John Cameron's personal blog

One of the major messages that superfunds direct to young people is not as straight forward as it seems – and may even hurt them financially.

You see, superannuation funds often encourage young people to put extra money into superannuation, so that they can reap the long term benefits of compounding.  The logic is simple – put more money in now and there will be more there to grow and compound over the long term – possibly lots more.

The result of the funds’ projections is pure mathematics – and maths does not lie. 

Income Protection insurance is about to make a change – for the worse.

The gold standard of income protection, has long been “agreed value” policies, and these have been the products that most advisers have recommended to their clients.

With agreed value contracts, the amount that you will receive when you go “on claim”, is agreed up front, at the time of taking out the policy, and is based on your income at the time of taking the policy out. This provides a high level of certainty of your cover. As Always, there is a catch. If the insurance company needs to (e.g. if it is losing money), then it can increase your premium (well, not just your premium but the premiums of everybody who has that sort of cover).

Whenever you invest, there is a trade-off between risk and return, and this is undoubtedly true.

But, when it comes to measuring risk, things are not always what they seem.

The problem arises with the way in which analysts measure this risk.

One of my favourite pastimes each Saturday is reading the weekly column by Nikki Gemmell, in The Weekend Australian magazine. She writes about life and the lives of herself, her family and people she has known, and gently draws valuable lessons from them.

Last Saturday, she wrote about 2 people who had been high profile in their day, earning big money. However, their later years were nothing like their early years. The money ran out, their health deteriorated and they spent their last days in relative poverty.

That’s a story that we are likely to hear more of, as the population ages, but it is a problem that Financial Planners are well positioned to help you avoid.

Most of us had retirement dreams, and couldn’t wait to finish work. So once retired, why haven’t we started ticking items off the bucket list? There’s no time like now for living your dreams.

When Tony and Chris retired they had grand plans involving a campervan, Kakadu and a rescue-dog. Their great Australian road-trip was happening the very next year, after they, “just got few things out of the way”.

Things like their daughter’s November wedding, then the kitchen reno in January. Kakadu wasn’t going anywhere; it would wait until July – after Chris’s knee reconstruction.

When comparing different superannuation funds, how confident can you be that you are comparing “like with like”?

The short answer is “not at all”.

Generally when comparing funds, the media like to bunch all those with the same label (such as “balanced”) together, and then compare the performances. Funds are classified as “balanced”, “growth”, “conservative”, etc., depending on the split between “growth assets” and “defensive assets” within each fund. 

There’s a common view that as you approach retirement you should tilt your investment portfolio towards more conservative investments. This means favouring things like term deposits, annuities and cash management trusts while reducing exposure to more volatile assets such as shares and property. The thinking is that preservation of capital is key, as without an earned income it is hard to recover from any downturns in the share or property markets. 

In the days of high interest rates this might have been a good strategy, but when interest rates are low and life expectancies long, being too conservative with investment can see the money running out way too soon.

Peter plans to retire on his upcoming 63rd birthday. He has $600,000 in super and wants this to provide him with an income of $50,000 per year. If his net return is 3% pa, Peter’s nest egg will last for just over 15 years . The problem is there’s a good chance Peter will live into his late 80s or even 90s. To give his savings a chance of lasting until he is 90 (27 years), Peter will need to target a net return of 7% pa.

Retirement: you’ve made it! And one of the rewards for all your hard work is that you can now access your superannuation. Suddenly a world of opportunities opens up – a Caribbean cruise, major home renovations or maybe helping your kids reduce some of their debt.

Of course you deserve to celebrate your retirement, but bear in mind that your super might need to support you for the next 30 years or more. Eat too far into your nest egg in the early days and you significantly reduce the time that your super will last. This is particularly the case in a low interest rate environment.

Take Ron and Val. They retire with a combined super balance of $800,000. At an interest rate of 4% pa this nest egg will fund annual living expenses of $60,000 for 19.4 years[1]. If they spend $100,000 on travel and home renovations and give a further $100,000 to their children, the reduced nest egg will now only last 13 years.

There are a number of super funds built on the concept of “life stages”.

This means that the fund is heavily invested in growth assets such as shares and property when you are in your younger age. As you get closer to retirement, the mix of investments changes, and shifts more towards low volatility and low yielding things such as cash and fixed interest funds. Hence, the fund balance changes as you go through different life stages.

