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 aged 20 to 30. Today we consider the likely Money Triangle profile of older persons:
Persons 30 to 40 years old 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 reasonable time to start saving and investing.
On the Money Triangle, older persons’ profile tend to show a lowering of disposition to take risks as their age moves closer to 40 years old and beyond. The Money Triangle profile would likely be: 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 30 to 40 is a useful time to review your investment objectives and the strategy which will include 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 in value over time. The risk of the illiquidity of holding real estate will be countered by the liquidity hedge that you have been establishing in an emergency fund.
By then, your finances should be taking shape in concert with your overall investment 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 order to 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 a serious significant financial catch-up. Regardless of your age, planning for your retirement is a very important item on your financial agenda. Retirement readiness assessment and 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 years 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, say 20 per cent or less.
The Money Triangle can thus serve as a useful guide in allocating your investment portfolio between income and growth stock over your lifetime as your investments goals and objectives shift.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances.This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.