Does your retirement super need to be ‘Zengosaidan’?

I often like to read ‘peculiar’ books that give me some insights into different ways of thinking. I recently came across a book review in The Monocle Minute. It inspired me to buy the book: A Monk’s Guide to a Clean House and Mind by Shoukei Matsumoto (Penguin Books 2018). Now, I am not Buddhist, but I did find this little book an interesting read. In particular, it spoke about the concept of Zengosaidan, which is defined as ‘… a Zen expression meaning that we must put all our efforts into each day so we have no regrets, and that we must not grieve for the past or worry about the future … Don’t put it off till tomorrow …’

I found this idea thought-provoking – particularly when I consider my daily work, which is retirement planning. Because at some point, most people in Australia will stop working and retire. For a lot of them, they will need an asset base to fund this stage of their life. Best-case scenario, they will be 100 per cent reliant, or partially reliant, upon these funds.

However, despite this reality many people drift through life without placing much emphasis on, or at least paying attention to, the preparation required for saving for later life.

Now, I am not saying everybody needs to become an expert in retirement planning. I think the important distinction is we should become engaged with our impending retirement and ensure that when the day arrives, we have no regrets.

We often take a ‘no regrets’ approach to life experiences such as holidays, ticking off the bucket list or achieving other major lifetime goals. However, shouldn’t we be turning our attention towards what steps might need to be taken to ensure that our retirement savings are maximised during our career and particularly in the lead-up to retirement?

Today, the only discussion we often hear about retirement is having ‘no regrets’ about spending the kids’ inheritance and driving off into the distance.

It’s probably time this conversation matured.

I think this philosophy of ‘no regrets’, or Zengosaidan, needs to be front of mind as we approach retirement. For example, consider the following mental checklist:

  • Do you have enough to live on in retirement – for the whole of your retirement?
  • Have you maximised all possible options within your retirement strategy to ensure that you are well placed when you retire?
  • Looking at your retirement picture, what are the financial trade-offs if you make particular financial decisions today?

Believe it or not, virtual reality can make this process a lot easier. In a few years’ time I will be able to sit with a client, get them to put on a virtual reality headset, and then pull up a picture of what they might look like at retirement age. This might help them appreciate what they need to do to help the older-looking them in retirement. Potentially, we can create a real-live model of what retirement will look like if they do nothing, compared with what it will look like if they put into action the recommended steps to maximise their financial position opportunities.

Until this technology catches up with us, though, we will need to use our own imagination for the time being. I think, however, it is important that you keep in mind the following: When you stand at the threshold, about to take the leap from your working life into retirement, and reflect on what you have achieved, you want to be confident that you have optimised your financial situation, so the next chapter of your life can be everything you wished for and more.

Like all great ideas, it’s important that when you think about retirement planning, you don’t go it alone and seek advice from a practising and suitably qualified financial planner and, of course, I recommend AJ Financial Planning.

Could your Hostplus Index Balanced Fund be a disappointment?

Around $2.5 billion has reportedly flowed into the industry super fund Hostplus in recent times. This influx of funds has largely been on the back of media commentators promoting Hostplus, in particular its Hostplus Index Balanced Fund.

My understanding is that the main thrust for this investment boost was on the back of lower fees and the merits of index investing.

We recently had a client who, after reading media commentary, wanted to move their funds from another industry super fund into the Hostplus Index Balanced Fund. Their existing fund’s fees were 0.19%, while the Hostplus Index Balanced Fund was reportedly charging a low-cost fee of 0.07%. But was switching funds the right decision?

Does the argument start and finish with fees and does index investing mean a better result? To get an overall picture, let’s compare the performance of the Hostplus Balanced Fund compared to the Hostplus Index Balanced Fund. As both are reportedly ‘balanced’ funds (refer to our article ‘Industry funds headed for an asset allocation disaster’ https://www.ajfp.com.au/2017/07/17/are-industry-super-funds-headed-for-an-asset-allocation-disaster/), if these products are true to label, then it should be a fair comparison.

At the time of writing this article, the Hostplus website reported the following performance returns, net of all investment and administration costs.

It is important to note that historical performance is no guarantee of future performance. However, over time it might given an indication of the level of competence of the fund’s managers and the soundness of their investment strategy. Unfortunately, 10-year figures were not available for the Indexed Balanced Fund and are therefore not included. But I believe seven years is a reasonable timeline to afford some sensible analysis.

If low fees are the only matrix for success, then why is this not reflected in the end result – net performance over the longer term for the investor?

In fact, over the shorter, three-year period the performance variance between the two funds was 2.71% p.a. So while investors saved 0.99% in fees, they potentially gave away 2.71% in returns. Assuming a super balance starting point of $100,000, if this variance continued at its present pace, over an investor’s working life it could result in a total loss of return of around $171,839.

