The only way to properly engage in the financial planning process is to have knowledge.
Armed with factual knowledge the path to financial independence is so much easier and more enjoyable. With this in mind let us challenge some common propositions that may be taken for granted, but are at the very least, questionable.
Retirement income as a percentage of pre-retirement earnings.
It is plain lazy and mostly inaccurate to assume that your retirement income needs can be based on your pre-retirement earnings. Commonly it is proposed that you should assume that your retirement income needs are between 66% and 75% of your current wages.
Ignore this and do the actual figures.
In retirement, you should not have; loan repayments, superannuation contributions, taxes, school fees, work related expenses etc. Nor will you have a salary. So forget the percentage formula and be prepared to carefully consider your retirement lifestyle and the true cost of maintaining it.
Close enough is not good enough.
Once your salary stops and your life is to be funded from your savings, it is critical to take control of future outcomes as much as possible. You can only achieve this by taking the time and the effort required rather than letting it happen by chance. Even relatively small errors in projections and estimates can lead to significant variations in your planed strategy.
The more income you believe you require, the more capital you will have to save to meet this requirement.
Risk profiling.
The assumption that allocating your money into different asset classes (shares, property, cash) will produce a predictable outcome is wrong.
The assumption that by taking a higher risk you will achieve higher returns over a defined period of time is also wrong.
The proposition that the “lower the return the safer the investment” may suite the banks, but is also baseless.
Asking a client a few silly questions about how they may react to uncertain market outcomes and than allocating their savings accordingly, is negligent and dangerous.
Check out your current asset allocation and ask your self;
- Why do I hold these assets?
- Will they produce my desired outcomes?
- Do I have options?
Security of investments and guarantees.
Although fixed/ guaranteed investments have attracted a significant movement of retirement money since the beginning of GFC, you need to question and understand the real security of these investments and guarantees provided. Government guarantees are the ultimate security and they are limited to Government bonds and bank deposits of up to $250,000 per account per deposit taking institution.
Semi government, state government and corporate bonds are next in line and are assessed for their security based on the balance sheet and cash flow of the issuer, and then rated by an agency like Standard & Poors, or Moodys.
Unfortunately, many guaranteed annuities and retirement products are offered by institutions which may be guaranteed but may carry a low rating, or may not be rated at all due to the underlying assets within that product.
As we well know, the size and the previous reputation of financial institutions does not necessarily mean security.
Understand and compare the investment risk before committing your savings to that product.
Locking in Investments for long term or life.
Why would you do it? Is it because they appear to offer long term security and certainty? The fact is that the outcome may in fact be quite the opposite. Your circumstances are likely to change (losing a partner, where you decide to live etc.) and you may need to rearrange your finances as a result.
Remaining flexible and maintaining control of your finances will allow you to continue to make decisions with your money that is in your best interest throughout your retirement.
Should all your retirement funds be in Superannuation?
Which structure you hold your retirement savings within is very much dependant on your individual circumstances.
However, unless there are significant tax and/or Centrelink advantages in holding your savings in the superannuation environment in retirement, holding your money in this structure may be costing you unnecessary fees.
As with any element of your financial situation, you always need to understand the reason why your money is where it is? This also applies to superannuation.
Comparing returns from bank interest and bond yields with share dividends.
This is a concern, as many publications are forever speculating as to whether and when, retirees should look to switch from fixed interest or yield to dividend income.
There is nothing to compare! These are entirely different investments.
Bank term deposits offering 5% p.a for 3 years, will pay exactly that and your capital of up to $250,000 is guaranteed at the end of the period.
A company which paid a 5% dividend has done so based on historical trading outcomes.
Neither the future rate of return nor the capital are in any way certain and definitely not guaranteed going forward.
Where is the similarity?
You can only achieve growth through shares or property.
If growth means; surplus return after inflation, tax and costs than this proposition is clearly wrong.
Simply put, if you can achieve a total return of 5% from whatever source and the inflation is at 1.5% and you are not paying tax (pension phase in the superannuation environment), than your net return (call it growth, if you haven’t spent it) is 3.5%.
What seriously impacts on growth are the uncertainties that are thrown our way and the fees that are paid.
Indexing retirement income.
If you are fortunate enough to be a recipient of an indexed government pension and it suits your objectives; good for you.
On the other hand, do we need to index our retirement income streams and at what rate and cost, if it is from private funds?
It is my experience that for most retirees, the peek spending needs (not allowing for change in health or accommodation) happen within the first 10 years from the date that client finishes work.
The living costs gradually decline after this period and then level off. For this reason, I believe that purchasing an indexed income stream in retirement can in fact be counter-productive, expensive and as previously stated, undesirable.
Review your actual living costs and needs as you go and make sure you can make necessary adjustments.
Keep it Real- Be Careful.
Finally, there seems to be an increasing trend in intelligent, well to do retirees being ripped off.
All sorts of schemes are being offered, ranging from Nigerian letters, high monthly mortgage returns, batting syndicates, and overseas shares to commodity and currency software and highly geared property road shows. Over a 35 year period of being involved in accounting and financial advice, I have come across my fair share of these generous invitations to our clients.
My question is; “If the proposition is that good, why do they need you?”
Always be sure to fully understand where your money is being invested and why you are investing your money in that manner.