Tag Archives: Retirement

How to stay focussed in volatile markets

By Robert Wright /June 01,2018/

Investing in markets means volatility. When done well, you are getting paid for taking on risk. So why is it that sharp drops in the market have such a visceral impact on us? We only have to go back to early February, when markets dropped 4.6% in a few days to recall such a time of alarming headlines and concerned conversations.

The first thing to say about February is that it was far from unusual. Since 1979, there have been 182 five day periods worse than the February decline. It happens, on average, every three months. It’s about as frequent as a 29 degree day in Sydney. Warm, yes, but barely worth a comment. So why do we all feel this way when the markets fall?

The second thing to say, is that it was not unusual and moments of this ilk will happen again. With central banks commencing or stepping up their interest rate hiking cycles and unwinding quantitative easing (QE) stimulus, together with a divergence in monetary and fiscal policies, the result should be greater volatility.

Preparing for the inevitable

So the market just fell. You’re reading headlines claiming billions of dollars of value have been wiped off the stock market in a matter of hours, days. You check into your account and see that your investments have also been affected. What will you do?

What most people do is act. They sell in fear. This is entirely natural, however, it is likely to be the wrong strategy. So what should you do?

For now, the best advice it to do nothing and to seek expert advice. That will feel all wrong. So let’s unpack why that is and what to do to manage those feelings. To paraphrase a recent Wall Street Journal headline, ‘The Share Market Isn’t Being Tested, You Are’.

We need to feel in control

Nothing undermines a sense of control over your investments like a sharp and unexpected stock market fall. The immediate priority for many is to re-establish that sense of control. One of the most tempting means is by doing something, anything. This is linked to a deep-seated part of human nature and manifests in a desire to maintain the illusion of control.

In our daily lives, in order to act, we need to be confident in our ability to make an impact. In most cases this confidence can be classified as overconfidence, but without it we might not act at all. Being paralysed by indecision can be as bad as acting with overconfidence.

Search for meaning

You will probably have a very strong need to know why the market movement happened. It is more than mere interest. Needing to know is linked to the desire to act. Because jumping blind into a strategy feels wrong, we need an insight to give us enough confidence to act. Hence, the pressing need to find out why.

Actions have consequences

Adjusting your market exposure to suit evolving risk and return opportunities can be valuable. However, selling in fear is a powerful behavioural bias that costs investors dearly. If you were to sell in fear in each bear market (20% down) for Australian Equities since the early 1980s, and only return to the market some months later or once a recovery has started, then instead of a compound annual growth rate of 10%pa, you’d have achieved 8%pa. This is a costly bias.

One of many costly biases

There is a panoply of behavioural biases which help us get through the day. They are valuable mental shortcuts that help us act fast, handle information overload and find meaning. Occasionally these mental shortcuts do not serve us well. Investing is one such domain. If everyone is running out of a building, our instinct is to join them, no questions asked. This is a good example of the ‘herding’ bias – after all, the building could be on fire. However, this same bias in the investing context can be costly. Study after study has measured the costs of these biases and estimates range from 1% pa to as much as 6% pa.

What to do

• Recognise that markets are complex.
• Seek advice and consider the impact. Ask yourself – why am I making this decision? Is this investment part of an overall plan? What might go wrong? What does the evidence say?
• Record your decision and why you made it – by tracking your decisions, you can reflect on the evidence and adjust or confirm your approach.

Keep your eyes on the prize

Keep your eyes on the prize, whether that prize is growth, income, capital preservation or a mix. Bouts of short term volatility don’t mean allocations have to change. Remember, this has happened before and will happen again. Selling in fear costs real returns in the long term. Financial advice is the best insulation from these and other biases waiting to erode our returns.

 

Source: Macquarie

Maximising your retirement benefits

By Robert Wright /June 01,2018/

After working hard for so many years, naturally you want your retirement to be as comfortable and enjoyable as possible. That’s why it’s worth knowing which types of government support you may be entitled to when you’re transitioning into this new phase of life.

If you’ve been putting money into super throughout your working years, this is likely to be your main source of income when you retire. However, you might also be able to access other allowances and concessions that can help you reduce your living costs.

And let’s face it – when you’re a retiree, every dollar counts. With this in mind, let’s take a look at some of the main government benefits on offer.

