Many of my clients manage a self managed super fund and we often have in depth discussions about the major concerns they have (or ought to have) about their retirement. In today’s blog I discuss some of them and provide some thoughts on how to deal with them.
The key risk in retirement is to outlive your savings and then have to rely on the age pension. This is a real and serious risk. Once you made it to 65 years of age you should expect to live another 20 years and it would be best to plan for another 25 years of a hopefully active life. As such many financial advisors believe that you’ll need at least $ 1 million to retire comfortably. This amount will provide $ 50,000 p.a. in retirement income if we presume a return of 5 %. You can get 5 % return relatively easily as Australian dividend income if you include the then tax free franking credit.
However, you need a lower fund balance if you can increase the return on your funds. Or if you achieve a higher than benchmark return your retirement quality (available income) will improve dramatically if you have the before mentioned $ 1 M super fund balance.
In order to achieve a higher return than just dividend income you’ll need to stick your neck out somewhat and decide that you’ll have to more actively manage your funds. You need to discard the buy and hold strategy usually favoured by financial planners (It’s less work for them!). You need proven strategies of stock selection (Go for growth not only yield!). You need to manage those positions as not every trade will work out. That means you need a hard stop loss level where you realise the trade is not going to work out and where you get out with a small manageable loss having sufficient funds left trying something else. You also need a way to take profits in a systematic manner. You could shoot for percentage profit targets, get out at obvious resistance levels or take profits at classical charting minimum price objectives. Alternatively you could use a trend following approach and stay with a winning position for as long as the trend is still up and only take the profit once the stock turns into a downtrend. An active strategy requires time, education and commitment and the ability to handle a setback but the rewards are well worth the effort.
Loss of capacity
I see this with parents and friend’s parents. Mental acuity very often goes down from around age 75. You can hope that this will never happen to you (Good luck!) or you can at least delay it through being mentally active (try playing a musical instrument – other than a CD player-, learn a foreign language or read Latin poetry or the Bible in Greek or do any other mentally stimulating and difficult activity such as trading and investing!). And the problem is that you won’t realise that you are not that sharp anymore and very often we are in denial. But eventually organisational skills go down and you’ll find it harder to keep up with the administration of your super fund and with managing your investments. So plan for that event if you think this will never happen to you and get your children involved so that they know where things are and who does what. Teach them (as early as possible) your trading and investment skills and start investing together so that they can take over with investment decisions for you when necessary. Yes, this requires trust and there is a chance that your children disappoint you but it is better than not staying on top of your financial affairs.
It is also important to organise your affairs beyond your death. This usually means having in your super fund – as early as possible – a binding death nomination for your surviving partner so that she / he just takes over the pension until her / his death. It is important to talk to your accountant about this early enough so that everything is sorted if the unexpected happens. This will avoid a lot of headaches for your children and your surviving partner.
Most client portfolios I see are not sufficiently diversified. Trustees stay with the usual suspects (the banks, Telstra, Woolies, BHP, RIO and maybe CSL) or they go for the high risk speculative mining company. They tend to have too much cash and scarcely any overseas exposure. But the large cap end of the Australian market is not always the best segment to invest in (growth is hard to come by these days) so looking at mid caps with higher growth potential is very important. Australia has periods of significant outperformance of world share markets followed (as now) by severe underperformance so although you are based in Australia it does not make sense to keep all your assets there and you should seriously consider overseas investments. I like direct share investment in the US as this is by far the largest share market in the world (around 50 % of world market capitalisation) and you’ll find sectors there that are simply not available in Australia such as chip makers, fibre optics, biotechnology, and the famous FANGs, and the new and upcoming ‘next big thing’. On top of that I believe you should seriously consider investment in ETFs or CFDs on ETFs on other countries outside Australia and the US (as it is hard to be an expert in many different markets). There are many country specific or region specific ETFs out there either listed on the ASX or on ARCA, a subsidiary of the New York Stock Exchange. This allows you to easily gain exposure to emerging markets, frontier markets, South America or any specific country with a nice story (e.g. rally after the Presidential elections in France or South Korea).
It’s your money. You call the shots and even if you have advisors you’d better know what you are doing so you can supervise your advisors and make sure they work in your best interest. In order to “know what you are doing” you’ll have to educate yourself in financial and investment matters. Many of my acquaintances (they seem to be all smart and intelligent people all working in IT for some reason) are not educated in financial and investment matters, usually only buy investment properties (because it’s easy and property never goes down….) and put education in the ‘too hard’ basket. But what if a few years of “learning the ropes of investing” will get you to achieve a return of more than double the standard blended long term super fund performance of around 6 % after fees? Could that motivate you to increase your investment knowledge? Let’s say you can achieve an excess return of 10 % points (over and above the usual 6 % super fund return of a balanced portfolio), that would translate of additional income of $ 50,000 p.a. on a $ 500 k super fund balance or a cool $ 100,000 on a $ 1 M balance? And through learning the investment ropes you could get to the magic number of $ 1 M in super balance earlier? Well, I believe it’s of utmost importance that you know something about investment and know how to manage your share portfolio for superior return. Once you got the hang of it, and yes, this will take some time, it’s not going to happen overnight, you have a skill for life and you can transfer this skill to your children, probably the best gift you can ever give them.
Enough of the pep talk for today and in one of the next blogs I’ll discuss how to educate yourself in share investing in more detail.