We love being financial planner's, and we absolutely love providing you with the best information. Here is a compilation of some of our favourites.
How to not run out of money.
My parents have always said to me, they plan to spend their last dollar on the day they die.
Before I was their financial adviser, I didn’t give this much thought.
I don’t want their money, so I took this as intended: don’t plan on an inheritance.
When I became their financial adviser, I realised this was an impossible thing to plan.
To be able to get this exactly right I’d need to know the date they intended to die on, the exact sequence of investment returns they would get and any changes to tax law in the future.
Even then, the ‘butterfly effect’ means a small change in their spending in year one of their retirement could have a big impact 30 years later.
The safest way to allow for any changes in the future? A margin of safety.
When preparing calculations, we might assume you will live to age 95. If you pass away at age 87 with money left over, does this mean the plan was wrong?
I’d rather my parents have money left over and tell me I’m a buzz kill than turning up at my house with their suitcases in 30 years’ time because they’ve run out.
So on top of investment returns, tax savings, and the like, there’s another thing to think about when planning your retirement: what margin of safety will you be comfortable with?
What to do after making a mistake
There's not a person on this planet who hasn't made a mistake in their life before, especially when talking about financials. It is a part of human nature and life for us to make them; embrace them as a learning curve.
It is your perspective and the decisions you make afterwards that truly determine how you come out on the other side.
Living in modern Australia, there are not many financial mistakes that you could make without ever recovering from.
These can range from following an investment trend and losing a few thousand dollars, to borrowing WAY out of your means and purchasing multiple investment properties that have experienced no growth.
But again, it is your perspective and the decisions that you will make that decide how you get through it.
The first thing to do after making a mistake is to acknowledge and accept the fact that you’ve made one. There’s no use pretending that nothing happened… if you want to make an improvement, you need to acknowledge the issue.
The second thing is to figure out what it is you can do to minimise the effects of the mistake and look towards the future. Be conscious of not making any more mistakes and really figure out how you can reduce the hurt.
The third is to come up with a plan or strategy that will get you out of the mistake. What are the right decisions for you to start making from now and into the future?
Making a financial mistake can have an impact on your money, of course, but it can also have a large impact on your time, and it only gets worse if you sit there and ignore the problem.
Take action as soon as you can, ensure that you are doing the right thing, and learn from your mistakes. Remember that you'll eventually come out on the other side.
No such thing as no risk
If you’re in your 50’s, you have probably thought that the closer you are to retirement the more you should be invested in low risk. This usually translates to you believing that you should be avoiding the volatility of growth assets such as companies.
The issue with this thought is that it fails to include the very real possibility that you may live for a long time and will need a larger balance to survive.
Risk doesn’t just disappear when you decide to put your money in non-volatile assets, it gets swapped out for the risk of you possibly running out of money in your retirement or downgrading your lifestyle.
Remember, when you retire you are no longer earning an income and the only way that you’ll be gaining any money is through the return generated by your retirement savings.
Let’s use a scenario.
If a couple had roughly $500,000 in retirement savings and maximised their concessional contributions each year for ten years while being invested in low risk cash investments (such as term deposits), they would retire with circa $1,000,000 in retirement savings. This amount would generate a return of around 1% ($10,000) and assuming you want to draw an income of $80,000 p.a., you’ll be on the back foot immediately by drawing more money than what your investment can generate.
Once you see this, you’re focus will shift from worrying about volatility to a worry about running out of money. You’ve essentially shifted the risk.
The alternative scenario.
If that same couple had instead maximised their concessional contributions each year for ten years while being invested in companies, generating a conservative return of 8%, they would get to circa $1,500,000 in retirement savings. By this point their retirement savings would generate a return of around $120,000 p.a., which is more than the $80,000 they wish to draw as income.
Still, people may find the alternative scenario to be risky.
A way to help handle this risk is to build contingencies into your plan for when a large market drop happens. We like our clients to have about 1-2 years’ worth of living expenses put aside for WHEN this occurs.
When you have the discussion about the risks involved in your investments, just be mindful about the trade-offs involved, such as your retirement lifestyle. It should never be a one-dimension discussion about volatility.
If you wish to discuss your options feel free to get in contact with our office at 07 4772 0938.
Why it’s not as easy as just buying shares while they’re cheap
“I’m going to wait until the market is at its lowest, and then I’ll buy up.” How often have you heard people say this? This is a common thing for potential investors to say, especially during tough times. But here’s the problem: they never put a number or timeframe on their plan, and that’s because ‘the market at its lowest’ is not something that anyone can predict. Not even Warren Buffett himself. If a financial adviser tells you that they can – run.
When people wait for the “drop in that market”, their cash sits in their bank account. The problem with this is that, currently, there is barely any return on cash. Interest rates are virtually at zero or 1% at the moment.
So, would you prefer holding onto cash and gain a 0-1% return while waiting for the “drop in the market”, or have a guaranteed return by investing, even if it’s a long term and possibly volatile plan? In the long run, people who invested will be better off than those sitting on cash.