In short, when considering investing in a superannuation fund, you need to factor in all the elements. At a minimum, these include the ongoing costs of the fund, and the net return on a like-for-like basis. There are plenty of low-cost super funds around, but very few actually produce a decent return. And while performance is difficult to gauge, competence and quality of management can sometimes be illustrated over the longer term.

Like all sound investment decisions, it is important to seek professional guidance from a practising financial planner. Contact AJ Financial Planning today for a chat.

AJ Radio – Episode 19 (Recorded 24th July 2018)

In this 19th Episode of AJ Radio we crack open a segment of the investment market that was once thought perhaps to be a trivial area. Now, with a projected 2.3 billion people participating in this area of the market and a forecasted spend of $137.9 billion in 2018, this area of the market is no longer a niche player.  This episode takes a closer look at what is transpiring in this exciting video game market and the opportunities it presents for investors.

Is it better to retire on a $350k super fund, or a $900k super fund balance?

When it comes to retirement most people believe more is best, but is this always the case? Have the Centrelink changes that came into effect last year distorted reality; has the $350k super fund become the new $900k – without all the extra effort of squirrelling away so much for retirement?

Let’s assume we know two couples who are about to retire. One couple has a balance of $350k; the other has $900k. Both couples want a modest living standard in retirement, with an income stream of around $50k p.a.

The first couple with a combined balance of $350k can expect to receive an income stream of around $21,000 p.a. Potentially, they might also receive the Age Pension if their combined assets – excluding their home – sits under the threshold of $380,500. The projected Age Pension is likely to pay them a combined income of $35,573. Thus, they will end up with a total combined income of $56,573. It is likely that at a 6% drawdown rate, their superannuation will not be eroded too fast, so it should be possible for them to keep pace with inflation during their remaining lifetime.

In addition to receiving the Aged Pension, this couple will also receive all the benefits and concessions that normally come with it, such as discounts on utilities, medicines, etc.

The second couple has a combined super balance of $900k. Like the first couple, they own their own home. But as their combined asset balance exceeds the maximum Centrelink threshold of $837,000, they are not eligible for the Age Pension.

This couple will commence an income stream from their superannuation balance and, assuming a similar 6% drawdown limit, they will be eligible to draw a combined retirement income of $54,000 p.a. If their super fund’s performance remains reasonable, this should also last them until life expectancy and keep pace with inflation.

However, being over the Centrelink threshold means that this couple is not eligible for any of the discounts and benefits that normally accompany the Age Pension, although they will also not be affected by any government changes that might occur in the future to Centrelink thresholds.

They could also draw down a higher income stream earlier in their retirement, to enjoy travel and entertainment, etc. Then as they age their need for cashflow might not be as great, so they can gradually ‘ease off the throttle’ and reduce their balance to the $350k mark, and be in a similar situation to the first couple.

So the next time you are feeling a little underwhelmed about your retirement picture, it’s important to give consideration to all options that might be available to you. Sometimes, bigger may not be better. Or, you might be better off sitting at the $900k balance, possibly spending the difference on home improvements, travel, a new car etc. Later you could drop to the Age Pension limit, and even if you receive just $1 from the Age Pension, it still means you qualify to enjoy the other benefits that come with this government offering.

Before delving into a retirement strategy, it’s important you take your personal situation into account and seek advice from a qualified financial planning professional. Of course, we recommend AJ Financial Planning.

AJ Radio – Episode ​15 (Recorded 17th October 2017)

In this 15th Episode of AJ Radio we discuss retirement. Specifically, we explore what you should do if you don’t have enough money for retirement, and what are the steps you could consider taking to handle this situation. We also give a quick update on the speculative and very interesting cryptocurrency market.

 
 

Should investors participate in class actions?

A flurry of class actions over the past few years raises the question: is this area of law becoming the new feeding ground for ambulance-chasing lawyers?

The marketing and PR is slick: ‘If we don’t win your case, you don’t have to pay a cent’; ‘Just register for the class action and you might receive some money; if it fails, you don’t have to pay anything’.

With any great concept the question must be asked: does it make sense for an existing shareholder of a company to participate in a class action against that company? You hear the words ‘money’ and ‘free’ – is this too good to be true?

Let’s look at an example back in 2012, when National Australia Bank (NAB) settled a class action, paying out around $115 million in a settlement to its shareholders.

However, bearing in mind about 40% of this capital – according to the Australian Financial Review (AFR) newspaper – would have paid off the litigation funding partner, and about 10% would have gone to the lawyer representing the case. So, to keep the maths simple, about 50% of the ‘winnings’ went out the door, and shareholders got to keep the other 50%. Isn’t this just free money?

In another case involving NAB (the consumer bank fee settlement), again the AFR reported the sums paid to the litigation funding partner and the solicitor were even higher – about 70% – so each case can vary, but it’s still free money, right?

Now, let’s work out if this makes sense. To keep it simple, let’s assume you owned 100% of a large bank like NAB as a single shareholder. Congratulations, you are now $82 billion richer. One day, a smart lawyer with a glittering smile approaches you and begins a discussion.

