Because the retirement pension is guaranteed until death, you do not have to worry after retirement about how long your money will last. If, however, you draw your assets at retirement as a single lump-sum payment, it is your responsibility to manage this money well.
Many people invest at least part of their capital on the financial markets in order to earn additional income. These investments can, however, involve fluctuations in value and losses. With a lump-sum withdrawal, assets may have to be sold to cover ongoing expenses. If these sales take place in an unfavourable market phase, this can impair the long-term preservation of assets. In addition, the capital generally has to be invested with risk in order to achieve a return comparable to that of a lifelong PF pension in the long run. Can you cope with such setbacks financially?
For investments on the financial markets, the risk depends above all on the chosen investment strategy. As a rule: the higher the share of risky investments – equities in particular – the greater the short-term fluctuations in value and the greater the risk of losses. But even bonds, which are generally more stable, can gain or lose value significantly when interest rate levels change.
With a balanced securities custody account consisting of slightly more than 50% equities, you would have achieved an average return of around 2% per year over the past 20 years after deducting standard market costs. During this period, however, the portfolio would twice have suffered a loss in value of at least 14%.
If you opt for a lump-sum withdrawal and for private investment of your assets, you should therefore be able, financially and personally, to withstand such losses in value. In addition, market crashes can hardly be predicted reliably. Sharp price losses immediately after retirement can be particularly unfavourable, when the withdrawn capital is invested on the financial markets for the first time.
So that you can bear the capital market risks of a private investment yourself, specialists consider that the following requirements should in particular be met:
- Expertise: do you have the necessary knowledge to have your assets managed, or to manage them yourself, in an interest-aligned and efficient way? Bear age in mind as well. With increasing age, health limitations – dementia for example – can impair the ability to decide consciously and independently.
- (Objective) risk capacity: can you cope with financial losses on your invested assets? Your accustomed standard of living should remain secure even if your assets temporarily lose more than 20% of their value in a stock market crisis.
- (Subjective) risk tolerance and discipline: are you also emotionally able to withstand such losses and to stick to your investment strategy? This applies in particular when a market downturn occurs at an unfavourable moment – shortly after retirement, for instance, when you have only just invested your capital. Anyone who finds it hard to stay calm in phases of uncertainty and sharp price swings may be less well suited to the risks of a private investment.