As we age, hold more shares?

[Dona Ferentes]

Why you should keep buying shares well into old age​

By John Beveridge - .

..One really damaging myth that also deserves to be shattered is that investors need to progressively put more of their assets into cash or cash like investments such as bonds as they get older.

That is such a dominant narrative that there are even so called “lifestyle” super and other investment funds that are designed to follow that principle and it is also a common financial planning principle that is followed when advice is sought.

Selling shares is a big mistake​

The big problem with all of this is that following this maxim is virtually guaranteed to cost you some serious money over time.

In fact, some excellent 2013 research done by Dr Wade Pfau from the American College and Michael Kitces of the Pinnacle Advisory Group shows that in almost all circumstances, an investor is much better off slowly increasing the percentage of their assets invested in shares as they get older.

So, rather than selling down shares and holding more cash and bonds as you get older – something some have modelled by holding the same percentage as your age in bonds and cash – you are much better served by reversing that concept and increasing the percentage of shares in your portfolio over time.

Their research paper “Reducing Retirement Risk with a Rising Equity Glidepath” has been highly controversial but has so far survived many challenges to its basic results from those who can’t give up their idea of upping the amount of cash you should have in your portfolio as you age.

The reason the rising shares glidepath works so well is that if the share market is down or falling when you are converting cash into shares, you buy more and lock in better returns over time.

Or if you are buying as the market gets closer to a top, you are still enjoying stronger returns than cash provides and will build up a handy buffer against future bear markets.

In both cases you will reduce risk by progressively buying in periods where shares are cheaper and fewer when they are more expensive.

From the many critics who have emerged questioning the rising shares glidepath, I have only seen two real points that put much of a dent into the idea.

Sequencing risk​

One is the concept of sequencing risk, which describes the risk that a couple of down years on the share market might have on the portfolio of somebody who is recently retired and is thus unable to make up those losses through extra earnings elsewhere.
This is a very real risk, particularly for those with smaller levels of retirement savings, but it only lasts for a while and can be countered through a more careful following of the idea of the rising glidepath.

Being US research, the percentages of retirement savings allocated to bonds and cash are very high by Australian standards for all except the most conservative and risk averse investors.
Indeed, the most optimal rising glidepath from the paper is if the investor starts with a shares percentage of between 20% to 40% and increases that over time to between 60% to 80% in shares.
Adopting this approach would actually be seen as very cautious in the early years by Australian standards, but it would effectively guard against sequencing risks because such a small percentage of total assets would be exposed to the share market in the early years of retirement.

Panic selling must be avoided​

The other criticism of the rising glidepath is effectively psychological and concerns whether older investors could cope with the inevitable share market falls and dips without panicking and selling at the worst possible time.

This is arguably one of the main aims of financial planning which often sees advisers encouraging their customers to stay the course and not panic or fly to cash during market downturns.
However, many investors have now had a lot of experience riding out the many perils and pitfalls that the share market can serve up and they should be much better equipped to handle any volatility that a rising glidepath might throw up.
By maximising time in the market and minimising timing the market, returns are usually far superior.

Even conservative investors should be buying​

What is interesting is that even for more conservative investors who might begin with a lower percentage of equities, the rising glidepath could still produce a far superior result than the more common and traditional but flawed “load up with more cash” approach.

Adjusting for the Australian experience, the rising glidepath is likely to begin with local and international shares being closer to 60% of the average retirement portfolio but this research shows that this higher level could safely keep rising during retirement.

The amount remaining in cash would eventually be limited to just what is needed for immediate income needs without having to sell shares to fund regular payments.

Even here, Australian investors are lucky because our shares generally yield larger dividends than offshore shares and so can be relied on for a large chunk of income needs.

The rising glidepath might not suit everybody but it is certainly interesting to know that there is a real danger in slavishly following old-fashioned ideas of portfolio construction which would see the portfolios of most retirees selling shares and stockpiling lower yielding cash.

 

[divs4ever]

Even here, Australian investors are lucky because our shares generally yield larger dividends than offshore shares and so can be relied on for a large chunk of income needs.

'rely ' no , as a supplement , yes

i noted the US ( and other places ) with their strong preference for capital gains over div. income , on a US-based early retirement forum , and that was the final reason in not investing directly in internationally listed shares ( dual-listed is acceptable )

Buffet's favourite holding term .. 'forever ' made sense to me as an Australian shareholder hoping to retire in the next 10 years ( when starting out )

let's hope the government/regulators don't stuff up this island of sanity in personal investing

 

[JohnDe]

A great read, thank you.

