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Retirement Planning

retirement-planning

Retirement Investment

Getting Started - Easy retirement starts from early planning

Developing the right investment strategy for your retirement savings is easy when you have a clear idea of when you plan to retire, how much money you will need for your retirement, and to what extend your risk tolerance level is. All investments involve some degree of risk. It is necessary to have a good understanding of it prior to forming your retirement investment strategy.

Understanding Risks

To be a smart investor, you should understand what kind of risk is involved and its implications. These may include:

Inflation Risk

Inflation causes money to decrease in value at some rate, regardless of whether the money is invested or not. As investments are generally long-term in nature, one of the biggest risks for investors is inflation risk. Your savings or money will lose value if they do not earn enough to stay ahead of inflation.

Tips: If your investment cannot give you a higher-than-inflation return, your money is losing value over time.

Investment Risk

Generally speaking, due to market volatility and other external factors, your actual investment return may deviate from the expected outcome. This refers to investment risk. Smart investment is partly about risk management. To maintain a balance between investment risk and return, your portfolio should feature basic asset allocation in a way that suits your needs. Investments with higher potential returns entail a greater risk of losing money, but this can be balanced in a long-term investment plan.

Tips: If you take out high risk investments only to be consumed by anxiety, you have chosen the wrong level of risk, so it is important to analyse your risk tolerance level.

Managing Risks

There are a number of ways investors can manage or reduce risks, including diversification and dollar cost averaging.

Diversification

As the old saying goes, “don’t put all your eggs in one basket”. Diversification is the spreading of your investment across a number of different assets to help reduce the overall investment risks. In a diversified portfolio, the negative results of some investments will be offset by the positive returns of others, thereby leading to higher returns and posing a lower risk than any individual investment.

Tips: In general, there are two ways of diversifying your portfolio, which involve spreading your investments among:

(i) Asset classes – cash, bonds and equities
(ii) Markets – geographic regions, countries/locations, sectors and currencies

The Power of Dollar Cost Averaging

Dollar cost averaging is a technique designed to reduce market risk through regular investments at predetermined intervals and set amounts over time. By buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price, investors can purchase more shares when prices are low and fewer shares when prices are high. Consequently, the impact of short-term market fluctuations on an investment can be mitigated and the costs of units purchased are averaged out.

Tips: Under dollar-cost-averaging, you do not have to time the market. By investing on a monthly basis, you can may enjoy the following benefits:

Avoid investing a lump sum at the worst possible moment

Encourage a long-term perspective and enable your investments to compound over time

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5 Steps to Retirement Planning

Step 1 - Understanding Retirement Needs	Step 2 - Risk Tolerance Assessment
Step 3 - Understanding Investment Choices	Step 4 - Fund Selection
Step 5 - Regular Review

Step 1 - Understanding Retirement Needs

You should always set investment goals based on your risk profile, personal needs and life stages instead of trying to time the market. To determine how much you need for retirement, consider the following:

Will you own a paid-up property after retirement?

Will you receive any income from other family members after retirement?

What standard of living are you seeking after retirement?

The higher your post-retirement expenses, the more you have to save up for your retirement in an early stage.

Step 2 - Risk Tolerance Assessment

Risk tolerance is the level of risk and uncertainty you are willing to handle amid any negative change to the value of your portfolio. This level normally changes according to your age, financial situation and life circumstances.

Generally, if you are relatively young and have a long investment horizon, you will have a higher tolerance to risk and you may adopt a more aggressive investment strategy. On the other hand, if you are close to the age of retirement, you will have a lower level of risk tolerance and therefore a more conservative investment strategy. For example, an investor nearing retirement generally has a lower risk tolerance than a 28-year-old manager who has a longer time frame to make up for any losses.

To assess your own risk tolerance level, take our Risk Assessment Test to see if you are a conservative or a high risk-taker. This will help you decide on a suitable portfolio mix and give you peace of mind.

Step 3 - Understanding Investment Choices

Before deciding on your investments, you should understand the features of each fund option. Every fund has its own investment objectives and instruments, and it is only by understanding them that you may judge whether a particular fund is suitable for you and whether its risk levels are acceptable or not. You can then choose your fund choice according to your risk tolerance level.

