After having worked hard throughout your life to build up your assets, savings and investments, once you are retired a key objective should be to preserve the wealth you have accumulated.
Besides ensuring you can enjoy your current lifestyle throughout your retirement years, you may wish to pass on wealth to your children and grandchildren.
A key investment strategy for helping preserve wealth is diversification across different asset classes (equities, government bonds, corporate bonds, property, cash etc) as well as across geographical regions.
This approach helps to manage and mitigate the risk of any one asset type underperforming over time, ensuring you are not over exposed to any given asset type, country, sector or stock.
At the same time the aim is to provide the highest potential return for your risk profile.
Traditionally, many retirees have preferred to leave much of their savings in bank deposits, which have been considered secure.
However, in fact, when you take the effects of inflation and withdrawals into account, not to mention the historically low interest rates of recent years, the capital in your deposit account is likely to erode.
To illustrate this, we have prepared a comparison of two investors.
Both retired in 1980 with savings of £500,000.
Mr X invested in a fixed interest deposit paying a fixed rate of 6% per annum.
Mr Y invested in a diversified balanced mixed asset portfolio made up of bonds, equities and cash*.
Both investors planned to withdraw £30,000 each year, and this withdrawal amount increased each year in line with an estimated annual inflation rate of 2%.
The difference between the two is quite staggering.
Ten years after the initial investment, Mr X had £466,534 in his deposit account. Mr Y’s mixed asset portfolio had £1,468,817.
By 2000, Mr X’s deposit account had reduced to £312,677. In contrast Mr Y’s investments had grown to £4,537,042.
Mr X’s deposit account ran out of money in 2009.
That year, Mr Y’s portfolio totalled £4,878,247. It has continued to grow overall since, and last year it stood at £7,497,285.
This is in spite of the fact that by this stage his annual withdrawals had increased to £57,667 with inflation.
This does not mean that it will have been a smooth ride. The years since 1980 have seen significant events which have impacted the markets. These include 1987’s Black Monday; the 2001 September 11 attacks; the US subprime crisis in 2007 and Lehman Brothers collapse in 2008.
Nevertheless, in spite of periods of market volatility, Mr Y’s portfolio still grew from £500,000 to £7,467,285 over the 33 years from 1980 to 2014. This was because he remained invested throughout, and had a suitably diversified portfolio.
It is essential that your portfolio is specifically suitable for you. It should be strategically designed around your personal circumstances, objectives, time horizon, income requirements and risk profile.
The starting point, whether you are building a new portfolio or reviewing one that may have been neglected or set up without a specific strategy, is to get a clear and objective assessment of your personal risk profile.
This can be achieved through psychometric analysis and attitude factors, while also taking full account of your personal views.
Your asset allocation should then be based on your risk profile. The lower your risk profile the higher the allocation to ‘safer’ investments such as fixed income (although this will, of course, limit the upside growth potential of your portfolio) and vice versa.
Once set up, your portfolio needs to be regularly reviewed to ensure it remains suitable for you, is rebalanced where necessary and takes changes in your circumstances into account.
While your investment strategy is very important, you also need to ensure that your investment returns are protected from taxation where possible.
Placing your portfolio within a compliant tax efficient structure will provide protection to help you legitimately avoid paying too much tax, as well as keep most of your investments in one place. It could also provide estate planning benefits to help you pass your wealth on to the next generations with as little tax and bureaucracy as possible.
You therefore need holistic advice to cover your investment planning, tax planning and estate planning, and from someone who is well versed in the nuances of the Portuguese taxation and how it can impact your wealth. UK nationals also need to take UK taxation into account and the interaction between the two regimes.
* Illustrative portfolio comprising 50% MSCI World TR GPB; 40% IA UK Gilt TR and 10% LIBOR GPB 7 Day.
This article should not be construed as providing any personalised investment advice. These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com
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