When we think about money and the path that it takes intertwining within one’s life. We can identify 3 distinct phases of money much like the seasons of an apple tree, firstly there is the accumulation or growth phase, then the preservation phase and finally the distribution or harvesting phase.
Part one of this series of articles is about the first phase, some might call it ‘spring’ when new growth appears, blossoms bloom and fruit starts to form. Here at Common Sense we view this phase as the accumulation phase and it generally starts when you are a young child.
Like spring, the accumulation phase of money is all about growth, growth of money and assets. Whether that is through saving your hard-earned money, investing in retirement funds, buying a home, starting a business or any number of other possible things the key to the accumulation phase is growing assets that will generate an income now or in the future and/or maybe sold for a profit at a later point in time when you need to.
Most commonly for New Zealanders the path follows a similar pattern we start work, save hard, join KiwiSaver, buy a home and focus on paying down the mortgage whilst having some savings or investments on the side. During this accumulation phase we have the propensity to take on more risk within our investments, as we have the time to withstand the ups and downs of the markets. If things don’t quite go to plan, we have the opportunity to re-start, re-build and carry on.
Unfortunately, this can’t be said for the remaining two phases of the money tree, one in which people often skip, which could have grave consequences throughout retirement.
When traversing your accumulation phase there are three key points to work towards:
Start sooner rather than later
Save more rather than less
Take more risk now when you can afford to, rather than later when you can’t.
Next week we will discuss the preservation phase.
This article is part 1 of a 3-part series on the money cycle, any information provided is general in nature and not to be considered personalised financial advice. A copy of my disclosure statement is available free upon request.
In our first article on the money cycle we laid out the pathway that New Zealander’s face when planning and preparing for retirement. The first phase we discussed was the accumulation phase where you can afford to take risks and grow your assets. In part two we discuss the second phase of the money cycle, sometimes the most important and often the phase most overlooked, we call this the preservation phase.
Following on from our accumulation phase you have managed to build some assets whether that is in property, investments, KiwiSaver or anything similar, assets that will provide you an income or return later in life. The preservation phase is all about preserving and preparing your assets for distribution, this should be done over the last 5 – 10 years before retirement. In the distribution phase which we will talk about next week, we mean retirement or passing your assets t those you want them to go to.
Many New Zealander’s generally to follow the path from the accumulation phase directly into the distribution phase. The preservation phase is the important part in the middle, it is all about ensuring that investment structures, entities, asset allocation, risk profiles and all the other parts to investment/retirement planning are put in place.
As a general rule you should look to reduce the risk of any investments as you have less time to recover if they perform poorly. This helps to reduce the impact the market’s us and downs might have on your lifestyle throughout retirement.
When traversing your preservation phase there are two key points to work towards:
Reduce your risk to enable good decisions in volatile markets
Ensure your structures (trust, company, personal, etc.) are going to be able to help not hinder your retirement plans
Next week we will discuss the all-important distribution phase.
This article is part 2 of a 3-part series on the money cycle, any information provided is general in nature and not to be considered personalised financial advice. A copy of my disclosure statement is available free upon request.
In our first two articles on the money cycle we laid out the pathway that New Zealander’s face when planning and preparing for retirement. The first phase we discussed was the accumulation phase where you can afford to take risks and grow your assets. In part two we discussed the second phase of the money cycle, the preservation phase, where you reduce your investment risk and develop strategies for protecting your assets in preparation for your retirement.
The last stage of the money cycle is the distribution phase, whereby you start to distribute your assets to provide for your income and lifestyle needs throughout your retirement plus any gifting to family or charity.
As we touched on in the second article, most New Zealander’s skip the preservation phase and by doing so they potentially open the door to the three major risks of retirement investments. These risks are from the interest rates, the NZ and global share market, and the sequences of returns.
In retirement investment strategies are more conservative and have a greater exposure in income producing assets such as bonds and term deposits. There is an inverse relationship between the value of a bond and interest rates, meaning if interest rates go down, bond values go up and vice versa. In times of interest rate fluctuations this can cause undue volatility for investors.
Market risk is the risk of volatility in the share markets which is ever present, however if a drop is sustained over a period of time that can cause dire consequences for those in the distribution phase.
The last and most dangerous risk for those in the distribution phase is that of the sequencing of returns. What we know is that markets and interest rates go up and down, we simply don’t know when. If an experience like the GFC was to occur in the early years of your distribution phase and you don’t have a system to protect your investment assets then your journey would look markedly different to someone who experiences those fluctuations later in their distribution phase.
As a general rule to protect your assets in your distribution phase, you need to ensure that you have sufficient assets to provide for your income needs for several years so you can avoid drawing on your investments when returns are relatively poor.
When traversing your distribution phase there are two key points to work towards:
Ensure that you have sufficient assets to provide for your income needs for 3 – 5 years in low risk or cash investments.
Structure your investments to avoid falling into the trap of the sequencing of returns.
This article is the final part of a 3-part series on the money cycle if you would like to learn more about how you can protect your investment assets in the distribution phase then feel free to give us a call.
Any information provided is general in nature and not to be considered personalised financial advice. A copy of my disclosure statement is available free upon request.