Many of our clients come to us in their mid-50s. At this stage, on average, they have 10 years left of their working lives which equates to 260 pay checks. So, we look at how much of each pay check they need to invest in order to achieve their personal retirement goals. It can be a difficult stage of life.
Throw in a worldwide pandemic with lots of false information getting around, and it’s no wonder people start to question their decisions. It’s human nature for one to think “what happens if I buy now, and then the market drops even further?” There is generally a lot of fear.
So, what is our recommendation and take-home message? Don’t wait for the market to drop – invest when you have the money. Pick a strategy and stick to it. You don’t even need to think about whether shares are cheap or expensive – just decide how much you want to invest each fortnight and stick to it.
It’s a long-term game. As Warren Buffett once said: Someone's sitting in the shade today because someone planted a tree a long time ago
3 immediate changes you can make
There are a fair few strategies that we’ll be able to use immediately with most of our new clients to help achieve their retirement goals.
3 of the easiest and most important changes that can be implemented can make the biggest difference.
Cut your living expenses by 10-30%:
Putting 10-30% of your wage into your super funds (maximising your concessional contributions):
Looking at your superannuation investment strategy:
These 3 changes are not hard to put in place right now and the difference they can make to your retirement will be significant. Giving up some of your income now, will give you the ability to truly enjoy your time in retirement.
Should you move all your super into cash when you retire?
There is a common belief that in retirement you should have moved all your super into cash and defensive assets (such as fixed interest), but it really depends on your current situation.
If you are planning to retire at age 75 and live to 80, then it is probably a good idea to move your superannuation to cash because you can do so without having to worry about running out.
But retiring at age 60-65 and, on average, living for another 20-30 years, you just won’t experience the return needed to make those retirement savings last you over the length of your retirement.
Unfortunately for most people, they seriously underestimate how much they will spend in retirement. Even if they got the first year right, there’s a big chance they’ve forgotten to include inflation in their calculations as well.
People also generally underestimate how long they will be retired for.
That money is needed to last your entire retirement, not run out earlier.
So, how can you expect that money to follow you through without it generating a return on the way?
In most cases, you just can't.
Another thing to be wary of is if in a life cycle investment strategy, or similar, it’s common for superannuation funds to automatically change your investment strategy to something more conservative and continue to do so as you get closer to retirement age.
They assume that you want less volatility the older you get.
Volatility is not the thing that will do the most damage to your retirement plans, it is the lack of return needed to fund you throughout.
The thought that everybody needs to move their superannuation into cash by retirement is just wrong. There is no one-size-fits-all when it comes to financial planning and there are certain decisions that need to be made to achieve the best outcome for each individual.
Why a 10% drop in the share market shouldn't be a surprise. The week of 28 February 2020 the ASX200 had dropped by around 10%. This has taken many people by surprise. But should it?
Each year the ASX200 will on average decline by 10%.
This decline may continue and be more than 10%. What has happened so far is only the average.
What effect will Coronavirus have? No one knows.
Will company prices continue to drop in the short term? No one knows.
What are we doing based on this week? Going through our list of clients who were on the borderline being able to apply for Age Pension and updating their balance with Centrelink.
The rest of the work with our clients has already been done. For our clients who are still working, they know that a drop in prices is a great chance for them to accumulate more shares at a lower price. For our clients who are retired, we already have a plan in place for how they are going to continue to draw an income based on a 10%, 20%, or 40% drop.
Every 6 months we meet with our clients, and every 6 months we remind them:
You are invested in the largest companies in Australia and around the world. The price of these companies is very volatile.
Over time, we believe that the profit of these companies will continue to rise on average, and as a result your ownership ‘share’ will grow in value.
In the short term, expect a drop of at least 10% once per year. Expect a drop of 20% at least once every few years. And expect a drop of 40-60% at least a couple of times throughout your life.
If you have a Financial Adviser, and they haven’t had these conversations with you, they are doing you a disservice.
Active management VS Index management
An active fund manager selects the companies and sectors they believe are going to outperform a common index. For example, an active manager may benchmark their performance against the ASX 200. This index reflects the performance of the 200 hundred biggest companies in Australia.
Who wouldn’t people want all their investments going towards companies that outperform index management?
The issue with this, is that outperformance is highly unlikely. For every manager that outperforms, someone must be on the losing side of the trade.
So yes, your individual manager may outperform every now and then, but chances are you are going to lose out in the long run.
The reason for this is fairly simple. Most active fund managers charge a higher fee. So not only does your manager need to outperform, they need to outperform by more than the additional fee charged.
An example. A super balance of $500,000 is divvied up between 10 active managers who each get 50,000 to invest in the 30-40 companies that they believe will outperform. These managers charge a fee 1% higher than an index fund tracking the ASX 200.
Using the above figure, if the ASX 200 gained a return of 10%, you’d need a return of more than 11% just to get back to square.
Another advantage of index management is that you will automatically be very diversified. For example, the largest 200 Australian companies hold about 90% of the market capitalisation of all the companies (roughly 1500) in Australia.
