Carbo-loading your retirement funds – Moneyweb

In the run-up toward retirement, when your liabilities are hopefully behind you (or have flown the nest), you have time to accumulate funds and ‘carbo-load’ your retirement investments. There is only one way to do that. Instead of spending that extra cash, you have to understand the income/spending balance and free up wealth to invest. Once you switch on retirement mode, your funds have to be treated quite differently — there is no more time to make up mistakes.

Helping investors protect and growth their wealth is the most enjoyable aspect of being a wealth advisor – it is gratifying both for the client and I to go back into the records and watch how the ‘plan’ has come together, not unlike a fitness coach watching their client complete a marathon. We can see how what seemed like an impossible retirement actually makes it past the gate, and everyone can heave a big sigh of relief, the client can go and live their best post-work life, and I can carry one doing what I love — watching out for their income. All moonlight and roses. Right?

Not so fast.

The other side of wealth

While we advisors might be good with our planning, projecting and suggesting – it is the other side of the wealth equation where the magic happens. Wealth is just what is left after you have consumed your income. This is the income equation:

You need to carbo-load, bulk up the wealth side of the equation. If your income is too low for your consumption (cruelly called living beyond your means), or you constantly adjust your consumption up every time you get an inch ahead with your income, then, it’s simple Grade 1 math. Nothing left, therefore no wealth. Consume less than you earn, the less you consume, the better your long-term outcome.

I’m sure this is not what you were wanting to hear. You were probably waiting to hear about some magic product or commodity that could propel you to the finish line. Sorry, there is no silver bullet here, just old-fashioned economics.

There is only one way to bulk up your wealth: consume less – make sure your income growth outstrips your consumption by a wide margin. The sooner you understand this simple dynamic, the better the outcome. This isn’t simple, and you might have to admit (just to yourself) that you are the only one who can put this right. I find that it is those clients that put their head in the sand or infinitely procrastinate doing a simple budget, that have the greatest difficulty changing course – often leaving it to that ‘event’ I call retirement, to actually get on top of their side of the wealth equation. The advisor and planner’s control is the wealth, yours is the income and consumption.

Managing consumption at retirement

At retirement, the advisor usually helps you convert your wealth into an income-producing portfolio, so they take over the management of the income side of the equation, but consumption is always up to you (unless you get placed under curatorship). Even in bankruptcy, the consumption is up to you.

The reason we build up strong reserves in our retirement portfolio over time is so that it can weather the storms, cycles and super-cycles in the market. It is like a tree that is merrily going about its business, only to be attacked by a swarm of caterpillars, which strips every last leaf off the tree. A sharp market downturn can shave up to 40% of your growth portfolio in weeks.

A tree can usually recover because it has saved up stores in the trunk and roots. I see it every year with my Crinum (a fabulous indigenous flower that has a fat bulb, aka, plenty of reserves). Like clockwork, it gets decimated by the amaryllis caterpillar, often overnight before I can remove them (I don’t really like to spray). It may take a few weeks, but the leaves return every year (although the flowers may not). However, if it’s a veg, or a seedling, then it’s usually tickets – same with a poorly diversified portfolio with ‘asset concentration’.

It takes time to build up that bulb, that buffer to withstand shocks, and by the time you get to retirement, there should be plenty of space to withstand market volatility – but probably not enough to save it from the ravages of your over-consumption over time.

Building reserves to weather shocks

You’ll notice two variables here, time to retirement and consumption in retirement. If you have decades until retirement and your portfolio is still a seedling, you have time to resow and grow that portfolio to a mighty oak. Five years out? Not so much. If you know how fat your bulb is going to be, and how well you can live off it, then you can fatten it up to meet your expectations of a higher income (or, the less fun route, downscale your expectations).

Pre-retirement, properly invested with some oversight, prudent investing and a clear understanding of its objective, a retirement portfolio can be left to grow, with the frequent watering and fertilising from new contributions. In that crucial phase where you are now expecting a harvest from that investment, it’s time to start paying more attention. In order to pay attention to that, you are going to have to broaden your skillset and understand a bit more about what is driving that portfolio, and if it’s properly planted to yield the income you expect.

The fact that you’re reading this is a good start, but I also put out a newsletter and podcast weekly (just drop me an email). What a tree needs to grow versus what it needs to produce fruit for harvest are two completely different things. So too with retirement investments. I have gone into the nitty-gritty of asset allocation at retirement here, but at the risk of sounding like a stuck record, do it yourself at your peril. If you’ve been building up a stock portfolio with a broker, it’s not enough to instruct your stockbroker to pay you an income, assuming it will continue to come from the dividends you’ve been reinvesting for years.

Growth portfolios are not enough

We often come across clients who have either built these portfolios or inherited them, and while they may have been managed adequately for growth – a stock portfolio’s primary function – the average 2% dividend yield is usually not enough to sustain an income. Unfortunately, in many cases I have come across, capital is being unwittingly consumed to ‘make up the difference’. (To be fair, stock brokers are not usually professional financial advisors but asset managers, what is needed from a portfolio that has to generate income is a multi-asset manager/managers). Placing capital in a high-yielding retail bond or participation bond is also not as good as it looks. At the end of the five-year period, if you haven’t been reinvesting at least half of that nice juicy interest cheque, then the purchasing power of that capital has eroded significantly. (R1 million is worth R783k in five years at 5% inflation).

What lessons can we learn from this? Retirement is not the time for amateur hour; mistakes made at this point don’t have the time to be ‘fixed’. Spend your energy on understanding your income and consumption (my RedFile organisational system that includes templates for income statements and balance sheets is still available free on request), but more importantly, on carbo-loading your wealth. Have oversight and understanding of your wealth without trying to micromanage the performance. This is a marathon, not a sprint.