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.
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.
In this 20th Episode of AJ Radio we challenge some paradigms of investing and retirement. As the financial world is no always logical, we raise some interesting questions when thinking of the amount of funding for your retirement and if higher returns for investments are better.
At AJ Financial Planning, we are often contacted by clients who are:
moving back to Australia after working abroad
about to move overseas to take up a job opportunity
relocating to retire in a country that has a lower cost of living, or
moving retirement benefits or investments either to Australia or elsewhere as part of their relocation strategy.
Moving a large amount of money between countries can be a nerve-wracking process. Often people use their local bank for this type of transaction. The main benefits of doing so are that it is a relatively simple process, and they are dealing with a financial institution they feel they can trust.
The reality, however, is that they may findthemselves being gouged anywhere between 1 to 10% on the cost of the foreign currency transfer.
Let’s start by asking why do banks charge so much? It comes down to what is known as the ‘interbank market’. Think of this as a ship that leaves port and the cargo on board is your cash. It is en route,say, to the UK and along the way it might stop at a number of ports in other countries before finally getting to Dover in the UK. Each time it stops at a port, it has to hand over some of your money. The interbank market is very similar in that it is a range of associated banks moving funds all around the world. Sometimes it goes directly from one bank to another; other times it might need to be routed via a number of banks to get to its final destination.
In some instances we have seen clients who were wanting to move a large amount of funds and their local bank or overseas bank indicates they will likely charge them up to 10% of the capital. In these situations,this could have cost our clients anywhere from $10,000 to $100,000, depending on the amount of the transfer.
So are there better, cheaper ways to move money? Over the years, the foreign currency (FX) market has evolved and today there are a number of alternatives available.
It does depend on how much you are trying to move, of course. The additional complexity may or may not be worth the headache, depending on your situation. sLet’s look at two soptions:
A number of intermediaries now provide specific FX services independent of banks. An example of this type of provider might be OFX. Essentially, OFX works as an intermediary. So you would push your AUD or nominated currency into this FX provider,and then the FX provider handles the exchange on your behalf at an agreed rate. These funds are then deposited into your nominated account.
If the transaction is large enough, you could consider establishing a stockbroker account through Interactive Brokers or another FX broker, andthen trade the FX over a period of time at the most opportune times for a cost-effective FX conversion to maximise the amount you ultimately receive.
If you are thinking about making an FX transfer, spare a thought to how much this might cost.
It is important before deciding on a provider to ensure that they are of sound backing and have a strong reputation in their field. The ones mentioned in this article are just illustrative in nature and we neither endorse nor recommend that the reader uses these providers.
Any FX transfer is complex in nature and would require substantial consideration before executing. We would recommend that you obtain advice from a suitably qualified financial planner and, of course, we recommend AJ Financial Planning.
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.
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.
In this 18th Episode of AJ Radio we look at inheritances – what are the changes that have occurred in this area, what are the common mistakes people make with giving and also receiving inheritances, and also how you can best optimise a potential inheritance.
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.
In AJ Radio’s 14th of episode, we talk about sequencing risk. What is it and how do we manage this type of risk when it comes to investing? We also provide an update on the geopolitical situation with North Korea and what impact this may have on the global financial markets.
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.’