Age Pension

Once you reach age pension age (between 65 and 67 depending on your date of birth), you can apply for the Age Pension if your income and assets don’t exceed certain levels. Depending on your financial situation, you could be eligible to receive a full or partial Age Pension from the federal government.

There are different income and assets test thresholds for singles and couples, as well as for homeowners and non-homeowners under the assets test.

Under the assets test, if the value of your assets (not including your home) is below the lower threshold, you could receive a full pension – and if it’s between the two thresholds you may be eligible for a partial pension. However, if you’re above the upper threshold, you won’t receive any pension at all.

These thresholds are currently:

• Single homeowner: $253,750 to $556,500
• Single non-homeowner: $456,750 to $759,500
• Couple homeowner: $380,500 to $837,000
• Couple non-homeowner: $583,500 to $1,040,000

Your income (eg. if you’re still working) may also reduce the value of your pension. As a single pensioner, you can earn up to $168 a fortnight without it affecting your pension entitlement.

A couple can earn a combined fortnightly income of $300. Every dollar you earn above these thresholds will reduce your fortnightly pension by 50 cents.

Your age pension is the lower of the assets test and income test calculation.

Other allowances

On top of the Age Pension, you may also be able to access additional government payments, such as:

Carer allowance – if you give daily care to an elderly person or someone with a disability or serious illness.

Rent assistance – to help cover your rent if you receive an eligible government benefit and are renting privately.

Energy supplement – to help manage household costs if you receive an eligible income support payment.

Affordable health care

Even if you’re not eligible for the Age Pension upon reaching age pension age, you can still get a Commonwealth Seniors Health Card – as long as your annual income is less than $53,799 for singles and $86,076 for couples.

This card offers reduced cost medicines under the Pharmaceutical Benefits Scheme, bulk billing for doctor’s appointments and cheaper out of hospital medical expenses through the Medicare safety net.

Other discounts and concessions for seniors

You can apply for a Seniors Card once you reach 60 (or 65 for Queenslanders), as long as you’re working the required number of hours a week and you’re a permanent resident of your state. With your Seniors Card, you’ll get exclusive offers and significant discounts on a range of different services, as well as holidays and entertainment.

Different businesses in each state offer Seniors Card discounts. To find out what you’re eligible for, check the government website for your state or territory, or look for the Seniors Card sign in stores.

Additionally, if you’re receiving the Age Pension or another government allowance, you may also qualify for a Pensioner Concession Card. This card provides lower cost medicines under the Pharmaceutical Benefits Scheme, bulk billing for doctor’s appointments, cheaper out of hospital medical expenses through the Medicare safety net and assistance with hearing services. In addition, this card allows you to access many state based concessions.

These are just a few of the many benefits available – but the eligibility requirements are different for each one.

To find out more, please contact us.

 

Source: Colonial First State

Who’ll inherit your family heirlooms, if not your kids?

By Robert Wright /November 23,2017/

If you’re a baby boomer, you may be considering passing down some of your treasured possessions to your children or grandchildren—especially if downsizing your home is on the horizon.  If you’ve already made the assumption that they’ll be willing recipients, you could be in for a surprise.

Increasingly, younger generations aren’t interested in inheriting such items. In fact, possessing lots of ‘stuff’ is out of fashion, leaving many parents to think about where their heirlooms might end up.

 People, priorities and tastes are changing

Just a generation or two ago, younger family members were grateful to receive the solid oak dining table and silver gravy boat—seeing such possessions as an extension of themselves and their family’s past.  However, with the rise of the internet, younger people today more often identify with their social profile than they do family objects from a bygone era.

The Australian dream of owning a house is also less achievable, as prices rise, leading an increasing number of people toward apartment living and leaving less room for family collectibles.  Being tied down by boxes filled with historical items is also not practical for people who are opting to work and travel abroad, but it isn’t all just about the inconvenience.  Over time, tastes and fashions change. Minimalism is in and clutter is out—and shelves that were once filled with ornaments and trinkets have been replaced by clean white walls.

 How to part with your prized possessions

It can be a struggle to accept that your children don’t want to hold on to items that have sentimental value to you. It’s not that they don’t love you—they just may not love your stuff.  So, how can you do a clean out without your past being lost?

