Common Retirement Issues – Retirement spending

A recurring discussion i have with people in retirement revolves around spending money on themselves be that for holidays, new cars and other comfortable items around the home.

This is not with every person or couple however with a good number of people there is an issue they have even though they may have looked after their own families, possibly financially looked after their parents as they too got older and some have been in business and employed people to assist them in raising their families. Now at retirement they have a good level of assets which have the capacity to produce reasonable retirement income.

This is the golden years of life and these people have the assets and the time free of past obligations however there is a strong restriction on their lifestyle. The restriction is their own thought process and value system.

Remarkably there is approximately 10-20% of people that find it very difficult in retirement to spend money on holidays, new cars air conditioners and lots of other life comforts etc and this is because they feel that spending money on themselves is “selfish”. This comes from couples or even worse singles. How can a single be selfish with their own money ? What else can you do with your money if you cannot spend it on yourself.

These people are happy to give their money to their children or take the children on holidays to where ever the children want to go however will not go to places that they have always dreamed of because they feel selfish.

The other condition that rears its head at retirement after 40 or 50 years of work is the people that “Feel Guilty” spending money as they are not earning any money. This is  difficult  at retirement allowing that you could be retired for over 30 years so that is a long time to feel guilty.

How will you prepare for retirement and how will you feel when you finally stop work. You will be surprised at how difficult it is to stop work and rely on these things called assets to look after you in retirement. You will also get very sensitive to how much things cost and whether you are spending the income that your assets are producing or you are now eating into the capital that you have accumulated.

We work with people pre retirement to try and get them accustomed to the casflow from investments and to see that the income coming through well ahead of retirement irrespective of the headlines or what you see in the media.

Plan for your retirement before you get there. Plan how much money that you need to sustain your lifestyle and then work out what assets you have and how long will they last during your retirement. If you dont have enough money it is better to know that 5 years before retirement than 2 weeks after. When you have time you can take action to improve things and that includes spending money on yourself for things that you enjoy doing.

You have one life and if you are lucky enough to get close to retirement you need to relax and enjoy yourself and enjoy the assets that you have accumulated as that is the reason you saved your money in the first place.  Dont feel guilty you are not selfish you are human and you will not go from a careful or frugal person to a spendthrift so your children will inherit good money and you can have a good time as well.

Remember: it is never too early to start planning.


Superannuation funds and poor service

Imagine you have been in your employer superannuation fund for over 40 years. You are now looking to turn on your superannuation pension to assist in paying down your home loan. Your adviser who is experienced in these matters advise that there are funds around that are more cost effective than your employer fund and they normally offer much better client experience.

Given the importance of getting the pension payment is more important than the choice of fund the paperwork is taken to the employer fund in the last week in May to roll the superannuation to pension and requesting a pension payment before the end of June.

You would think in this age of technology that would be enough time for a super fund provider to roll a persons superannuation fund to a pension fund in the same stable and have a pension payment prior to the 30 June.  4 weeks you would think that is plenty of time.

Unfortunately this fund say they cannot get their systems organised to get a pension payment out within the month. If the person wanted to take a lump sum payment that would be okay however a pension payment is not possible. Is it only me or is that nonsensical.

What sort of service is this for the members of the fund.

Beware of your fund they are not all the same. Some offer good customer service and others think the money is theirs and not yours and you should not take the money out for any purpose. You deserve a fund that is happy to have you as a client and will respond to your requirements as quickly as possible. There is plenty of them around happy to have you as a member.


Actuaries say fix super now !!

What the hell are the actuaries on about when they say fix super now ? What is wrong with super that needs to be fixed. When you read the article you find the article is not about superannuation at all it is about tax.

What the actuaries are talking about is increase the tax on superannuation for the high income earners. They want to reduce the definition of a high income earner from $300,000 pa to $180,000 pa.

My question is if you increase the tax on superannuation contributions wont that reduce the amount of money in superannuation ? Is that at odds with the objective of superannuation which is to grow a larger pool of assets to fund retirement. That is the purpose of superannuation.

The actuaries are confused when they say fix super now. What they are saying for reasons known only to them is that the Government should use higher superannuation contribution taxes to fix the budget black hole. Now that superannuation has grown from basically $0 to approx $2 trillion dollars over 25 odd years now is not the time to encourage Governments to start taking more money out of the superannuation system. Where will it stop and who trusts the government to look after them in retirement.

