One of the questions I’m most asked by retiring clients is, “How do I manage my investments once I’m retired?” While I could give them all the technical information and thought processes behind it, that may not help the client understand. I find that stories and analogies are much more useful in explaining concepts. Yet for many years I struggled to find a good analogy for my clients. When an apartment building was constructed across the street from our old office, I found my inspiration!
Constructing buildings and portfolios
A retirement investment portfolio is like owning an apartment building. You spend your career constructing a building one floor at a time. Each year you save money, the total investment pool grows, and you develop a sizable building with multiple floors and apartment units. And when you retire, you stop construction and begin filling the building with tenants. Thus, at retirement, the focus changes subtly from growth to income, and that’s when you get the rent checks.
Managing the building
In our case, we carefully select a handful of property managers to look after the building and collect the rent. But unlike a real apartment building, our managers review the tenants’ financials each quarter to ensure their rent checks will continue arriving without concern. And if the manager has concerns about an existing tenant, he can swiftly remove the tenant and replace them with a tenant they like better!
Insuring operational costs
Over the long term, we’re confident the building and the land will appreciate in value. We also know, however, we may need capital for major repairs and upgrades. This is where our planning incorporates an “insurance layer.” This layer of investment — generally filled with guaranteed interest certificates (GICs) — ensures that we always have cash for those big expenses whenever they happen, regardless of the state of the building or the tenants.
Typically, we like the insurance to be enough capital to cover three to five years’ worth of income/rent checks. We hope to never need this capital, but an event like 2008 may happen again. And if it does, we really do not want to put any “mortgages” on the building or be forced to sell an apartment unit at a discount. Thus, this layer allows us the privilege to keep the building intact and keep things moving along for many years.
I am slightly stretching the analogy, but one added factor that an investment portfolio provides us, which a building may not, is that we could sell an apartment unit or two at the time of our choosing. It is not uncommon, nor is it a particular problem, to choose periods when we “stratify and sell” an apartment unit or two. If the building/units have appreciated in value and inflation has caused expenses to increase, we often need this added capital to get through our later years. Yes, it means that we have fewer units to generate income, but when planned properly, we can afford to sell parts of the building as needed without running the risk of selling them all off before you “check out.”
Ideally, we are never in a position where we need to sell units in the building. If, however, the building was not large enough when we started, it is a process that may be needed without compromising one’s ability to pay their bills through retirement.
Psychologically, I would suggest that there is great strength for the client in keeping this analogy in mind when looking at their retirement portfolio. We know that both investment portfolios and real estate values will go up and down. Why then is it that building owners do not seem to get too concerned when real estate values go down, whereas many investors become very concerned with reducing values?
I hope you have found this analogy useful. Please feel free to try a version of this with your clients.
Bryson Milley is a 21-year MDRT member from Vancouver, British Columbia, Canada, and a Top of the Table member. The views expressed are those of the author and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.
For more advice on communicating with clients:
- Listen to “Communicating with almost-retirees when the market tumbles”
- Read “The 3-minute inflation explanation that clients will remember”
- Watch “Learn questions that matter to clients” [MDRT members only]
- Watch “A simple way to explain term vs. permanent life insurance” [MDRT members only]