John Cameron's personal blog

Most of the principles, ideas and guidelines around how to structure retirement income, have been developed by theoreticians, and are often impractical and out of touch.

Now, a financial planner with decades of practical experience, has produced a booklet that looks at the performance of different asset classes over almost 50 years. The main conclusion   –   there is no “best” answer across all times. It depends.

To download a copy, go to: http://www.blackswanevent.com.au/landing-page-lump-sum 

I’m going to stick my neck out just a bit and say that: “Retirees have got a raw deal over the last couple of decades”.

Nothing new there you might say. But, what I am referring to is the advice that has been available to retirees when it comes to investing their superannuation to produce an income stream.

And, no, this is not another diatribe against financial advisers, as the problem lies much deeper.

The term “Black Swan Events” has a particular meaning in investment circles.

The term refers to events that are unexpected and unforeseen. They can be either negative or positive, but such is human nature that the main focus is on negative events and their consequences. One recent Black Swan Event was the GFC in 2007 – 08. The GFC damaged a lot of people, and the overhang is still with us.

Generally, the term is used in financial markets, but then again, it can just as much be personal, and close to home – a sudden family illness, a major accident, or finding your home is riddled with white-ants and in need of major repairs. All of these could be very costly.

Recent reports in The West Australian have shown people nearing retirement are confused, with many planning to keep working beyond the “normal” retirement age of 65.

The state of confusion is hardly surprising, given the unique financial times we are in, and the mixed and often contradictory signals that emanate from various sources (who often are pushing their own barrow.)

Talking about mixed signals, let’s start with the stockmarket. Every night, commentators fill our television screens, with graphic accounts of how much the market has gone up, or down during that day. Even if nothing has happened, they still go to great lengths to make it graphic. But, then I guess that is the nature of television. A factual statement such as “nothing much happened on the market today”, - next story please -  would hardly have viewers glued to their sets. After all, there are ratings to think about, aren’t there!

Redundancy payments are in the air again, with the WA Government announcing plans to cut the number of public servants.

However, there is a nasty little surprise lurking in the tax laws for people over age 65. The tax treatment is very different either side of 65.

Just to be clear, what we are talking about are specific REDUNDANCY PAYMENTS. These are separate from superannuation and a range of other exit payments. Broadly speaking, a redundancy payment is a specific extra payment that is made when an employees’ job has been abolished, and the person is no longer required. Redundancies can be either voluntary, or not.

The following article "Where To Look For Income In Times Of Low Interest" was written by John Cameron and appeared on pg 2 of The West Australian - Financial Planning Supplement - 21st August 2017.

The figures quoted are taken from special research into retirement incomes, undertaken by Delta Research and Advisory at John Cameron's behest.

More will follow over coming weeks.

Once again, the Commonwealth Bank is in the firing line. This time it is under a cloud for, allegedly, not meeting its obligations to report suspicious financial transactions – and the press is having a field day.

Foremost among their comments/analysis/hysterics (pick your own descriptor) is the conclusion that the CBA has a poor culture, and they need a better one. Well, call me pedantic, but I think that qualifies as nothing more than a giant SBO (Statement of the Bleeding Obvious), and a solution needs more than endless SBO’s, but some deeper analysis.

Firstly, what is culture? In this context it should refer to the values that drive expected norms of behaviour – that is, how are people expected to behave, as dictated by beliefs and values of the workforce. If somebody does the wrong thing, they will be pulled up by their peers, not just by the managers. It cannot be captured in policy procedures, memoranda, protocols etc.

There has recently been serious concerns expressed in major media, about investors in account based pensions (it applies to other vehicles as well, but most of the rant has been about pensions).

The “concern” goes like this: “because a lower company tax rate will mean companies are paying lower tax, the will have fewer franking credits to pass on, and investors will get smaller tax refunds.”

Oh, save me. There is a serious misunderstanding here.

The twin elements of investment are risk, and return. We are constantly told that you cannot get a better return, without taking on more risk (but the reverse doesn’t apparently apply. If you invest in higher risk investments, it doesn’t follow that higher returns will necessarily eventuate. And, here the argument becomes fairly circular – more risk means more risk, which may mean no return, or total loss - if you get my drift).