To say now is the time to fix super is misleading. There is nothing wrong with superannuation and this article has everything to do with budget repair and nothing to do with superannuation and it is no wonder the public get concerned where you have reputable organisations making cheap politically motivated statements about superannuation that have nothing to do with superannuation at all or how well it is going.

Here is a question for the actuaries to consider, If the superannuation system was to grow from $2,0 Trillion dollars to $6.0 Trillion in the next 30 years what would be required for that to happen and how would that impact the government, its tax collections and Centrelink payments? That is something that would be useful to know and is right in the zone of the professional actuary.  Superannuation is only ever discussed in Australia in light of taxes and that is totally misrepresenting the value that superannuation brings to the Australian economy.

The actuaries should not be lowering themselves into cheap political statements that do very little in the short term to fix a massive problem being government spending and the Governments complete lack of control over their spending. That would appear to be government on both sides of the spectrum.

Keep superannuation as a retirement incomes strategy and not a government deficit solution.

Life incidents and TPD and Income Protection Insurance

It is late in the last quarter of an amateur footy match and the scores are close. The pressure is on and a finger gets hurt during a tackle. It hurts a bit however the adrenaline is flowing so play on. Later that night there is not a lot of movement in the finger however no pain. No pain is good however no movement not so good. Off to hospital next morning and outcome is it is not broken so wait to see if the movement returns over the next 6 -8 weeks otherwise surgery will probably be required as in that case it is likely to be a ruptured tendon and that can only be repaired surgically should that be the case.

In this case the player has medical training and knows that if the tendon has been ruptured it should be repaired ASAP as the longer you wait the less chance of full movement being returned to the finger. This person is a Physiotherapist so it is very important that full movement is restored to the finger otherwise they will not be able to do their job with the same effectiveness as previously. Imagine if they were  a surgeon.

This highlights the difference in an insurance context between own occupation Total Permanent Disablement insurance cover (TPD) and Any Occupation TPD. As a physio or surgeon restricted movement in your fingers make it difficult or impossible to do the normal duties of the occupation that you have been trained to do. You could do other occupations even within the hospital environment such as being an Orderly or general cleaning however that is not what your years at Uni was about.

Imagine if the footballer had TPD cover Own Occupation in their super fund. In this case they have the correct insurance however in the wrong place. Being a footballer you can imagine they are under 30 years of age. Being a Physio or a Surgeon it is not hard to see if the one injured finger was two or three fingers there is no hope of working again in their profession so they get the TPD payout from the insurer however they cannot get the money out of the superannuation fund as it does not meet a condition of release from the super fund based on the SIS legislation as they are not Totally Permanently Disabled under the any occupation definition.

It is very important to have the right cover for you in the correct place and a call center or online application will not give you that advice. It also depends on  your job. I am a financial planner and had a business partner some years ago that lost two fingers and restricted movement in a third finger after an incident with an angle grinder on the weekend. (underlying message of this blog is dont have a life on the weekend) and that made no difference to his working life when he eventually returned to work after his recuperation and IP claim however would be devastating to someone in a different occupation where you need to use your hands and fingers such as some medico’s dentists and a lot of tradies.

That brings us to the income protections policy (IP). The standard in a lot of big employer funds is that you get your salary continuance after a 90 day wait. A lot of times there is also a set amount of cover that you are protected for however it has no relevance to your monthly income and in a lot of cases will not meet your home loan repayment let alone your normal cost of living.

In this case the person will be off work for 6 weeks after the surgery or 42 days. They could have a personal Income protection policy that commences a payout after 30 days and also provides benefits if you go back to work on limited duties. In that case it could payout the difference between your income on limited duties and the monthly amount that you are covered for. Income protection or salary continuance cover (two names for the same thing) is very important to have as it works together with the TPD insurance and assists in covering the gaps. In this real case the person is 22. What happens if the finger injury does not heal as it should and it has a material impact on their capacity to do their job. In that case they would not have paid the HECS on the Physio degree and can no longer work as a Physio. The HECS is still due and you dont have the earning capacity anymore.

