Retiring comfortably made simple
Posted 24 Oct 16
There is a lot to be gained from lowering the background noise and sticking to your long term goals.
Confidence can have a positive impact on most aspects of our life. With confidence, everything seems more achievable and your investment goals are no different.
The years since the GFC have made it difficult for some people to invest with confidence, although that does not mean it is no longer possible. Confidence is all about having a positive attitude, and most importantly, being well prepared.
The following are core principals required in order to be a confident investor with clear direction:
Have a plan (set clear goals)
Any project or goal that is either complex or has a magnitude of variables requires forethought and planning in order to achieve a desired outcome. For instance when planning a holiday, most people will have a general process they like to follow, some have refined over many years, some have learnt from previous mistakes, others seek advice while others rush around and book arrangements at the last minute.
When we consider retirement the potential variables increase significantly, although the alternative of not planning could mean a lifestyle well below what someone had become accustomed to or expected once they retired. A stage of life that may have been thought of as freedom may become a period of worrying whether you have enough to do the things you would like. The earlier you set your financial goals the greater the likelihood of achieving them.
When you see investment prices dropping due to the latest piece of bad news, it’s a natural reaction to think you need to do something before it’s too late. However, selling investments during or after a market downturn inevitably means missing out when prices pick back up again – which can happen quite quickly.
For example, the Australian shares ASX/200 index dropped by 40.4% in 2008, but the following year they gained 39.6%. If you sell in a downturn and eventually buy your investments back, you may be paying more for those assets than you sold them for.
Having a sound investment strategy that you have put in place with your financial planner means you’re focussed on the end goal, not the fluctuations along the way. This can help you stay calm and confident when others are panicking.
Understand investment cycles
Investing in growth assets like shares and property will always come with some risks, and there will always be the potential for negative performance. But over the years, the overall trend has been consistently upwards.
Between 1993 and 2012, the Australian share market only experienced four negative years out of 20. The average return for Australian shares over that period was 9.9% per annum.
It can be difficult to see the upside when there’s a lot of ‘doom and gloom’ in the media. However, investment markets have survived the Great Depression and two World Wars and this resilience should give you confidence to persevere with your long-term plans.
Think long term
People have different ideas of what ‘long-term’ means, but it’s probably longer than you think.
Take an average couple aged 50 and 45. He can reasonably expect to live to 86, and at that time her life expectancy will still be six years. This means that at age 50, this couple are likely to be investing for the next 42 years!
Your financial plan needs to be flexible enough to cater for your short-term goals, your spending needs in retirement, and your long-term aged care needs. This is something your financial planner can assist you with.
Cover all your bases
The ideal way to ride out the lows and capitalise on the highs of the investment markets is to develop a comprehensive financial plan that covers your investments, superannuation and insurance.
For example, you may find that investing inside super is an effective way to reduce the tax you pay on dividends and capital gains – which are taxed at a maximum of 15% inside super instead of your marginal tax rate when you invest outside super.
Life insurance can also play an important role in protecting your family against a serious illness or accident. With this additional financial support, you can be more confident that your long-term plans will survive an enforced period out of the workforce for you or your partner.
Spread your risk
Your financial planner will show you how to diversify your investments so that when one class of assets goes down (e.g. shares), another may well go up (e.g. bonds).
The key is choosing a mix of investments that suits where you are in your life, your attitude to risk and your goals, and then sticking with these investments through the market highs and lows or until your objectives change.
A diversified approach across Australian and international shares, bonds, property and cash investments will reduce your exposure to any one asset class, and it can be easily done through a managed portfolio.
Stay up to date
Once you have a financial plan in place and you have set a direction, from here it is paramount that your progress is monitored to ensure that you remain on track. New rules and regulations come along regularly – particularly in superannuation. New investment opportunities will always emerge. The best way to ensure you’re making the most of these opportunities is to review your financial plan regularly with your financial planner. With their ongoing support and advice, you can be confident in all market conditions that you are working towards the lifestyle of your choosing in retirement.