We all know that there is no such thing as a low risk, high growth investment product, which provides a guaranteed return. And we also know that in order to maintain a good lifestyle in retirement, our super savings need to be fairly substantial. But many Australians continue to play Russian roulette with their retirement incomes, either because they fail to consider that they may live well past age 80, or they buy dodgy investments in the hope of making a quick buck.
The worst retirement strategy, according to Lisa Faddy, financial planner at Majella Wealth Advisers, is forgetting to have one, or just leaving it far too late. “We’ve seen people at age 50 with a superannuation balance of one year’s salary, expecting to be able to save enough by retirement to live off.” And now that the government has placed restrictions on how much we can place in our retirement accounts each year, Faddy says everyone needs to make superannuation a priority much earlier.
Financial planner Ray Griffin, of Griffin Financial Services, says he has witnessed a few people who were convinced they would have a short life expectancy, and thought it was ok to spend more than their investments could generate. “They suffered from an out of control declining income position – spending more than you earn means you’re eating into capital. Reduced capital generates less income, and so more capital is spent to fund living costs.” As a result, Griffin says any retirement capital was diminished to the point where the individuals were ultimately reliant on the age pension. He adds: “Money won’t make people happy, but it does give them more choices in life .”
In terms of investments, investors should always ensure that they don’t have all their eggs in one basket. After all, even good companies can suffer a plummet in share price. Faddy says: “There have been many well-publicised corporate collapses of late and for retirees especially, the high yield debenture companies that have gone under have caused significant losses. Large retirement savings losses have occurred lately when most of someone’s savings were invested with one ‘high yield’ issues – especially those that looked like a term or bank deposit, but in reality were actually a high risk investment sold to people mostly without financial planners.”
Taking out a margin loan to fund investments should also be viewed with caution. Andrew Buchan, director of financial planning at HLB Mann Judd, gives one disastrous case study. “I knew an 80 year-old couple who had a seven-year margin loan. As their equity increased in the loan, they would extract that value to live on. They were capitalising the interest, which was basically a house of cards that you knew one day would collapse.”
According to Griffin, many people fall into two camps. They either get greedy, and invest in outrageously risk investments, like Westpoint or Fincorp, or they get scared and lock up all their cash in a bank term deposit.
Then there are those individuals who buy investments which produce no income at all. Griffin explains: “For some retirees, bullion, rare coins and art works have seductive aspects to them. They are ok if you have sufficient other assets to generate retirement income. But, quite fundamentally, they won’t pay the council rates, car insurance and put food on the table unless you sell them and can make a capital return.”
One of the most memorable get rich quick schemes for in the 1990s was centred on ostrich farming, with individuals paying up to $60,000 for a pair of breeding birds. Many of the birds failed to breed, or died, and many Australians lost huge sums of money. As Griffin says, unless you’re an experienced farmer and grazier, buying investments which you have to feed or water is extremely risky.
Ultimately, if a return on an investment looks too good to be true, it probably is, warns Faddy. Buchan adds that a high risk product doesn’t necessarily mean you should run away, as it may also provide high returns. “It just means you should be prudent and only invest what you can afford to lose and still retire comfortably.”
Griffin also warns against buying into the hype. “People should be aware of sales pitches – successful investing is about making sound decisions and is often based on professional, objective advice. It’s not about buying the latest you-beaut investment fad.”
Buchan adds that one of the most common errors he sees is people walking into a planner’s office the day after they retire looking for advice on their super. “The earlier you can start to prepare for retirement, the better off you will be. Have a life-long financial plan.”
Tips for avoiding a super disaster
1. Nil entry fee products: you get nothing in this world for free.
2. Massive gearing strategies: you will have to pay off that debt sometime.
3. Self-managed super funds: do you really want the burden of running your own scheme in retirement?
4. Momentum investing: following the latest market darling isn’t necessarily a wise move; set your asset allocation and stick to it.
5. Make sure you have a will and enduring power of attorney.
6. Avoid investments which aren’t supported by research.
7. Risk and return: if mortgage trusts are paying 7% and you find one paying 12%, be suspicious!
Source: Andrew Buchan, HLB Mann Judd