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Preserving Wealth for the Transitional Investor

The primary objective of a transitional investor is to preserve—rather than build—wealth. To achieve this, investors should take a tempered approach, slowly adjusting the composition of their holdings to support their retirement plans and meet their risk profile.

As investors approach retirement, their financial outlook shifts. While younger investors prioritize long-term growth, transitional investors—those navigating the years between their working career and retirement—have spent decades accumulating wealth.

With a sizable nest egg set aside, transitional investors are focused on how they will support themselves during their golden years and achieve their legacy-planning goals. They are entering a new phase of life, and although they may feel secure, they still need to employ a proactive financial strategy.

Adjusting risk

Traditionally, financial advisors recommend a scaled model for investors nearing retirement. Until the age of 50, investors can engage heavily with higher-risk assets. At 50, experts recommend that investors scale back to a 60 percent allocation for higher-risk offerings. At 60, this should decrease to 50 percent, and so on. This reduces the possibility of major losses in the years leading up to and during retirement.

It is worth noting that investing is personal. This formula will vary based on an individual's values and appetite for risk—and each investor should create a strategy that works for them.

That said, long-term growth is unlikely to be the best primary goal for transitional investors, even for those who are less concerned about generating supplemental income. Per Internal Revenue Service (IRS) guidelines, retirees must begin participating in mandatory distributions when they reach a certain age. This gives them less time to recover from potential losses from speculative investments before drawing on their portfolio.

Income over growth

To combat this, individuals nearing retirement age should adapt their investing criteria. This means pulling back from high-risk, high-reward investments, like ground-up real estate deals, in favor of more conservative offerings that can provide a steady influx of cash, such as private debt.

Industries that provide high-demand products and services—for example, logistics and transportation—typically generate reliable income streams. Real estate also performs well, especially assets like self storage and multifamily. Real estate investment trusts (REITs) outperformed the S&P 500 over the last 50 years, and self-storage REITs have been among the best-performing investments in the sector. Because storage is inexpensive to build and operate, it can achieve high margins and returns, making it an excellent match for the risk profile of a transitional investor.

Multifamily assets profit from steady demand, too. However, for those nearing retirement, working with an operator is preferable to pursuing a self-financed real estate deal, which will carry a much higher degree of personal liability.

Avoiding bad debt

Even within a stable, profitable asset class, many different risk profiles are represented. To succeed within self storage, transitional investors should focus on cash-flowing facilities and spread out liability by investing in a portfolio or fund.

When vetting a deal with an operator, investors must consider any debt attached to the offering. What appears to be a safe, low-risk deal can be seriously compromised by the burden of subpar debt.

Operators utilizing floating debt to finance deals in the multifamily, office and retail sectors are increasingly making capital calls to keep up with snowballing loan payments. Investors need to be cautious about placing their money in over-leveraged deals, or those shored up by variable-rate debt—particularly as interest rates climb.

Following the (industrial) money

Transitional investors can get some insight into the market by paying attention to the movement of institutional capital. Historically, pension funds concentrated their allocations on stocks and bonds. More recently, there has been a migration toward asset classes such as real estate, private equity and infrastructure.

In January 2023, the Prime Group closed on the largest self-storage fund in the industry after a $2.5 billion raise. The fund received substantial backing from institutional investors, including public pension plans and endowment funds. This is one example of how larger entities are adjusting their allocations to incorporate inflation-sensitive assets.

By tracking the tactics employed by institutional investors, individual investors can assess which asset classes, sectors and industries are a good fit for a transitional portfolio.

Balancing assets

A central tenet of any solid investment strategy is diversification. As transitional investors gravitate toward more conservative positioning, this remains key. Investors nearing retirement should continue diversifying across markets, assets and operators. This includes investing in a mix of asset classes, such as stocks, bonds, real estate and commodities.

Some diversification of risk is essential, too. In the case of self storage, an early career investor may look to participate in deals that offer significant growth in a higher-risk environment—for instance, ground-up development.

Transitional investors, on the other hand, should direct only a small percentage of capital toward these offerings. Instead, they should look for debt and equity offerings with a low-to-moderate risk profile. A modernized storage facility with steady occupancy and stable income projections will be well-placed to generate consistent revenue.

A gradual shift

As a transitional investor's priorities change, their investment strategy must also evolve. To ensure their portfolio remains aligned with their goals, it is important that investors regularly review their allocations. The primary objective of a transitional investor is to preserve—rather than build—wealth. To achieve this, investors should take a tempered approach, slowly adjusting the composition of their holdings to support their retirement plans and meet their risk profile.

By diversifying their portfolio across multiple cash-flowing asset classes, transitional investors can protect their wealth while enjoying the benefits of a lifetime of smart investing.

Ryan Gibson serves as CIO of Colorado-based Spartan Investment Group, a privately-held real estate investment firm specializing in the self-storage industry. He can be contacted at [email protected].

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