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. 

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.

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.

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.

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.

One of the issues that repeatedly crops up when dealing with clients is, “How well placed are you to deal with unforeseen expenses?” 

The expenses can range from relatively minor things such as an appliance suddenly failing, a minor car accident or a leaky roof, through to things far more catastrophic – a major illness, death of your partner, loss of job, marriage breakdown or any of a whole host of other things.

I started thinking along these lines, on reading a story in the Financial Review on 1st July. The story reported a survey carried out by the US Federal Reserve, to assess the resilience of American households if some financial shock occurred.

In the financial world, “Black Swan Events” are unforeseen changes that have a profound impact.

The term ‘black swan event” has come into regular play in the world of finance since Nazim Taleb’s 2007 book, “The Black Swan; the impact of the highly improbable.”

Recognising the existence of “Black Swan Events” is profoundly important, and has significant implications on how we all should manage financial matters. In some ways, the lessons of Black Swan Events challenges much of the conventional wisdom of financial planning.

Last week was a bad week for the banks so far as publicity goes.

Prime Minister Malcolm Turnbull gave the banks a genteel tongue lashing (they hadn’t always acted in their customers’ best interests, he said) at a lunch called to celebrate Westpac’s 99th birthday. 

A birthday party may not be the usual place for a VIP guest to give his hosts a jolly good talking to, but the PM’s words were soon followed by a chorus of politicians calling for a Royal Commission into the Banks. Motives undoubtedly varied from the purely political to the more principled. However, nobody has yet spelt out what they want any Royal Commission to enquire into and there hardly seems any point in having a Royal Commission just for the sake of it. The Government, for its part has replied that ASIC already has Royal Commission like powers, and presumably could be relied on to use these powers if they thought it was necessary.