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Ask Geri: Where Should A Retiree Invest?(4-min read)

Hi Geri,

My father retired recently and got his retirement fund in lump sum. I want to help him invest the money so that he can maximize the amount he got and make it last. Where can he invest such money?

Thanks!

JV, loving lawyer daughter (inquired through FB Page)

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Hi Sir Geri,

How do I choose which mutual fund to avail? I already have a preferred fund manager in mind, but I don’t know which of their offered funds suits me. Help please. Thanks a lot!

From XGerona (through FB page)

raining money.jpg

Thank you for your inquiries.

At whatever point in our lives, for every investment we enter, time and again, we should always consider our investment OHA. As we have reiterated in our Newbie Guide and in our Investment 101 article, each investment must be made with the following in mind:

  • O-bjectives (what do you wish to achieve, what is the investment for?)

  • H-orizon (how long can you wait to make the investment grow?)

  • A-ppetite (how much investment risk and volatility can you handle?)

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FOR JV

Congratulations to your father! He managed to prepare for his retirement. Not all parents are able to give it the proper attention as they are too busy financing for the present– the needs of their family and kids. Now that you father is retired, I would think the OHA will be as follows:

  • Objective: Capital preservation, to make it grow just enough for the expenses of the retiree, to make it last as long as possible. At this point, the goal is to make the retirement fund last, not to risk it chasing substantial gains.
  • Horizon: Depends on life expectancy, give or take 20 to 40 years perhaps? But not too long compared to horizon of fresh grads and those in their early 20s. Should be liquid enough and easily withdrawable in case of unforeseen needs.
  • Appetite: Low risk, acceptable gains. No need to risk the hard-earned money to chase higher gains.

Let’s say your father got P1M lump-sum, I would recommend storing half in a bank time deposit or even LTNCD and then the half, to be invested in bonds. Another variation will be 1/3 in TD, 1/3 in bonds, then 1/6 for leisure, travel and enjoyment, 1/6 for business or something your father is passionate about. Of course I’m assuming the monthly expenses and medication are already covered by the loving lawyer daughter. LOL! 🙂

YOU CAN ALSO DO THE MATH

A more methodical way to do this is to compute the monthly expenses expected to be incurred by the retiree, then multiply that by 12, you get an X amount. That X amount then should be the annual interest earned by the investment where your father may put the money. Ideally, the interest earned is enough for the expenses so that the principal amount is kept intact.

For a 500K in time deposits (3% p.a.), and 500K in bonds (6% p.a.), that will yield to only 15K + 30K = 45K per annum or P3,750 per month. If this is enough, well and good. If not, the catch is then to increase the retirement fund (for those not yet retired) or look for investments with higher returns (for those retired already) without substantially increasing the risks.

If we put the whole P1M in an equity fund, it can possibly earn 15% p.a. or 12.5K per month but this entails more risks and returns are not guaranteed compared to bonds. There is also real chances of losing part of that P1M.

The retirement fund calculator in #3M can help you make a more informed decision.

retirement full moon

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FOR XGERONA

Similar to above, but since you did not mention at what stage of life you are in right now, I will just provide some guidelines:

  • Objective: Are you investing for retirement or college tuition with more than 20 years or 30 years to go? Or are you retiring soon and only have 5 years left to grow your money?
  • Horizon: Depends on your ‘O‘. 5 years? 10 years? 30 years?
  • Appetite: The shorter time you have, the less risk you should take. The more years you have, you can take a bit more risk as long as returns are worth it.

You can check the track record and historical performance of each fund, to see how it has performed in the past (best measure is CAGR). Note though that historical performance does not guarantee future performance, and that the higher the returns, the more risks it entails, that is why the fund you choose should always align with your established OHA.

Alternatively, you can follow the asset allocation strategy discussed in our previous article: How to Invest the SMART Way? This way, you can adjust the allocation as you grow older.

For more information about various investment options, just browse our investments tab, or for newbies, our Newbie Guide.


Be like JV’s father and prepare for your eventual retirement. We all deserve a richer life, and we all have the means to provide ourselves with that. Don’t just work hard, but be sure to work smart. Allow my 10 steps to a richer life ebook, neatly summarized into WISER PINOY, guide you and your family in its fun journey towards financial freedom.

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May we all have richer lives!

Photos from Pixabay.

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2 thoughts on “Ask Geri: Where Should A Retiree Invest?(4-min read)

  1. Hey just wanted to update you. We inquired with a preferred bank and my father is now set to invest 70% of his retirement money into NLEX bonds. Rate is 5.3% p.a. for 7 years. He’s ok with the rates. Then the 30% we just keep in his savings account for his emergency funds. Thanks for your advice!

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