I have been collecting shares for quite a few years, only selling a small percentage to fund other ventures. The only downside is the high taxes paid to lazy governments.

 

[Gunnerguy]

For me I’ve always been heavy in equities (and IP) . Fortunately With a strong wage income over the years the falls in markets, have not caused me to sell in fear. Now as my 60 years approaches I plan to have about 1-2 years spending in FI, cash or my options trading account leaving about 85% in equities and a paid off PPR. I’ll always keep a high percentage in equities.
However I would disagree with the article suggesting low equity percentages in ones early years.
Load up on equities when you’re young, keep an emergency fund, time in the market, don’t fear the dips, diversity, live within your means, blah blah blah, the usual ….

 

[JohnDe]

Loading up our Super doesn’t seem to be a problem, but I worry about the tax hit when taking it out.

Super contribution caps climb as rising wages trigger indexation​

Super fund members will soon be allowed bigger tax deductions for pumping money into their retirement savings after a rise in contribution caps was set in stone on Thursday.
For the first time in three years, the annual cap on tax-deductible concessional superannuation contributions will rise on July 1, from $27,500 to $30,000, after higher employment incomes triggered an indexation increase.

Concessional contributions include compulsory employer payments, salary sacrifice and other personal tax-deductible super contributions. Non-concessional contributions, made from after-tax money such as personal savings, will also rise from $110,000 to $120,000.

Aware Super’s general manager of advice, Peter Hogg, said the higher caps would give people “extra firepower to top up their retirement savings”.

“While we know that many of our members are struggling with cost-of-living pressures at the moment, the increase in contribution caps will be heartening news for many older members who want to get their finances in the best possible health,” he said.

“Wages have been climbing at a relatively quick rate in recent years but contribution caps, because of the way they’re indexed, haven’t changed since 2021, so really we’re playing catch up.

Concessional caps rise in $2500 increments and are indexed to average weekly ordinary time earnings (AWOTE), which the Australian Bureau of Statistics said on Thursday had risen 4.5 per cent in the year to November. Non-concessional caps are four times the concessional cap.

The SMSF Association said separate bring forward provisions meant someone could inject two future years of non-concessional caps in one financial year, for a total of $360,000 from July 1.

“These changes were expected and, alongside the stage three tax cuts applying from 1 July 2024, mean some may have additional disposable income to contribute more to super,” SMSF Association CEO Peter Burgess said.

Many people are also allowed catch-up contributions of previous year’s unused concessional caps, but Mr Hogg said super top-ups were not always the best option. “If you have a mortgage, for instance, you may be better served by making extra repayments,” he said.

 

[Dona Ferentes]

Loading up our Super doesn’t seem to be a problem, but I worry about the tax hit when taking it out.

that's another subject.

 

[JohnDe]

I'm going to unload here.

My paternal grandfather came to Australia in 1953, he was told that if he worked hard he would get a pension when he retired, He worked hard, became an Australian citizen and purchased land, and paid for his wife and three children to come over six years later. They lived in a derelict house, my grandmother worked and their three children went to school. Later they built a new house on the large property they owned.

My father was promised the same thing, work hard and you will get a pension. He worked odd jobs after school, got a an apprenticeship after finishing high school, worked two jobs, got married and had five children. Dad always mentioned that receiving a pension as appreciation for all his hard work was his wish, he wanted recognition for his input in helping build a great country.

Dad worked very hard, many nights I did not see him because he was building his business and working late into the night.

When retirement age came around he was told that he could not receive any parts of a pension, because he had too many assists. that was a huge disappointment to him. He accepted that he was very well off, had set up all his children, but he could not accept or understand why his 50+ years of hard work was not rewarded by the government with a small pension to say thank you. Many European countries give a small allowance as a thank you.

He died 4 days short of 77, his body worn out by all his hard work, his lungs scared from many years of working with toxic fumes. He died without recognition of a pension. I will never forget how stingy the Australian system is, it will spend every cent it receives and more, it will support our weak, disabled and lazy, but hardly recognises its hard workers, iit looks at every opportunity to take from those that work their guts out.