• Ask your children to pick one or two items—no matter how small—that they want to keep.
• Consider donating big items, like furniture, to local shelters, hospitals or charities. There’s always someone in need who can benefit.
• Scan photo albums onto the computer to create a digital photo book which can be stored online. This way it can be shared with all your family without taking up physical space.
• Consider selling those items that you no longer want, need or have room for. Popular selling sites such as eBay or Gumtree can make it very easy.
• Finally, if you are going to sell any items, make sure you research their value first as you may be selling something of great value.

Looking beyond just your heirlooms

Finding a good home for your prized possessions is important and something you want to think about. What you do with your wealth and other assets down the track will also require thought. Addressing such things early on can give you peace of mind and discussing things with your family could avoid any possible controversy down the track should people not agree on things.

 

Source: AMP

Funding retirement income in a low interest rate environment

By Robert Wright /November 23,2017/

While a traditional bank deposit is generally regarded as one of the safest forms of investment, it also currently offers among the lowest returns. For those relying on bank deposits to fund their retirement income, the current record low interest rate environment offers little reward.

For those approaching retirement, low interest rates could mean having to rethink their retirement goals, retirement time frame and potential sources of retirement income. For existing retirees, it could mean having to re-assess their goals. Simply put: low interest rates means more capital is required to fund future income needs.

This raises the question – if interest rates stay low for the foreseeable future, how can you fund the retirement lifestyle you’d hoped for?

Regardless of whether you are preparing for retirement, or are already retired, the answer lies in focusing on factors you can control, rather than those you cannot. Whilst there are many aspects of investing that can’t be reliably predicted, there are many factors you can control, including:

• how much you spend;
• how much you save;
• how much investment risk you are prepared to accept;
• how you structure your investments; and
• how much you pay in fees.

For those still working, it could mean adjusting discretionary spending, so that more funds can be used to boost retirement savings, or additional mortgage payments can be made to reduce the amount owing, or a combination of both. Less spending now means more money for later.

For self-funded retirees, it could mean adjusting discretionary spending by taking fewer ‘big’ holidays or by considering the Age Pension in their future planning.

Inevitably, investors may feel compelled to move further along the risk curve to seek out the retirement income they desire. In other words, they may seek to diversify away from cash and invest a higher percentage of their capital in alternative forms of income producing assets – such as shares, property and infrastructure. This is often referred to as the ‘search for yield’.

Cash vs Alternative Income Assets

The cash rate in Australia is currently 1.50%, with some institutions offering around 3.00% depending on the deposit amount and timeframe. Compare this to shares, where it is possible to receive a 6.00% return (or more), often with the benefits of franking credits.

There are, of course, risks associated with growth assets that can’t simply be ignored, and investors need to feel comfortable that the value of their portfolio will fluctuate over time, as the assets respond to prevailing market conditions. Whilst a regular dividend can help to offset the impact of any future share price falls, there is no guarantee that dividends will continue to be paid at the same rate.

Managing investment risks can be achieved by:

• buying and holding quality assets;
• being prepared to stay invested for the long term; and
• being prepared to ‘capitalise’ on over-heated markets.

Structuring your Assets

The overall structure you employ is the foundation to your portfolio and impacts the net return you receive. Quality assets, poorly structured, can lead to lower real returns.

For self-funded retirees, the decision to hold assets via a super fund or account based pension, or in their individual names can lead to very different results, in the form of:

• Returns – some structures don’t pay tax on earnings, so holding assets in the right structure can lead to higher returns.
• Benefits – some structures offer Centrelink exemptions, so holding assets in the right structure can lead to increased entitlements.

Understanding the difference between structures, and how these relate to you, can be complicated as they relate to an individual’s personal circumstances. This is one area that is definitely not “one size fits all.”

Fees

The fees you pay, whether direct or indirect, will also impact the net return you receive and can make a significant difference over the long term. Fees can generally be categorised into three areas:

• Administration
• Investment
• Advice

It is important to have a good understanding of the total fees you are paying, to be satisfied that you are getting “value for money.”

As outlined above, it is clear that there are many factors to consider when it comes to deciding which approach is best for you. Now, more than ever, due to the current low interest rate environment, it’s worth reviewing your overall position to determine whether your current strategy remains relevant to your needs and lifestyle. Please contact us to discuss your particular situation.

 

Source: Capstone