The current way of measuring risk, is to look at the average volatility of returns over an extended period (in practice it is a bit more technical, but this is the essence of it). The more volatile the returns, the riskier the investment, and vice versa.

This way of measuring risk has been around since the 1950’s, and it was certainly a big improvement on what went before.

The recent Federal budget contained some incentives for older Australians to sell their homes and downsize. Specifically, people over 65, who were selling their home that they had owned for 10 years or longer, will be able to put $300,000 each into their superannuation. Previous restrictions that would prevent this, will not apply.

However, it remains to be seen how attractive this is, especially to people who may lose all or part of the age pension in the process. By freeing up capital in this way, it moves from the non-means testable area (your home), into the area where it becomes means testable. In the process, all or part of your age pension may be affected.

In our experience, people often decide not to downsize when faced with this loss of pension. However, this action is not logical and puts too much emphasis on the age pension. After all, the age pension is nothing but a source of income, and it is not inherently better than an alternative source of income.

Look at the literature over the last hundred years or so, and you will see 2 classes battling for the economic upper hand. They are Labour and Capital. 

Karl Marx based his whole theory around this battle. While classical and neoclassical economists portrayed it in less confrontational terms, much of their theories were still based around competition between these two classes.

Enter the third class – Consumers.

RETIREMENT INCOME SEMINAR

Important issues for retirees: Estate Planning, Investment, Income...

Details and RSVP:

1. Changing Times

For several years, we have been in an environment of ever falling interest rates, as Governments have relied on monetary policy to fix the damage wreaked by the GFC.

However, while this has arguably prevented some really horrible things from happening (such as a world-wide depression), it has not succeeded in making good things happen. Now many are looking to more Government spending to boost economic growth. In this context president-elect Donald Trump spoke on election night of modernising America’s often old and creaking infrastructure and making it the world’s best. Depending on the scale, this would indeed be a game changer. If successful, it could also draw other countries down this path, as well as lead to rising (instead of falling) interest rates.

In certain parts of the financial world, we are meant to provide advice that is “clear, concise and unambiguous”.

This is a very worthy goal. A quick glance at some stock exchange announcements shows that “clear, concise and unambiguous” is often missing in action.

Announcements are often couched in terms that are unintelligible to ordinary people. It is as if they have been framed so that only members of the “financial tribe”, who are schooled in that tribe’s mind numbing jargon can hope to understand.

Two major global events this year have defied the expectations of the media, be it mass media, social media, or any other media.

I refer to Brexit, and Donald Trump’s win in the US elections. If you followed the build up to both events, you would have thought that there was no way either of these events could turn out the way they did – let alone both.  

Furthermore, the chatter beforehand held that either event would lead to the collapse of the stockmarket, and the economy going down the toilet. 

(Will Governments start spending more to boost growth?)

Over the last few months there has been a notable shift in the narrative around economic policy.

Since the GFC, the main tool of policymakers has been monetary policy (think record low interest rates). 

Miracle of Miracles, Wonder of Wonders -  the much debated, and heavily criticised (by some) changes to the superannuation system have passed Parliament and are set to become law. The original changes (amendments) were announced in the May budget. As a result of heavy criticism, the original amendments have been amended sufficiently to pass through the Parliament.

Passage through Parliament at this time indicates a degree of cooperation between the various political parties. It was starting to look like they may not pass until the March sitting of Parliament, and this would have put their implementation date under pressure, as the changes are due to start on 1st July, 2017.

Now the work begins of looking closely at the details. On first glance, it looks like the effects of the changes will vary greatly between different individuals. Some people will see no change at all. For others, the changes will be substantial. More to come.

“Black Swans and Stunned Mullets - Two Species Often Found Together”

Black Swan Events occur when something that was totally unforeseen, or at least very unlikely, happens.

On that basis, if you had listened to the experts, the win by Trump, certainly qualifies. The airwaves were full of forecasts of a Clinton win. The smug certainty of all the pollsters and forecasters before the election is now matched only by their “stunned mullet” demeanour since the election. Talk about egg on face, or any of dozens of other metaphors, but the message is clear – the experts often get it wrong – way wrong.

ASIC has recently penalised banks (again) for failures in their financial planning divisions.

This time it was for charging customers “advice fees”, which entitled the customers to annual reviews. However, no reviews were carried out.

Whatever happened to good old fashioned service? you might ask.