And the scariest part of all, is that we are getting screwed worse than ever. Our governments say that they want to take care of our disadvantaged, fair enough. But how do they classify disadvantage. By spending millions on a referendum to create two countries, a bottomless pit called the NDIS, a defence equipment list that changes by the day, hoodwinking voters by reneging on promises like highways and paying billions in fines, calling for a Commonwealth game and then backing out and paying the expenses, opening a back door for wealthy refugees, offering education and health expenses paid by the Commonwealth government to illegal immigrants, and the list goes on.

The small benefits that the government gives as Superannuation benefits are smoke screens.

 

[Skate]

(1) By maximising time in the market and minimising timing the market, returns are usually far superior. (2) Australian investors are lucky because our shares generally yield larger dividends than offshore shares and so can be relied on for a large chunk of income needs. (3) It is certainly interesting to know that there is a real danger in slavishly following old-fashioned ideas of portfolio construction

There are three important points based on the article
(1) As an investor, time in the market is more important than timing the market to make quick profits. This approach tends to lead to higher returns over time.

(2) Large Australian companies tend to offer high dividend yields, combined with franking credits can be a reliable source of income for investors.

(3) Personalised portfolio construction is better than following a one-size-fits-all approach as this helps to ensure that the portfolio is tailored to deliver optimal returns.

Skate.

 

[dyna]

I'm going to unload here.

Thanks for unloading , mate.
Brilliant . And brave , but I wouldn't do it again.
The lefties here , will jump down your throat for much less than that .
( I hardly ever post for that reason. So ....close my eyes , shut my big mouth and live my dream . Happy , healthy and wealthy . Life is so good .)

 

[Knobby22]

Loading up our Super doesn’t seem to be a problem, but I worry about the tax hit when taking it out.

If you are over 60 (or is it 65?) and you are retired there is no tax. Or at least that is my understanding.
Am I wrong? Can someone let me know?

 

[Gunnerguy]

If you are over 60 (or is it 65?) and you are retired there is no tax. Or at least that is my understanding.
Am I wrong? Can someone let me know?

No tax after preservation age if transferred to pension account. Full access to funds in pension account. You can still keep an accumulation account with usual conditions, tax, contributions, downsizer etc. Then whenever you want you can move funds from Acc to pension up to lifetime max of $1.9M.

 

[Ferret]

No tax after preservation age if transferred to pension account. Full access to funds in pension account.

And no tax on withdrawals from an accumulation account after age 65 or meeting a condition of release after turning 60.

JohnDe seems a bit confused about super.

 

[qldfrog]

No tax after preservation age if transferred to pension account. Full access to funds in pension account. You can still keep an accumulation account with usual conditions, tax, contributions, downsizer etc. Then whenever you want you can move funds from Acc to pension up to lifetime max of $1.9M.

But only in super?

 

[Dona Ferentes]

As we age, should we hold more in shares?


Super is useful, the challenge is ; 4-5 per cent taxable but predictable, or 8-10% but volatile.

 

[divs4ever]

As we age, should we hold more in shares?

View attachment 171462
Super is useful, the challenge is ; 4-5 per cent taxable but predictable, or 8-10% but volatile.

i think one needs 6-7% predictable after tax , but good luck in getting that ,

that would need ace timing , to buy in a broad-based retrace or crash

 

[Dona Ferentes]

i think one needs 6-7% predictable after tax , but good luck in getting that ,

that would need ace timing , to buy in a broad-based retrace or crash

nonsense

 

[JohnDe]

If you are over 60 (or is it 65?) and you are retired there is no tax. Or at least that is my understanding.
Am I wrong? Can someone let me know?

I am under 60, and not retired.

 

[Knobby22]

I am under 60, and not retired.

So am I. So we can't touch it!

 

[Belli]

The flavour of the last few posts is concentrating of superannuation. Broaden it to also consider shares outside of that environment if you're financially able to do so. Do some numbers taking into account the tax-free threshold combined with franking credits. Not all the share income has to be franked either. $15k or $20k of income will most likely cover the majority of your non-discretionary costs such as keeping the roof over your head.

As to the worry about changes to tax law, I'll let you in on a little secret. It always has.

There is no magic sauce to any of this. Essentially spend less than your income, always invest and don't go mad with trying to gear if you are into that. Debt will smash you if you let it get out of hand.

 

[JohnDe]

So am I. So we can't touch it!

I was commenting on all the taxes and wasteful ways that the lazy governments have in place and like to change the goal posts.

“With a transition to retirement (TTR) income stream, you can access your super while working. To get one of these pensions, you must have reached your preservation age (between 55 and 60)”​