One question 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. Stories and analogies are much more useful to explain concepts. Yet for many years I struggled to find a good analogy for my clients. But I found my inspiration when an apartment building was constructed across the street from our old office.

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. When you retire, you stop construction and begin filling the building with tenants, thus 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, they can swiftly remove the tenant and replace them with someone they like better.

Insuring operational costs

Over the long term, we’re confident the building and the land values will appreciate. However, we also know 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 — 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 want insurance to provide enough capital to cover three to five years’ worth of income/rent checks. We hope to never need this capital, but an event like the 2008 Great Recession 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. This layer of protection allows us to keep the building intact and keep the financial plan moving along for many years.

Selling apartments

I am slightly stretching the analogy, but one benefit that an investment portfolio provides us, which a building may not, is the ability to sell an apartment unit or two at the time of our choosing. It is not uncommon, nor is it a particular problem, to pick 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, we’ll have fewer units to generate income, but planned properly, we can afford to sell parts of the building as needed without running the risk of selling them all before you die.

Ideally, we are never in a position where we need to sell units in the building. However, if 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, 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 decline, but many investors become very concerned with decreasing values?

I hope you have found this analogy useful. Please feel free to try a version of this with your clients. 

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.