By Fran White
There’s Death and Taxes and then there’s Money – another certainty of life is that money will have an impact on it.
We Baby Boomers will have to manage money for more years than any prior generation as we outlive old life expectancies, and this includes a lot of years still to come (hopefully!)
As a fairly typical Baby Boomer, the blueprint I had was a hard-working dad whose aim was to pay off the family home and live out his retirement, with mum, comfortably on his company pension. My dad succeeded, he worked for a company with a great pension scheme, retired early and lived comfortably to his standards for more than 25 years till he departed this world.
Sounds okay right? So why aren’t most of us Baby Boomers doing just the same?
Simply put – the rules of the game have changed.
Pensions now come from the government (and they are at poverty levels); and interest rates are so low that returns on all sorts of investments are way lower than they used to be. When my dad retired interest rates were around 15% – now they’re a mere 4% at best. Most of us have had far too few years of tucking money into Superannuation for it to have any chance of getting to the critical mass we need to be supported at the level we would like as self-funded retirees.
Add to this the Global Financial Crisis (GFC) which hammered many Baby Boomers’ retirement funds at an unbelievably crucial time – just as we started to think retirement was within reach! As the current joke goes: the financial planner assesses his clients’ position and advises “After adjusting for current conditions, I am pleased to advise you’ll be in a position to retire the day you turn 110.”
Suddenly, and horrifyingly for many, money management has shot to the top of our “to do” lists, and a swarm of businesses have latched onto the opportunity to consult, assist and advise us. While the watchdogs struggle to monitor the behaviour of this thriving sector of the economy, a lot more Baby Boomers are losing more of their hard earned nest eggs grabbing at straws proffered by financial service firms. While many folks in the industry are genuinely well intentioned, nonetheless their primary objective is to enrich themselves and their employers.
Unfortunately, simply ignoring the fact that there is a need to be involved in planning your future can also be a disastrous thing to do. Automatic selection of the type of fund your superannuation manager puts your money into can impact hugely on how much there will be when you retire. This is actually even more true for everyone younger than the Baby Boomers, as more of their money will be invested for many more years than ours was.
So let’s face it – most of us need to be involved, and preferably IN CONTROL – of our financial destinies.
Here are my suggestions for some basic rules of engagement:
1. Do Not Panic
Although going with your gut feeling can often be the best thing you can do, making the decision to go with your gut feeling needs to be thought through calmly and clearly. Making investment decisions in a state of urgency, panic or desperation is unlikely to bring about the best possible result. Take your time, list out pros and cons, ask for input from people you trust, do your research. It is well neigh impossible to pick the tops and bottoms in any given market, so never rush the financial decision-making process because you think you’ll miss an opportunity. Fact is – opportunities abound! It won’t hurt to remember also, that if something sounds too good to be true, it probably isn’t!
2. Consider the Risk
As you get closer to retirement there is less time to recover from a big loss, so staying with safer options is the way to sleep soundly. Always ask yourself “what if I am wrong”? before you invest anything. Is the potential return worth the risk? Never invest more than you can afford to lose in something with a high degree of risk. There are plenty of products nowadays that have guaranteed capital returns (and correspondingly lesser returns if they succeed), and these may suit you if you are further down life’s path.
3. Be clear about the Costs
Funds and advisors are pretty good at camouflaging costs you will pay as anything other than direct commissions, and a lot of these are hidden in the small print you need a legal advisor to read for you. It is one of those times you may well be glad of the mighty www as the information you need is definitely “out there”. Plenty of us have seen the valuation of an investment go lower while the managers are still telling us that the investment is performing well, and often producing reports that “prove” this. While we may be sick and tired of watching those ads about industry superannuation and the effect of lesser fees on the final payout, the message is too true.
All the things you can invest in – stocks, currency, property, land, artwork, commodities to name just a few – will go up and down in value and in returns, and the movements are not synchronised. One or two sectors will go up and all the others will go down, or the other way around, many times in a lifetime. Spreading your investment over several sectors can balance out the ups and downs. This can be invaluable if you find yourself in a position where you need some cash – you can choose which sector to take money out of. Perhaps sell something you have made a profit on and let the other investments run until it is their turn to be on an “up” cycle. If you have everything invested in real estate and there is slump in values, you may have to sell something at a loss to take out some cash in a hurry. Even if the only investment you have is your superannuation, make sure you consider which choices of fund are available, and pick one that gives you some diversity.
5. Get Educated
Please refer to number (1).
I don’t mean you need to go back to college and study economics! Money School can help you – we have a range of courses available to increase your ability to manage your money, and we’ll show you it is easier than you think. Our website will also give you plenty of suggestions of other ways to increase your knowledge, and even have some fun in the process – the next ASX Sharemarket Game is coming up and we all had a few laughs during the last one, and you can join in for free with the next one.
My next article will be an insight into my own journey from struggling single mum to self-funded retiree.
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.