Most Australians worry super won’t be enough

I was listening to a short finance spot on the radio earlier this week and the presenter commented that 3 out of 5 people believed they wouldn’t have enough in super to support them in retirement, and that most felt their funds would only last 11 years once they did retire. Pretty scary.

Then I happened across an article today where REST Industry Super CEO, Damian Hill commented that “Despite the fact that many Baby Boomers are worried they won’t have enough money to fund their retirement and that they are not prepared, it is surprising that so few are starting the planning process early and seem to be in no rush to get any formal advice to help them on their journey.”

And I have to say that of the numerous “pre-retirees” we’ve met with over the past couple of years, most have cited having to “scrimp and save” in retirement as being their greatest financial fear.

So what’s the answer to what seems to be a big problem? It’s all in the planning…

Sometimes we use certain phrases so often that they lose their meaning and importance, and I think this is what’s happened with the term “retirement planning”. I’ve even heard some institution based Financial Planners refer to it as if it’s a product! But the simple fact is that it’s the most valuable thing you can do in preparation for your retirement.

For anyone that’s worrying that they won’t have enough in retirement I recommend doing some comprehensive projections of your long-term financial security (or having them prepared by your adviser). This entails looking at your current financial position coupled with your likely retirement needs, and then getting a snapshot of your likely position in retirement. This exercise has two really great potential advantages.

1. You may find that you will actually have more than you expected for your retirement needs, and have been worrying unnecessarily. We’ve found this to be the case for about half of the people we prepared projections for over the past year!

2. If you’re concerns are well founded and it seems you might be caught short in retirement, then you have time to develop an action plan and make changes that will improve your position. Don’t forget that if you’re 55 or over you may be able to take advantage of some really super (yep, it wouldn’t be my blog post without a bad pun) tax savings that could make a huge difference to your retirement balance. For many of our clients these tax savings will add tens of thousands to their balance.

For anyone looking to retire in the next ten years or so, my strong recommendation is to plan, plan, plan! It’s just too important to leave to chance, and unfortunately we don’t get a do-over.

If you’d like to know more about what is involved in our projections service, click here.

And if you’d like more detail, please tune into my weekly local radio program “You and Your Money” Radio Eastern, 98.1FM, straight after the 9am news on Thursday.

Talk soon,
C

Cause of the GFC explained in less than 2 minutes

Over dinner recently, one of my friends asked how the sub-prime mortgage crisis in the United States caused the Global Financial Crisis (GFC). I explained that although the sub-prime mortgage debacle received all the publicity, it was more a symptom of the cause rather than the cause itself.

So then my friend posed a challenge to me. He wanted me to explain to everyone at the table exactly what did cause the GFC, but I had less than two minutes because he didn’t want me boring them all!

So here is my two minute explanation as to how the GFC occurred:

Pretty much from the 1970s attitudes started changing about the economy, and the role of government in commerce. By the late 80s, we were well and truly living in what was referred to as a “free market” economy where consumers and store owners (supply and demand) controlled the market with little government control. This is what lead to the privatisation of services such as utilities and transport.

The logic behind the “free market” economy was that with no trade restrictions to act as barriers to their creativity, entrepreneurs would be encouraged to generate wealth.  Then, as people became wealthier, it was expected that the wealth would subsequently cascade down so that everyone would benefit. Basically, the world would be saved by free economics.

In actual fact the above scenario didn’t achieve a cascade of wealth, it lead to “crony capitalism” whereby private companies were free to influence the market with little regulation. This fostered the perfect breeding ground for collusion, corruption, and concealment (as an extreme example, think Enron). Transparency was a thing of the past…

So all this meant that financial institutions, including banks were not answerable to anybody, and in the spirit of the “free market” economy, took the entire world down the drain a la GFC.

How did I go for less than two minutes? Obviously I could write pages on the topic, but that’s my absolute really simple explanation, and let’s face it, life’s complicated enough without complicated financial definitions...

So what does it mean for us now? Well the authoririties are working double time to compensate for their error in judgement by bringing control back into the equation. While trying to control terrorism, they also want some control over the media, financial industry, electronic media etc. I guess they want to kinda nip that “law unto themselves” idea in the bud.

The problem is, and history suggests this was always bound to happen, they are swinging the pendulum too far the other way - from no restrictions to major restrictions. This of course has an impact on how much risk people will take and how much people will buy/invest because the future is so uncertain.

History also suggests that a happy medium will be reached eventually. In the meantime, we need to accept that volatility will be an integral part of our investing lives until the dust settles. For more information on how to best deal with this, refer back to my birthday musings program and blog of 7 February.
Talk soon,
Caren

Some perspective around the “fiscal cliff”

Dad and I often laugh about some of the “extreme” terms that are coined by the media. One of our favourites is “fiscal cliff”, I mean blimey, how scary does that sound?! For me that term conjures up an image of Barrack Obama hanging one-handed from the edge of a cliff with Republican Treasurer, Tony Parker, prying at his fingers.

Don’t get me wrong, the situation in the US is serious, but as always, we need to keep perspective.

With all the doom and gloom, there’s also been a lot of good news coming out of the States and so I feel a little bit of balance is called for… Below are some good news stories that you could have been excused for missing amongst all the negative noise.

