LAST WEEK we considered the Money Triangle model, a model helpful in establishing a personal investment strategy. The Money Triangle consists of three main sections. The top portion of the triangle holds the most aggressive investments. The middle portion of the triangle includes “inflation fighters”. The bottom third includes safe and stable investments.
We looked at how the model may be used by a person 20-30 years old. Today we consider the likely Money Triangle profile of older people.
People at the 30-40 years old stage of life should be focusing on establishing a retirement plan and building a growth portfolio. If serious thought has not been given to retirement before, it is still a reasonable time to start saving.
On the Money Triangle, their profile may show a lowering of disposition to take risks as the age moves closer to 40 years old and beyond.
The profile would be, say, top 20 per cent, middle 50 per cent and bottom 30 per cent. Gradually, as you get older your investment drifts to lower risk levels in the bottom two layers of the Money Triangle.
This stage is a useful time to review your investment objectives and strategy which includes making a thorough assessment of your net assets.
In addition, your level of earnings may now be at a point where you need to seriously consider your tax bracket. If you are in a high tax bracket, you should attempt to shift from income-producing investments to tax-free bonds, as one example of the ways that you may seek to minimise the annual tax liability on your investment income.
If by this stage, you do not own a home, you should consider investing in real estate as an inflation hedge. Real estate tends to appreciate over time and can provide you with a tax deduction on interest payments. The risk of the illiquidity of holding real estate will be countered by the liquidity hedge that you have been establishing.
By now your finances should be taking shape in concert with your overall objectives. Here therefore is a good phase to re-examine the level of your life and disability insurance. Also, you may now consider that you have finances worthy of making a will or establishing a trust. If so, you should talk to an attorney who specialises in estate planning in orderto assist you in deciding.
Then as you move into the 40-60 years age range, your Money Triangle profile tends to shift again. First, if you have neglected your retirement planning, now is the time to start serious financial catch-up. Regardless of your age, planning for your retirement is a very important item on your financial agenda. Retirement planning will be your foremost priority at this stage.
Persons in this age group will tend to hold tax-free bonds, life insurance, tax deferred annuities, real estate and some growth stock. The emphasis will be on wealth building and increasing the value of your retirement portfolio.
On the Money Triangle, the profile would be say, top 15 per cent, middle 35 per cent and bottom 50 per cent. The percentage of income investments is roughly equal to your age. That is, at 50 years old, you should be holding about 50 per cent growth investments and 50 per cent income investments.
The over-60 old group should shift their portfolio to income-producing investments, including tax-free bonds, treasury bills and high-yielding common stock. However, to increase the likelihood of keeping ahead of inflation, some investment in growth stock should be maintained.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.