- There is a superficial appeal to this approach.

We have the lowest interest rates in our history, and the Reserve Bank warns that we are in for a prolonged period of low rates.

But just how low can they go?

Well, there are trillions of dollars world-wide that is currently subject to NEGATIVE rates. That’s right, NEGATIVE interest rates.

Imagine the following. You know a young couple with a family, a mortgage, and all the other commitments that go with modern family life.

Then, tragically, one day one of the parents is killed.

When the survivor gets him or herself back together after a few days, the survivor contacts their insurance company, to lodge a claim, only to be told that their insurance has been cancelled because of changed government laws.

At last, I’ve made it. Here I am battling away for years and then, all of a sudden I get the phone call out of the blue. It reminds me of that old show business saying: “After 20 years of slugging away, all of a sudden I am an overnight success.”

I’m sure the callers must have picked me out for special attention, based on some achievement that I can’t quite identify. Surely they wouldn’t call just anybody. Would they?

Enough of the levity.

Anybody following the Hayne Royal Commission could be excused for thinking our superannuation system is broken. It is not – although parts of it need serious repair.

An excellent article in the Australian Financial Review of 18-19 August, addressed and dispelled a number of myths surrounding the superannuation system.

The author of the Chanticleer column identified the following myths:

Good question. When you look beneath the surface of the Account Based Pensions offered by major superannuation funds, the answer is “quite a lot”.

How well an Account Based Pension serves you depends on its returns, and the risks taken to get those returns. Any financial planner worth his or her fee can help you structure a portfolio that provides a risk/return trade-off that meets your needs, both initially and, most importantly, over the years

The major tool to manage risk is “asset allocation”. This is a simple idea, and it relates to how much you have in safe, low risk investments, such as term deposits, cash and short term Government bonds, compared with how much you have in more volatile (but potentially higher yielding) investments such as shares, and property.

It’s that time of year again, where super funds are strutting their stuff, and the best performers are crowing about their place in the league tables of fund returns.

But, there is a dirty little secret to this exercise – it only tells half the story. The funds boast about their performance, but mention nothing of the risks they took to get that performance.

Mostly, they focus on the performance of their “balanced” option, which is usually understood to be a middle of the road mix of defensive and growth investments.

Retirement is one of the major lifetime events. Like lots of important events, proper planning is an important key to success. Finance is not the only area, but no doubt it is an important one.

So what should you do to prepare your finances for life after retirement? Here are 5 things to get you started.

1. PAY OFF DEBTS BEFORE YOU RETIRE.

Often when you go to a financial planner to plan your retirement, they will give you a graph to show how your capital might fare over a period.

The process is fairly simple. You start with an amount of capital, it earns interest, dividends and growth over time, and this grows the amount of capital. Deduct the amount you draw to live on, and you are left with a balance. Then, draw a graph of the balance each year, and there is your future capital mapped out.

However, this comes with at least 2 serious drawbacks.

Just as crops are first grown, then harvested, so is wealth.

Think of all the years of putting money away into superannuation. Money is regularly added, and this can be thought of as fertiliser. It helps the crop grow. Then there is the performance of the investments, which grows over time, with the occasional setback (much like a crop can experience setbacks due to weather, disease etc.).

All of a sudden it is time to harvest. Just as a well tended crop of fruit trees can go on producing fruit year after year, so to with a well structured investment portfolio. 

We have all been taught to look at the percentage rate of return when comparing investments.

However, in many situations it is important to look deeper than just the annual percentage return.

This is especially so in the case of retirement.

Black Swan Events are things that happen, but nobody sees them coming. Mostly the term relates to events in the financial world, where markets change suddenly, without apparent warning. Examples include the GFC, and the 1987 sharemarket crash.

Black Swan events can also occur in our personal lives, such as when a close family member is struck down by a sudden illness, out of the blue and with no warning. A current example is diver Taneka Kovchenko, who had to withdraw from the Commonwealth Games because of a medical diagnosis that “one dive gone wrong could turn her into a paraplegic”.

Then there is the example of Tim Paine. Who, 12 months ago would have tipped him to be Australia’s captain? He had a record as an outstanding wicketkeeper, but his career was hampered by serious injury (a broken finger that took several surgeries to heal), and at the start of the season he was playing for Tasmania as a batsman, and seemed to be on the way out of first class cricket.