…. ‘You have been a victim of misconduct by the NAB board and management. Here’s an idea: let’s sue the company you own and get you some money – because what they did was wrong!’

‘Wow, that sounds like a great idea! Let me get this straight; I can sue the company I own, and you will get me some money… so how much do I get if I win?’

‘Well,’ replies the clever lawyer, ‘you will get to keep between 30 to 50 per cent of the settlement money, but the best part is it won’t cost you a cent to go through the process and if you don’t win, you still won’t pay anything at all.’

‘Okay, great… let me just clarify to make sure I have the concept: I can engage you to sue the company that I own. If I win – let’s say settlement is worth $6.6 million – the company pays this amount to you, of which you keep $4.62 million and hand me $1.98 million.

‘Plus, the company I own will likely have spent at least $600,000 to $1 million defending the matter in the courts, and hands this over to the lawyers it has had to engage…’

‘Yes, isn’t it great?’ says the intelligent lawyer.

‘So, in total the company has spent $7.2 million in settlements and legals and I will receive $1.98 million. Aren’t I down $5.22 million overall on my investment as the company I own is an asset?

‘I’m a bit confused; wouldn’t it be simpler to simply raise this at the annual general meeting and vote against the board of directors and save all these costs?’

You can see how the absurdity of this argument only really becomes apparent when you imagine yourself as a 100% shareholder in the company. Why would anybody agree to such a ludicrous process?

In most cases, an investor gets to have their say each year at the annual general meeting. Every shareholder gets a vote on how the company is run and yes, you are only a very small piece of the pie and with a very small point of influence. But so too is an individual in a class action. So, isn’t it time we started to use our votes, linking ‘the crowd’ with smart tech to save all the legal costs?

Keep in mind the situation can change, for example, you may not be a shareholder as in the case of the NAB bank fee settlement case, or if the company is no longer trading and is possibly placed into administration this changes things too; every person’s situation is different.

The reality is, however, that when I log onto a law firm’s website to see the final outcome from a class action, I am warmly greeted with a form that asks me to agree ‘not to disclose the loss assessment formula or its contents to any other person’.

Could it be that what this line really means is ‘Psst, we don’t want anybody to know what is really going on’?

Are industry super funds headed for an asset allocation disaster?

Superannuation funds within the retail and industry super fund market usually offer ‘balanced’ or ‘growth’-based investment options. But what does this really mean; and aren’t these funds all the same?

On 31 May 2017, Vanguard’s Balanced Index Fund reported an allocation to growth-based assets of 49.9%.

Over the years, my interpretation of a balanced profile for an investor has been fairly similar to Vanguard’s 50/50 position; that is, one’s holdings are fairly equally split between growth-based assets and defensive assets. The question is, are industry super funds applying the same principle or, more importantly, are they headed towards an asset allocation disaster?

Recently I reviewed Catholic Super’s asset allocation, and I discovered something interesting. Delving into the target’s asset allocation for a ‘balanced’ fund I noticed a 70% growth-based assets allocation. This is a massive divergence from Vanguard’s recommendation, not to mention any number of portfolio theory textbooks. It made me wonder, has Catholic Super’s marketing department ‘mislabeled’ this investment option?

When reviewing Catholic Super’s strategic asset allocation, I also noticed that growth-based exposure was sitting at around 74%, if you included the ‘defensive alternatives’. If these alternatives are removed, it pushes the exposure up to 81%, as it is unclear exactly what these might entail.

Australian Super’s ‘balanced’ option appears to be in similar territory. When I looked at the mix of assets, if credit, fixed interest and cash are included as defensive assets, then growth-based exposure sits at 73%.

Neither Catholic Super nor Australian Super provide a date reference for these asset allocations on their respective website, so these percentages may have changed since they were originally published. It’s reasonable to assume, however, that both Australian Super and Catholic Super are taking a tactical asset allocation position – but have they reasonably exceeded these boundaries?

For years now, industry super funds have been reporting strong returns above those of their peers. The question must be raised, therefore, have these funds’ marketing divisions been pushing up returns by ‘mislabeling’ investment categories in order to attract new investors? Of greater concern, though, is whether these funds are potentially exposing investors to far more risk than the labels may imply?

So, let’s go back to the Vanguard Growth Index Fund reported on 31 May 2017. The index presently sits with a maximum range of exposure for growth-based assets at 72%.

You might ask, does having a larger exposure to growth-based assets matter? Doesn’t it mean higher returns for the members of the super fund and everybody is happy?

The short answer is: volatility and market downside. These factors make it very difficult for an investor whose risk profile is balanced to ensure they are matched carefully with the right exposure for their risk tolerance.

So, who has got it right? Vanguard, or the industry super funds? Which asset allocation really is ‘balanced’?

As Warren Buffett famously said, ‘Only when the tide goes out do you discover who’s been swimming naked.’