For some strange reason whenever someone brings up the “s” word (superannuation), there are two common reactions: The first centres around fear and confusion. Folks don’t really know how much money they’ll need in retirement and the prospect their investments will fall well short of what they need fuels a sense of anxiety about their future financial well-being. The Second centres around complete boredom. This is especially true for those in their 20s, and perhaps even 30s, that perceive their retirement as being so far off into the future that superannuation, for now at least, is a bit irrelevant. Let’s be very real about this. You will need a heck of a big pile of cash when you retire if you plan on simply taking it easy in those twilight years. So there are some facts and concepts you need to be aware of.
A recent Rabobank poll showed that baby boomers are retiring, on average, on about $200,000. That’s well short of the $800,000 they indicated they would like to have in retirement. In fact it’s generally accepted that you need around $1 million in retirement to live quite comfortably. That is, assuming you live in retirement for 15 years with no extra income, a million dollars would give you an annual income of around $65,000. So you can see retiring on $200,000 simply won’t cut it. But the sting in the Rabobank survey came from what the baby boomers said they were expecting to retire on. That figure was around $400,000. That means their annual income has effectively now been halved. What they didn’t count on though of course was the global financial crisis – or as the rest of the world defines it – the global recession.
What we are seeing is one of the great reality checks of our time. The rubber’s hit the road. Those mornings back in 2008 and 2009 when we were told over the radio or in the newspapers that the Shanghai Composite had fallen 5 per cent, or that the Dow Jones Industrial Average had plummeted, were the mornings that billions of dollars were about to be wiped off our market and hundreds of thousands of dollars wiped off folks’ superannuation funds. It was hard to reconcile at the time because it all seemed so abstract and we couldn’t feel it in the hip pocket. But unless the market climbed back up again, it was going to be all too real.
For perhaps the first time in your investing career you had to consider your ‘risk appetite’. That is, how much risk am I prepared to put up with for a given investment return? Many investors thought they were being ‘risk averse’ by staying in the market as it kept falling (doing nothing), but the reality is that simply having exposure to shares during a significant market-moving event is to signal quite a risk-loving (or at least risk-neutral attitude to investing). The sad fact is that investors felt trapped. They were told by investment firms to sit-tight and ride out the storm. They were told the market would eventually recover - and it would - but not in time for everyone.
This is where financial education is so important: Shares, or investing in equity markets, is just one avenue an investor can go down to build wealth. Other avenues can be far less risky and far more effective. They include: Government bonds, currencies and commodities. Debt – or government bonds – is a more traditional asset class but currencies and commodities are far less mainstream. What you’re ultimately trying to do is to ‘hitch a ride on the money train’. Now while that sounds a little crude, it’s based in a solid financial concept, that is, money has to go somewhere, so you may as well buy a ticket and follow it. It never disappears. It’s simply transferred from person to another. The aim of the investor is to catch the train, wherever it may be going.
Over the past 5 years large quantities of money have flowed into commodities like coal, iron ore, gold, and silver, and of course currencies like the Australian and US dollars (and the respective monetary assets you can buy with those currencies, like government bonds). There has been growth in equities markets but that has been concentrated more in defensive stocks like utilities, consumer staples and healthcare plays. The fact though that investors are keen to park their money in the ‘safe’ corners of a relatively risky investment class (equities) tells you everything you need to know about overall risk appetite in the market and the general movement away from shares. The volume in the market (or number of shares trading hands from day to day) has also been well below historical norms recently highlighting just how risk averse market participants are.
Money has flowed into commodities like gold because investors have been looking for ‘safe havens’ to put their cash. The attraction to the US dollar has a similar thematic. It seems despite the cancers attacking the health of the world’s largest economy, it’s still considered the ‘safest’ developed economy in the world. The bottom line is that investors are looking for more certainty and security. The ‘flight to quality’ is creating investment opportunities because more value is now being recognised in these assets
So if you’re staring down the barrel of retirement it’s vital you face reality now and not when it’s too late like many of the baby boomers. There is always money to be made. The returns may not be super-normal but they will be satisfactory. The key is to be courageous and ask yourself where the yield is. It may mean thinking outside the box and moving away from the mainstream super fund managers but the outcome is likely to be rewarding.