We see it time and time again, that new “retiring or retired” clients we meet have an investment strategy that is either too conservative or too risky for their financial needs.
This situation of investment conservatism or aggression is brought about for a few reasons;
Main reasons for being “too conservative”:
- History – Clients are now reluctant to take on risk after experiencing devaluations from the global financial crisis.
- Security – Clients know that money in cash and term deposits are not going to go backwards.
- Age Demographic – Clients feel they need to be conservative because they’ve retired.
- Financial Education – Clients don’t understand the financial literature and are not comfortable taking on investment risk due to a lack of understanding and trust.
Main reasons for being “too aggressive”:
- Passive Investors – Clients have a buy and hold mentality, and their asset allocation hasn’t de-risked as they move closer to or into retirement.
- Making up for the GFC – Clients did feel the financial impact of the global financial crisis and want to “get back” lost capital.
- Forced risk-taking – Clients not happy receiving 2.5% Cash or 4% Term Deposit, and so are forced to seek higher income returns from riskier assets.
The implications of clients being too conservative include either; “outliving their capital” and a “reduced lifestyle in retirement”.
The implications of clients chasing growth and higher returns, taking on more risk than their need to, includes an unnecessary exposure to future negative investment (share/property) corrections.
Outcome based investment planning
At Lifetime financial group, we engage with clients and seek to understand the financial outcomes they desire, and implement a strategy designed to achieve with certainty those outcomes and financial goals.
Retirees – Invest Smarter
Ok, so what should “retirees” be considering with their personal investment plan?
We have summarised the investment exposures available for investors seeking risk-reduced portfolios, in light of the current depressed interest rate cycle.
Right now there are investments that look much better than others taking into account “risk/return” attributes, and I’m afraid that many retirees will end up with ordinary returns in the coming years due to the “low yielding” investment environment we are in.
- With the RBA cash rate at 2.5% and inflation at a higher rate (around 3%), it means cash investments are losing “real” value.
- Enough cash should be held as an emergency fund, but not as a store of wealth.
- Term deposit investments do offer better rates than most cash accounts.
- But at 3.5 – 4%, investors are barely “getting ahead” investing in bank term deposits.
- Where capital security is needed, term deposits are a reasonable store of wealth.
- As a general rule government bonds perform really well in falling interest rate cycles, and underperform in rising rate environments. Right now, interest rates do seem to be stabilising and may soon (later in the year) start rising again. Beware, investment capital in government bonds, despite their low default risk and defensive elements, can devalue! Don’t be caught out.
- 10Year Australian Government Bond yields have started to move up ahead of RBA cash rate movements. This is common. It’s also saying that interest rates are eventually going to start moving up.
- With government bond yields at rates equal to or less than term deposits, term deposits do appear to be a superior investment in terms of total return on investment expected in the coming years.
- Many Industry Super & Pension funds, and conservative/balanced retail super & pension funds have sizeable government bond exposures. You may soon see reasonable underperformance of returns from these funds.
- ASX listed corporate debt securities have many names including; hybrids, convertible preference shares and capital notes, but essentially they have “debt/fixed interest and equity” characteristics, providing higher income yields due to additional risk.
- We feel the additional expected returns from these securities, more than compensate for the additional risks associated with them.
- We predominantly focus investing in corporate debt securities offered by the big four banks – ANZ, CBA, NAB and Westpac, due to their superior credit rating, lower risk of non-payment and reduced pricing volatility.
- At close to 5.9% grossed up yield (including refundable tax credits), these securities offer cash flow outcomes of around 34% higher than the better term deposits on offer, with minimal capital fluctuation.
- Dividend yield is very important when investing “retiree” money in shares.
- Companies that pay a large percentage of their profits out as dividends are worth considering, as they generally provide more “return certainty” to investors.
- These companies generally have a superior “income” or “cash flow” advantage to fixed interest investments in that dividend payments in dollar terms typically don’t reduce over time (unlike cash, fixed interest investments in reducing interest rate economic environments). Many ASX listed businesses adopt a progressive (increasing) dividend policy.
- Early in 2014, a number of companies have increased their cents per share dividends, and have consistently done this over the years as their profitability has improved. If you can ride out the share price fluctuations associated with these businesses, then their income payment outcome for investors is very positive – keeping pace with inflation.
In summary, retirees are currently faced with some difficult and financially complex investment decisions. Interest rates haven’t been this depressed for a very long period of time. It’s great for mortgage owners but less than ideal for “retirees” (particularly when taking into consideration the increasing cost of goods and services).
Below is a graph from the RBA that highlights the history and decline of cash rates since the early 1990’s.
At Lifetime Financial group, we are constantly weighing up how best to invest “retiree” wealth. Right now there appears to be strong disparity between investments that you “should” be thinking about, and those “unlikely” to deliver a decent financial outcome.
Our role is to educate, guide and implement prudent investment strategies for our clients. We use our experience and knowledge to assist with making sensible investment decisions and there is “too much” at stake for retirees to not seek decent advice at this stage of their lives.
If you know of a retiring or retired individual who doesn’t have adequate financial direction or if they need a second opinion, please have them call our office on 03 9596 7733 and make an appointment to meet with one of our Melbourne based retiree investment financial planning specialists.
Financial Strategist and Wealth Manager
LifeTime Financial Group.
An independently owned Melbourne based Financial Planning Group