So, what should you choose?
We believe that the time and effort put into searching for the outperformers can be better spent elsewhere. For example, minimising tax, making sure you are saving enough each fortnight, and things you can control.
If you have the ability see into the future and pick the active managers that are going to generate that larger return, then go for it.
If not, save yourself money on fees and stick with index management.
Why people in their 50’s are stuck in the middle. I’ve just had my first child just before I turn 30.
My father was 30 when I was born and his father was 30 when he had him. Based on this anecdote let’s assume the average 50-year-old has 80-year-old parents and 20-year-old children.
Out of these three, I believe that the average 50-year-old is in the toughest spot.
The average 80-year-old has probably had a pretty good run at retirement. They likely worked until 65 by which time they had their house paid off and a small amount of savings.
Centrelink Age Pension means-testing wasn’t as rigorous then so they probably got a full pension from day one. As a couple they might have received circa $30,000 per year.
Depending on the amount of savings they had they could probably afford to draw a bit extra from their savings which would have paid for some travel in the early years of retirement and as they slowed down they could have used this for other fun stuff (i.e. grandkids). Not a bad life at all.
The average 20-year-old is also in a pretty good spot. Mainly because the superannuation system will have been in place for the entirety of their working life.
Very soon they’ll receive 12% superannuation guarantee contributions. This means 12% of their salary will be forcibly saved in superannuation and compounded over 40 years. By age 60 they’ll have enough to replace their income forever-and-a-day without running out of money.
The average 50-year-old is in a bit of a pickle. They generally haven’t had superannuation contributions for their whole working life like the 20-year-old. There’s a good chance the Centrelink rules they operate under will be dramatically worse.
Already we’ve seen massive changes to means testing reducing the number of people eligible for the full age pension. That’s before we even consider all the talk about changing the age pension age to 67 or 70 or whatever it might be in 15-20 years’ time.
So that’s the bad news. The good news? You can make a massive difference to your retirement savings over the last 10 years of your working life.
We find on average with 10 years to go we can help our clients add around $500,000 to their retirement savings.
So, don’t be demoralised as you hear about rule changes to superannuation or the age pension. The most important thing is to get started on doing everything you possibly can to get in the best possible position.
Don’t rely on the pension and don’t beat yourself up over the fact that you haven’t gotten organised sooner.
The best time to start was 10 years ago but today will do.
Financial adviser vs stockbroker, which one do you need?
Often when I tell people I’m a financial adviser they ask me ‘what do you think the share market will do this year’ or ‘what do you think about NAB shares’ or something similar.
When I say that I have no idea they either think I’m holding out by not letting them know the ‘good oil’ or that I’m a terrible financial adviser.
The real reason is that these questions are more suited to the mind of a stockbroker rather than a financial adviser
It might be tough for them to hear but the reality is that typically trying to guess what will happen over the short term, or what the performance of an individual company will be, is next to impossible.
The question of whether some stockbrokers can outperform the average of the share market has been debated at length.
But the truth is it makes very little difference either way.
In reality, the answers to these short-term questions aren’t going to determine whether you can retire comfortably or not.
What does, and what defines us as financial advisers, revolves around three things:
In most cases, trying to guess what’s going to happen in the short term is just a distraction from the important questions. For example, are you using your income in the best possible way? Are you invested in the most suitable overall asset allocation? Have you done everything you can to minimise tax?
Once these questions are answered you will find that trying to squeeze an additional return out of your portfolio by timing the market or outperforming the average return may or may not be possible.
Either way it’s probably not that important.
Is renting ‘dead money’, or an opportunity to increase your retirement savings?
Most people have heard the saying ‘rent is dead money’. To some degree, it sort of is. Your cash will go in the pocket of someone else and you will not be getting any of it back.
However, there is more to consider.
A fair argument will mention that money going towards paying rates, interest to the bank, insurance costs, and maintenance/refurbishment costs are other examples of ‘dead money’ costs worn by a homeowner.
Purchasing a home is fine if it suits your lifestyle choice and you can afford to do so, just don’t underestimate the costs incurred by you.
If you decide to buy a home, there is a large chance that a significant portion of your income will be tied up into that single asset.
The positive in this, is that you are forced into saving through the loan repayments to your home. Because unlike your possible savings commitments, you must make those repayments.
But it then brings forward a large opportunity cost of being unable to use the possible spare cash flow elsewhere, whether it be through investing, superannuation contributions or even to assist with unforeseen future expenses.
Utilising this money to instead build your retirement savings and having a good investment strategy can have a large and positive affect on your future retirement situation.
However, you still need to make the correct financial decisions and not blow the spare income saved from not buying a home. Otherwise you may put yourself in a worse position.
If owning a home is a part of your lifestyle goals, ensure that you are taking everything into account and not disregarding those hidden costs that are rarely mentioned. Also, be sure that you are and will continue to be in the right financial position to fund your retirement goals.
Dallas Davison, Michael Hogue and Ali Hogue.