value as time moves on and markets change. The amount you may withdraw from these investments is usually variable.

So, given that our first two types of income are relatively stable, there is only the investment pot which we can use to make up for any shortfall in income.

The worst factor and possibly “the enemy” is inflation. Our cost of living will increase each year as time moves on, in line with the rate of inflation and our own individual spending habits. Remember, inflation does not retire when you do.

Another factor is the exchange rate between the currencies of your income and your expenditure where you live. You could be subject to significant variances between those currencies. This is beyond the control of anyone and cannot really be influenced.

We tend to assume that current realities will remain unchanged, yet the only constant is change.

Are you comfortable today with what you have, based on cost of living, exchange rates, inflation and investments? Do you think your pension will last in retirement?

Experience shows that these factors are highly variable. Have you given these realities serious thought or are you hiding your head in the sand?

Given that you may already have some income which will assist you in retirement, the third type of income is critical in that you will need to use it wisely and ensure that it generates sufficient returns to cover any cost of living shortfalls. For others there will only be the investment pot to generate all income requirements; they will not have any pension provisions at all. This is thus the key to successful retirement income management.

In most cases you can estimate the amount of income your investments need to generate a year or so in advance. It is thus wise to have that amount in very liquid assets which are not likely to diversify in value too much. Even if bank rates are low, it may be better to accept a lower rate of return on that part of your portfolio which you need to use for expenses in the near term.

In choosing a suitable investment vehicle for their long term requirements, many expats insist that they must have access to 100% of their portfolio at any time. Why? If you only need access to say 20% of the investment over the first several years why would you wish to give up higher returns for instant access? In addition, the portfolio allocation can be changed and moved at any time between many different asset classes. If you initiate such a portfolio and choose an independent consultant as the manager, the firm you appoint can be changed immediately if you become unhappy with their management.

In managing your investment pot it will also be very wise to ensure that you have asset allocations aligned with your liquidity requirements. For example, we already discussed an amount in bank fixed interest for the short term. There will likely be a medium term segment which would be suited to bond fixed interest. The longer term could be invested in equities or other longer term holdings for enhanced returns where volatility will be evened out over the period.

Every case is different and the best way you can start to plan and feel good about the longer term is to come and see me for an initial consultation. I will not only be able to assist you in the management of your portfolio but also in making comprehensive plans for your long term future.

Questions to the author can be directed to PFS International on 02 653 1971 or email to

Andrew Wood has been an expat in Asia for 34 years and is Executive Director with PFS International. He has been writing Net Worth articles for six years and has made a significant contribution to the PFS library of financial service articles dating back over nine years. These articles which cover the complete A-Z of financial planning are available to readers on request.

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