Safe Investment Strategies for Retirement.

Let's assume you are in or approaching retirement. You have your retirement nest egg, which has been working overtime lately, trying to catch up the time lost since the global financial crisis decided to change the rules on steady and consistent returns.

Your financial adviser asked you a whole bunch of questions and told you that you had a 'balanced' investor profile. You weren't quite sure what that meant but it sounded like he was treating you as 'normal' so that was comforting. He also reckons that because your are 'normal' he's going to stick half of your money in 'defensive' investments like cash, fixed interest, bonds, hybrid securities and perhaps even mortgage funds (cringe). The rest of your money is not retiring - it's going to remain working in the share markets or other 'growth' investments so you can lead a happy retirement.

But are you? Is this really the best investment strategy in retirement? Something based on your 'risk profile' rather than your actual needs? If you had anything invested in the share markets over the last few years then you already know what your reaction was when markets fell. If you felt like having a heart attack because your investments collapsed then either you haven't been taking care of yourself or you've been feeding yourself the wrong information.

The problem with basing an investment strategy on 'risk profiles,' as so many financial advisers do, is that it doesn't actually match your needs with market risk.

A better approach for a safe investment strategy for retirement is to first determine how much income you want to draw each year, taking into account all your living expenses including holidays and asset purchases. Multiply that figure by 3. That's how much you need to put away in 'defensive' assets. The rest of your nest egg keeps working for you in what ever 'growth' investments you are comfortable with and appropriate to your risk level.

Your income or pension drawdown is deducted only from your 'defensive' assets. Markets can go south for 3 years before you need to withdraw anything from your 'growth' assets. Too many financial advisers still use the 'risk profile' approach to investment strategies and rebalance the portfolio on a yearly or more frequent basis to keep the original asset allocation, crystallising losses along the way if markets are in an extended downturn.

The strategy is designed to set aside 3 years worth of income that you will need, allowing for what income is also generated from those 'defensive' assets. For example, if your nest egg was $500,000 and you wanted to draw down $40,000 per year then you set aside $120,000 less what income is likely to be generated on that amount over the next 3 years (depends on interest rates). At appropriate times you would top up your defensive portfolio with profits from your 'growth' portfolio. More frequently in good times, less frequently in bad times. The aim is to always have 3 years of income set aside but only if you can do so without crystallising losses.   

This safe investment strategy for retirement will work for any 'risk profile' and knowing that you have at least 3 years income set aside should provide you with greater comfort and security in market downturns.