• Whilst there’s been a lot of media coverage on the fact that that the US economy contracted slightly in the December quarter, it would seem this is mostly related to disruptions caused by Hurricane Sandy and a drop in defence spending. So far nothing concrete to indicate they’re heading back into recession. 
• The pace of growth in private final demand actually picked up from 2% in the September quarter to 3% in the December quarter, and basically what this means is that underlying growth is fine, which is a positive sign.
• US corporates are in a financially very strong position with approximately $1.7 trillion dollars in cash sitting offshore. More than 70% of listed US companies reported greater than forecasted earnings expectations last quarter and 65% reported greater than forecasted revenue expectations.
• Business investment is looking stronger, construction spending is on the rise, consumer sentiment is up and jobs growth has been fair.
• The Republican Party (who control the House of Representatives) have agreed to cooperate with Obama’s recent debt ceiling proposal, albeit with conditions, which is a positive step. As I mentioned on my radio program last year, I couldn’t ever imagine the Republican Party would want to be seen as the reason the US went back into recession and for this reason would ultimately always agree to raising the debt ceiling. However, last year that they left their cooperation until the 11th hour and the argey bargey caused some real confidence damage. And if I can just hark back to last week’s blog post, you’ll recall the impact investor confidence has on sharemarket performance in the current climate.
• Obama has proposed a “sequester” on automatic budget cuts and tax increases which would have otherwise come into play this year, and this should hopefully have a positive effect on confidence and economic recovery.
• The International Monetarty Fund (IMF) have conceded that some of their fiscal austerity measures have been harsher than necessary, and will take a more moderate approach going forward.
• The US banking system may not be completely “fixed” but is greatly improved, and definitely well ahead of Europe.
• The US has access now to abundant cheap energy in the form of gas, and by 2017 is set to overtake Saudi Arabia and Russia to become the largest single producer of oil in the world.
• The US housing crisis appeared to bottom late last year, and US households are reducing debt at around US $500bn per annum.

Without question, the US still have a massive task ahead to fully recover from the financial mess they got themselves into - a task made even more difficult by the political instability of a Government with no clear majority.

It’s easy to get caught up in the negativity because frankly that’s what’s thrust upon us every day, but at the end of the day, the question we really want answered is – how does this effect us? And you can only get this answer and perspective with a balanced view of what’s going on. Hopefully I’ve helped provide a little bit of that today.

What should investors be doing in 2013?

Today’s my first day back in the office since Christmas, and I’m pondering two important issues:

1. Why did I come back on a Thursday instead of just giving myself an extra two days break?

2. What was I thinking coming back on my birthday???!!!!

Interestingly, the financial world didn’t stand still while I was away. In fact it was quite busy!

Have you taken a look at our sharemarket lately? It’s trotting along quite nicely and putting a smile on the faces of lots of Aussie investors.

You may recall me griping last year about the US market’s record breaking returns compared to Australia’s lacklustre efforts, well it seems I was heard. I didn’t realise I had that much influence. I suspected, but wasn’t sure…

At its all-time peak in November 2007, the ASX All Ordinaries index reached 6,854 points. During the Global Financial Crisis (GFC) it fell as low as 3,091 points (a fall of 55%) on 10 March 2009. Yesterday it closed at 4,940, almost at that elusive 5,000, and a 59% recovery since the bottom…

This news also bodes well for the economy in general, because sharemarket recovery is usually one of the first signs of pending economic improvement.

Now, I’m often accused of being a bit of a Pollyanna by my family and friends, but when it comes to the sharemarket I’m realistic. There are fundamentals that even someone as optimistic as I am can’t ignore.

A few of the most important include:

• NO ONE can 100% accurately predict future sharemarket performance;

• The sharemarket IS NOT rational;

• Risk is an inherent part of sharemarket investment, and if it wasn’t, there’d be no point investing because that’s where the reward stems from;

• From inception, the sharemarket has ALWAYS returned to a higher point than its original peak, but no one can predict how long it will take;

• Sharemarket investment is a long-term commitment, and when you experience something as unexpected and unprecedented as the Global Financial Crisis, it may be longer than you originally anticipated.

There’s also no doubt that we’re living in an era where investor psychology is impacting the performance of the sharemarket more greatly than we’ve ever experienced. This is largely due to the almost instantaneous access investors have to information via the internet and media.

Unfortunately this information is not always understood or interpreted correctly and therefore the market is prone to over-react to what is, or is perceived to be, bad news. This isn’t going to change anytime soon, so we need to be prepared for market volatility even when it’s illogical.

I read an entertaining article in the Age last week by Marcus Padley who claimed that his new year's resolution was to stop occasionally and ask, "Is what I am reading, watching, listening to or doing, necessary, worthwhile or a waste of my time?" It made me laugh out loud, but I digress…

My point is that while our favourite economist, Felix Stephen, is forecasting a 7 year bull run from the end of this year (he’s also forecasting a correction and high volatility by this April), markets are quite literally unpredictable.

I would love to tell you that this recent market rally will continue, but I can’t. No one can. What I can tell you is that the investment philosophy of “set and forget” which worked in the early noughties has become somewhat redundant in this current environment.

So what do I think investors should be doing in 2013? I’m glad you asked.

1. Getting financial and market information from your Financial Adviser not the media. I’m not suggesting you shouldn’t take an interest in current affairs, but also make sure you get perspective that’s relevant to your personal circumstances, and without the scaremongering;

2. If you’re not reviewing your investment portfolio you should be; and if it hasn’t been formally reviewed in the past few years then it’s definitely time because changes almost certainly need to be made to reflect the current environment.

3. Don’t rely on “set and forget”, this just isn’t a sensible strategy in this post-GFC climate. One of The Hendrie Group’s primary focuses since the GFC has been sourcing strategies that include tactical decisions, and this should be a priority for investors.

4. If you’re thinking about retirement in the next few years then you should be getting advice NOW. Don’t wait until it’s too late to implement really effective strategies that might add thousands or tens of thousands to your retirement nest egg.

Hope you’ve enjoyed my birthday musings.

Talk soon,
Caren