If you imagine the surgeon or physio that can no longer work in their profession because of an injury they could work at a Uni as a lecturer however that income could be less than what they would earn in private practice in their profession. In that case the professional may have received an Own occupation TPD payout and they could also receive a top up from their Income Protection policy if the income that they earn in their new job or occupation is less than what they were earning when they were a physio or a surgeon.

The question you need to ask yourself is ” Do i have an occupation that i studied for or had specialised training to get my qualification ?” (Eg how does a bricklayer go with limited use of the fingers although insurers have different issues with bricklayers and IP)  If that answer is yes then you should look at having own occupation TPD not any occupation and that policy should be in your own name.

When considering your insurance options you should always assume that something happened yesterday to give rise to you making a claim. With that in mind what do you want to happen next.


Trowbridge Report Delivers far-reaching change on Insurance advisers

You have to wonder where some of these consultants are coming from when they make recommendations for our law makers (read politicians). The Trowbridge Recommendations which deliver far-reaching change on Insurance advisers freely states that the cost of writing an insurance policy for an adviser is between $1500 and $3000.
What Trowbridge recommends is that the Initial Advice Payment (IAP) is a maximum of $1200 or no more than 60% of the premium is below $2000. From there the adviser gets an ongoing commission of 20% per annum for the life of the policy.

This is a guaranteed way of losing money if this is your business. Governments can go for decades running up deficits just look at Australia however businesses cannot. This will be a far-reaching change on Insurance Advisers.

Lets look at the numbers. According to Trowbridge it costs the adviser between $1500 and $3000 to get a clients insurance underwritten. Remember this is Cost recovery, no profit. Read my point above, Governments can work on the no profit model however banks do not allow businesses to do that.

Lets assume your insurance policy has an annual premium of $3000. The maximum an adviser can get is $1200 in the first year and then $600 pa after that. The $600 will increase as the premium increases so that is good for the adviser business however dont tell any legislators or they will ban it.

For an adviser to write this policy it will take them 24 months to recover the cost of writing the policy and therefore will not make a profit for 36 months. I have five staff in my office and they like to be paid each 14 days so taking two to three years to get a positive cashflow from a client is not going to be too helpful in paying the staff if new life insurance is all that we do.

Trowbridge clearly acknowledges that the adviser will be losing money in writing insurance policies in this way. What is his message here ? He says he is trying to have a balance between what the true cost is for an adviser in writing a policy and eliminating any behavioural doubt as to whether the adviser is working in the clients best interest. Whose interest is Trowbridge working in here ? The staff of an advisers practice will not be too happy and how does the consumer benefit if the advisers are not here to speak with them anymore. When I said that it will take 36 months to make a profit from writing an insurance policy that assumes the adviser does not speak with the client in that three year period otherwise it will take longer to make a profit per client.

If advisers in small business cannot write life insurance policies as they are losing money with every policy they write who will write them ? Look at the Iron Ore industry now as a parallel.

The small miners are losing money with every tonne they produce and are going to be closing down really quickly if this continues for another 3 months. That will leave the giants BHP and Rio.

Who are the giants in the life insurance industry ? They are likely to be the ones to survive as they have the stored up capital which will allow them to run loss making advice ventures so long as they are funneling products through to the main business. That sounds remarkably like the funds management advice business for a number of years that FoFA was designed to overcome and now Trowbridge is heading that way for the Life industry as well.  Are the main players in the funds management industry also the main players in the life insurance industry? Interesting question. You will have to research the answer yourself.

My underlying question after this long preamble is how can a government consultant come up with a policy that freely acknowledges that anyone in a particular business is going to lose money for 2 or 3 years on each new client if their recommendations are implemented. What business school did this consultant go to and how does he expect a business to survive under this regime?

No doubt the answer will be that he doesn’t expect them to survive and that is the desired outcome of the proposals however how does a family benefit if no one will talk to them about what family protection should be in place. The BHP’s and Rio’s of financial services will still be there and no doubt if you go to one of the big guys they will have to have the other guys products on their recommended list as per the new proposals and those products from the other institution will get an equal representation in their advice documents. (I am really excited as the tooth fairy is expected at our house in the next day or so.)