In general, investment instruments of retirement funds include mainly equities, bonds and short-term interest-bearing money market instruments. Factors such as a fund's underlying investment instruments and the markets in which it is invested will affect the fund's risk level.

Step 4 - Fund Selection

You may choose retirement funds that fit your needs based on your investment goals, risk tolerance level and investment horizon. For example, the longer time you have before your retirement, the higher level of risk tolerance you may have. So you may opt for a more aggressive portfolio. For those closer to retirement, they can choose a lower risk investment portfolio with the aim of preserving capital.

Please see below for the investor profile and portfolio mix...

Age Range 20-30
Situation	Investor Profile	Investment Strategy	Portfolio Mix
Fresh graduateor those who have worked for a few years	Willing to assume arelatively higher level of risk to achieve long-termcapital growth	Aggressive	Equity funds

Age Range 31-40
Situation	Investor Profile	Investment Strategy	Portfolio Mix
Planning to get married or buy a new home	Willing to assume an above average level of risk to achieve higher returns	Growth	Mixed asset funds (e.g. 70% of assets in equities and 30% of assets in fixed income securities)

Age Range 41-50
Situation	Investor Profile	Investment Strategy	Portfolio Mix
Planning to send children to study overseas	Willing to assume a medium level of risk to achieve stable returns	Balanced	Balanced funds (e.g. 50% of assets in equities and 50% of assets in fixed income securities)

Age Range 51-60
Situation	Investor Profile	Investment Strategy	Portfolio Mix
Children grown up and working	Willing to assume a relatively low level of risk to achieve stable capital appreciation	Conservative	Capital stable funds (e.g. 30% of assets in equities and 70% of assets in fixed income securities)

Age Range 61 or above
Situation	Investor Profile	Investment Strategy	Portfolio Mix
Approaching retirement	Willing to assume the lowest level of risk with primary focus on capital preservation	Very conservative	Conservative fund

The above information is for reference only. You should consider your own risk tolerance level and financial circumstances before making investment choices.

Step 5 - Regular Review

Retirement planning is a life-long process. Each time you have reached a milestone in life – such as buying a home, getting married, having children or retiring – it is important to take a look at your portfolio and ask whether it still suits your needs.

Changes may arise in the market to affect the returns, volatility and prospects of your investments. Regular review of your portfolio allows you to evaluate whether the existing strategy is still keeping you on track to reach your ultimate goals.

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Frequently Asked Questions

1. This fund has offered the best return over the past six months. Should I switch my retirement investment to this fund?

Answer: As investors, we are sometimes attracted to investment funds based on the investment return over a short period of time. Nevertheless, the choice of an investment fund should be based on personal factors, including one's risk tolerance level, age and time horizon. Frivolous investing is especially dangerous for retirement investors who in general have a longer time horizon and should be looking at long-term performance rather than short-term volatility.

2. Do I need to rebalance my portfolio frequently in order to capture as much of the stock market's gain as possible?

Answer: Market timing, or buying low and selling high, is very difficult, even for professional investors. Although as retirement investors we should monitor our portfolios regularly, we should bear in mind that retirement investing is essentially a long-term activity. Other key factors such as risk tolerance level, age and time horizon should be taken into account.

3. Should I put all my retirement savings into cash so that I will not be affected by volatile investment markets?

Answer: Cash instruments, which generate interest returns only, are not an effective tool to protect wealth in the presence of inflation. The purchasing power of our savings deteriorates over time if the investment grows more slowly than the inflation rate. There are many retirement fund choices to suit different individuals' needs and we should conduct a full review of the fund options available.

4. Why should I review my retirement savings portfolio regularly?

Answer: Each time you reach a milestone in life – such as buying a home, getting married, having children or retiring - it is important to take a look at your portfolio to ensure it stays in line with your retirement goals and your changing life circumstances. In general, it is advisable to review your retirement plan every six months even though adjustment is not always necessary.

5. I know nothing about investing. Can I simply follow what my friend, spouse or colleague does?

Answer: Feeling as if we do not have time to plan our investment strategy is not a reason to follow someone else's. Having an individual focus is of paramount importance when it comes to choosing the right funds. We need retirement plans that fit our individual needs. Even members of the same family may have different circumstances and situations to consider.

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Retirement Planning

retirement-planning

Retirement Investment

5 Steps to Retirement Planning

Frequently Asked Questions

Allianz Global Investors

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