PLANNING ON IT: Split portfolio three ways to ward off value erosion

ONE of the biggest challenges in retirement is how to invest your money to provide an income while still protecting yourself against the eroding effects of inflation and income tax.
Investing in fixed interest gives certainty of income but returns will be low and unable to keep up with inflation.
The alternative, investing in growth assets such as shares and property, will give a better return over the long term but with increased uncertainty in the short term. For that reason, many retirees are afraid of shares. However, there is a way of structuring your portfolio so you can use both income assets and growth assets to advantage. Here is how you do it.
Divide your portfolio into three amounts. The first is a lump sum of cash that is the equivalent of six to 12 months' worth of income. For example, if you need $1000 a month to top up your income, set aside $6000-$12,000 in cash. This amount should be placed in a high interest on-call account.
The second amount of money should be the equivalent of one to three years' income; in our example you would set aside $12,000-$36,000. This should be invested in good quality fixed-interest investments.
The third amount to be invested is whatever is remaining after setting aside the first two amounts. These funds should be invested mostly in growth assets with a small amount of fixed interest.
The way this strategy works is that over a three or more year time period, the gain from your growth portfolio can be cashed up and put into your income portfolio to keep both portfolios constant.
The interest from your income portfolio can be put into your on-call account to keep it topped up, along with proceeds from investment maturities as required.
 Liz Koh is a financial adviser, based in Paraparaumu. Her disclosure statement can be obtained free by calling: 0800 273 847. Author of Your Money Personality; Unlock the Secret to a Rich and Happy Life. She can be contacted on liz.koh@moneymax.co.nz or view: www.moneymax.co.nz.