ONeil Financial Planning will thrive in this environment. We charge an advice fee for the financial planning work that we are doing and have no strong interest in the products that form the outcomes of the advice. We love the idea of higher ongoing revenues and have been using hybrid or flat commissions for many years where we provide insurance solutions. I have no doubt the changes foreshadowed will come into being as the Financial Services council will be strong supporters as will the Industry Funds and the Banks. They will want to clean up the industry for the benefit of the consumers !  Are they already the giants in the life insurance industry and the funds management industry ? The answer to this question is becoming more important. According to the stats the major banks and one big life office already own and/or control 70%+ of the advisers in the industry and they want to clean up the industry. Surely they already have that option by looking internally at their current business practices.

Who are the BHP’s and Rio’s in the Financial services sector and who will benefit ? If you are not familiar with the current Iron Ore saga let us look at the retail options in Australia beyond Coles and Woolworths. Australia’s cost of living is going through the roof because concentration of ownership in key sectors of the economy are taking away price competition and the Trowbridge report is going to eliminate the only people that have been ringing the bell about price sensitivity in Insurance premiums in the past.

I know everyone is disgusted scoundrel advisers are twisting policies every two to three years for the huge up front commissions however ask yourself if you would change your existing policy to a new one if the premium was increased in the new policy compared to the old one. Under the new regime no one is going to be able to be paid for 5 years if they want to discuss with you a change in the policy to get a reduced premium so who is going to do it. Allowing that no one is doing it what will happen to the premiums in the future ?

No doubt we will review this blog in 5 years and see how stupid it looks. My next blog is going to be about life insurance as well and something that happened this week so read on. It will be designed to highlight some of the issues in life insurance and definitions in your daily life and why you need to deal with someone that knows what they are doing. Reading between the lines Mr Trowbridge believes you should be prepared to pay for the advice yourself rather than through paying insurance commissions.  Look out for my next blog on life insurance.



Australian Shares “The Chase for Yield”

During this company reporting period there has been a lot written about shareholders buying companies in the “chase for yield” . The discussion is that interest rates are low and investors some of them first time investors are buying shares in companies to increase their income for retirement.

The thing that I have noticed in looking at some of the company results is that some companies have increased their profits and the dividend has risen accordingly. Other companies have reduced profits however they have maintained or increased their dividend to keep investors on side.

Ask yourself this question,

Do you think the dividends from a company are more sustainable in the future from a company that is increasing its profits or from a company that is struggling this year and are maintaining the dividends to keep the market on side ?

One industrial company this week increased profits by close to 20% and increased the dividend by the same amount which is a nice pay increase for the shareholders.

Then there was another mining company that recently had a “statutory loss” of more than $100m however increased their dividend and the share price had a sharp increase.

There is a lot more questions to be asked before you purchase shares in a company and we normally use a combination of managed funds and direct shares to ensure good diversification for your portfolio’s capital protection.

The interesting fact about the industrial company that increased the dividend is that it is now trading on 1.5% dividend yield however it will not be purchased by shareholders chasing yield. However a client I was meeting with this week purchased that company a few years ago when it was on a 2% dividend yield. Their dividend yield is now over 5% on their purchase price which was $17.60 and the share price is now well over $60 per share so not only have they had a good increase in dividend yield they have also had an increasing share price as well.

An increase in share price is only sustainable in the long term by an increase in profit. Anything else is market hot air or short term talk by the company to retain shareholder support until things improve.

We still have clients, one of them only just turned 50 and others now in their 70’s and 80’s who bought 2,500 CBA shares on the float at approx $5.30 each. Their dividend yield is now over 60% as the CBA now pay over $3 pa in dividends and they still hold the shares.

They could have sold the shares at $10 when they would have made approx 100% profit however the good thing is they didn’t get scared out by good performance and they have made an extra $80 per share and do not have a days worry about their investment.

Simple message, Don’t buy shares based on their Dividend Yield alone. A company needs to have sustainable profits which means there needs to be a good prospect of increasing profits. That is the way that you will preserve your capital value and then spend the dividends.

You need to determine what cashflow you require from your investments and then your share portfolio needs to perhaps have some “chase for Yield” type stocks however more importantly it needs to have companies with sustainable and growing profits as that is what will give you the growing income yield as described in a couple of real life examples above.

When interest rates rise in the future which they will at some point the “Chase for Yield” stocks will be less attractive based on something that has nothing to do with the company and that is where the share price will fall and you will lose capital value which is not what you want if you can avoid it.

