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Thanks to the Seinfeld comedy show, New Yorkers believe the nexus of the universe is the corner of First Avenue and First Street in the East Village. I once lived a few blocks away, as it happens. Frankly, another Big Bang wouldn’t go amiss.
And they’re wrong, anyway. The centre of the cosmos is the members’ bar at the Sydney Cricket Ground. Watching a game from there last week with friends, we were stationary as galaxies whirled around us.
Or maybe we were drunk. This was fine by me because I was sad. My parents had recently sold our family home of 47 years — hence the solo trip Down Under to help them move into their new flat. It’s a rite of passage, I suppose.
With a few more plastic banknotes in their pockets after the sale (Australia was the first to issue them, in 1988) my father and I also met with his financial adviser. It was sobering — we kids didn’t appear in any of the projections.
Fair enough too. My parents are just either side of 80, want to have fun, and new hips or a hunky male carer don’t come cheap. But the meeting had me thinking for the first time about optimal portfolios for “very advanced retirees”.
There must be many readers who are VARs themselves. Or soon will be. In developed countries people aged 80 and over account for roughly a fifth of everyone over 65 years old. In England it’s almost a third — more than 3mn people.
Yet you never see investment advice for this cohort. Which is odd considering how much money VARs have. Americans 75 years and older still have more than twice the savings of the average person aged between 45 and 54 — even if it drops a bit compared with those a decade younger.
If you’re blessed with the genes to live to 80, the chances are you’ll see 89 if you’re a woman and 86 if you’re a bloke. But most retirement strategies focus on decades. I also bang on about long-run returns. My dad couldn’t give a hoot.
Is the ultra short run simply too morbid to model? Or is it because many rules of thumb go haywire? For example, there is a popular one that says you should only draw down 4 per cent of your portfolio each year if you want it to last a lifetime.
That approach was meant for retirements of 30 years and even Bill Bengen, the financial adviser who first articulated it, thought the number was overly conservative. It can be adapted for shorter periods, but the numbers quickly become ridiculous if you’re a VAR.
Likewise, adjusting returns for volatility doesn’t seem so vital. Who cares? Nor does the distinction between real and nominal returns. That feels heretical given how important inflation is. Look how we obsess about this week’s US consumer price data.
But see it through older eyes. As is the case in many countries around the world at present, my parents understand that the interest income they can earn from cash is roughly the same as the inflation rate.
Keeping their money on deposit, therefore, earns them a zero real return. But what a bountiful nought it is — allowing them to eat, travel or buy their only son a thank-you bottle of wine for the 10 bookcases he erected.
Sure, purchasing power matters. But more important is actual money appearing in your account every month. And besides, everyone’s exposure to rising prices is different. My dad’s inflation basket contains only tomatoes, red wine and now the rent.
The latter is rising in Sydney, like many global cities. But the glut of Shiraz grapes a few years ago provides a nice counterweight. Nor are elderly folks overexposed to the persistently high inflation across many services. Taylor Swift and pilates instructors can charge a thousand dollars as far as mum is concerned.
Of course, deteriorating health can change finances quickly. That explains the dip in average wealth as people move into their 80s. But they are rich with property. Indeed in the UK, three-quarters of them still own their home outright — the highest proportion of any age group.
Some will have sold earlier than my parents — thus the lack of mortgage. But how should those who have downsized late in life invest the windfall? Rush to Las Vegas or stuff it under the mattresses?
Thank goodness a sensible answer is more obvious today given higher interest rates, flat or inverted yield curves, and relatively rich valuations for risk assets such as equities: 80 per cent cash, 20 per cent stocks.
It comes from another famous investment rule — that you should allocate 100 minus your age to equities throughout your life, with the rest in bonds.
Octogenarians having just a fifth of their portfolio in shares makes sense to me. It leaves most of it in safe assets, and yet if stocks rally like mad, such as recently, they reap some gains. There is nothing worse than reading about the latest hot trend, be it the metaverse or AI, and feeling old and left out.
Plus equities have the highest real return of any asset class over longer time periods. That means your children should ultimately thank you for remembering them too. They can raise the allocation later.
Meanwhile, thanks to higher interest rates, 80 per cent of your portfolio will be spewing cash. And because yield curves are flat to inverted, you receive as much or more yield in a deposit account as you would buying three, five or 10-year bonds — and the prices of those can fall.
That’s what my parents are going to do, anyway. That said, I wish them, and every reader in their ninth decade, such good health as to render this approach wrong.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; Twitter: @stuartkirk__
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