Share prices rise and fall all the time however you want some substance supporting your companies share price and that substance can only be growing profitability and not that the historic dividend yield is high compared to the cash rate in the bank which can change at any time.

It is critical to have a clear vision of exactly what you are looking for and why and that way you have a strong probability of getting what it is that you are after.

Expenses Key to Secure Retirement Income with Certainty

The key to a happy retirement is to understand your expenses. Most people don’t like to have a ‘Budget” which is fine however understanding your expenses has nothing to do with a budget. Understanding your expenses is to understand what it costs each year when you wake up on the 1st January to go about living a basic no frills lifestyle that you enjoy. On top of that you then add the cost of the things that you like to do and importantly your ” Bucket List” items.

What this does is gives you an understanding of your basic cost of living and then you add your discretionary cost of living. The base cost of living will increase each year as you get older. The discretionary cost of living will reduce as you get older as you wont be bothered doing things as you get older irrespective of whether you can afford it or not. Your health could also have a say in what you do in this regard so it is important to get the “Bucket List” things done whilst you can as you never know what is waiting for you around the corner.

The outcome of knowing what YOUR perfect lifestyle costs is that only then can you determine what level of income producing assets you need to live this glorious retirement lifestyle.

Don’t delay, contact us now to work out what you need to do to live YOUR PERFECT LIFESTYLE.  It is never to early to start planning. You wont regret it.



Investing for your risk tolerance

How do you know if your assets are invested in too aggressive a manner for your risk tolerance ? This is a question investors have been asking themselves for decades without coming up with a sensible answer.

Ask yourself these questions,

A. When you read the newspaper, watch the news on TV or go online to check your investment values, do you do it more than once per week ?

B. When you are looking at the value of your investments do you feel disappointed when the asset values have fallen?

If you answered yes to both of these questions your portfolio is probably too aggressive for your risk tolerance. If you are not convinced with my assessment how often do you check the value of your home?

If your answer is never it is because you are comfortable with the value of your home and you dont feel that a change up or down is relevant or worth worrying about. Some people check the value of their properties regularly and they are likely to have a lot of debt associated with the properties and are therefore again too risky for their risk profiles.

If the value of an asset is worrying you then it is too risky for your risk tolerance or it means you have too much invested. Life is too short to have these worries so realign your investments to some thing that you are comfortable with.

Financial System Inquiry Superannuation

The Murray Financial System Inquiry suggested that the Global Financial Crisis highlighted the strong role that the large pool of superannuation capital had in its “unleveraged capacity” in providing assistance and stability to the capital markets and broader economy at a time of high stress. The Inquiry goes on to say that the sharp increase in leverage in the superannuation system, although still low in the overall value of superannuation, if continued at this accelerating rate will reduce  the superannuation systems capacity to be that stabalising influence in the next financial crisis. As a result the Murray inquiry into the Financial System recommends that future borrowings should not be allowed in superannuation.

It also goes on to say that the risk of borrowings in superannuation and particularly in Self Managed Superannuation funds passes the risk of the strategies back onto the community as if the leveraged investments do not perform as they should in superannuation funds then the obligations falls to the taxpayer to fund the investor by way of age pension benefits and that is not fair to the community at large.

Following the GFC you dont have to go to far to find someone that borrowed money to invest in an asset that has lost 50 or 60% of its value or more and the problem they have is the debt is still there needing to be repaid. The recommendations from the Financial Services Inquiry will not stop people investing in assets that lose some or all of their money however in the future after an investment has performed poorly you wont have to repay a loan as well.

It is important to note that there has not been large leveraged losses in the superannuation system to date and this is a recommendation designed to take away that risk before it becomes an issue. Eg prevention is better than cure.

Financial System Inquiry Unclaimed Money

In a win for common sense the Financial system inquiry recommendation 41 said that the rules for unclaimed moneys should be changed back to 7 years inactive rather than the three years that it was changed to in 2012. Three years was always too short allowing that you may be wanting to save for school fees or other longer term ventures and then the government takes your money in 3 years. This was always totally unreasonable and it is a good outcome if adopted by the Government. This inquiry is partially designed to improve long term savings and this is a step in the right direction.