Teeing Up Your Retirement

Whenever the probability of a US recession reaches 20%, there is a recession 100% of the time. According to the website Pragmatic Capitalism, that’s how you should interpret the chart below. It’s the kind of statement only an economist could make. If 20% is all it takes to predict a definite recession, why is it just a 20% probability of a recession?

Probability of a Recession in the US and When a Recession Followed
Probability of a Recession in the US and When a Recession Followed
Source: St Louis Federal Reserve

Anyway, a recession wouldn’t be great for Obama’s next four years. We’re glad he won. A recession under a socialist is preferable to a recession under a fake capitalist, given that their policies are the same.

Why should you care about all this? Well back in 2008 a recession in the US halved Australian stock prices in short order. So maybe the ‘20%=100%’ chart is important to your personal wealth. But we’ve got bigger fish to fry when it comes to that wealth.

Last week’s Weekend Edition of the Markets and Money featured some solutions to retirement problems. But we put the cart before the horse. What are the problems you’re trying to solve in the first place?

That’s an open question, by the way. We’d like to hear from you at letters@marketsandmoney.com.au. (Let us know if we can publish your feedback, with or without your name.) What are your doubts, concerns, goals, and fears when it comes to retirement? If you haven’t got any, why not?

The newly launched Money for Life Letter is about weighty solutions, so that, once you take on the task of teeing up their retirement, you’ll have the means and confidence to back yourself financially. Even if you’re already in retirement, the Money for Life Letter has ideas that will make your retirement dollars go further and keep them invested in faster growing and safer assets.

Thinking about all the things that worry you can be counterproductive if it makes you panic. You need some empowering ideas that deal with those issues too. Making a ‘retirement to do list‘ can shock you into inaction instead of action if your list is too long. If your list of simple solutions is just as long, you’re more likely to begin ticking things off.

But at some point, you should face the reality of your retirement finances as a whole. Because reality will face you once you retire. Here are some of the problems you could face.

1. Running out of money

Australians are living longer lives. Many choose to retire at the same age their parents and grandparents did, despite that change. The longer retirement leaves a financial gap that needs filling.

It’s not just a longer life that retirees are choosing. Better healthcare means retirees can enjoy a better quality of life in their old age. That means more expenses too. You’ve got lawn bowls, golf clubs and water-skis to buy.

2. Risky, volatile assets make wealth unpredictable

The stock market crash in 2008 was a wakeup call for Australians in particular. They were caught out holding far more shares than other countries’ investors. Australians retiring in 2007 were forced to sell their assets at bargain prices to pay for their costs of living. That’s far from ideal.

Owning vast amounts of risky assets that can crash and boom without reason or warning is not a good retirement savings strategy. Unless you want to live in fear. Some people like to worry. Our personal view is that retirement thrills and spills should be had somewhere other than the financial world. Unless you like taking a punt with some carefully set aside play money. Even ardent small cap investors are careful to limit their punting money. The rest needs to be invested in safer assets.

3. Interest rates and government assistance

All around the world, retirees and pensioners are being bled dry by their governments. Low interest rates for savers and low pension increases have devastating effects on the best laid retirement plans. Here’s the Telegraph explaining what’s happening in the UK:

‘Millions of savers will see the predicted value of their retirement pots plunge by almost 40 per cent after the financial regulator ordered pension firms to cut their growth forecasts due to the global economic slowdown.’

Retirees were supposed to be an emerging political force. But the focus of the government in Australia has been to help out families and mortgagees with baby bonuses and lower interest rates. Savers don’t get a mention.

4. Rising cost of living

Australia may be a great place to live, but it’s also expensive. This will become painfully obvious when you retire and give up your regular salary. Instead, you’ll being drawing on your capital.

5. Who can you trust?

Financial advisors never seem to be in the press for the right reasons. Here’s an example from Joanna Bird in the Australian Financial Review of them making the cut for the wrong reasons:

‘The remuneration models of many financial advisers are unusual, possibly even unique. They are paid on an ongoing, indefinite basis without any active step by the client to effect payment. Combined with the average consumer’s lack of interest in their own financial matters this results in the current situation where many people are paying for advice they don’t need.

‘Those who see a financial adviser may soon forget – if they ever comprehended – that they agreed to pay them a regular fee out of their investment products and that this will happen every year until they actively stop it or sell their product.’

It’s not just questionable fees and commissions which have retirees worried. The failure of financial institutions like the Victorian regional lender Banksia are enough to make you question everything.

There are plenty of other things for retirees to worry about. Let us know what else worries you about your retirement by writing to letters@marketsandmoney.com.au. But don’t forget that there are powerful solutions to deal with these issues too. If the five challenges we’ve mentioned above are ones you worry about, take a look at our video presentation here.

Until next week,

Nickolai Hubble.
Markets and Money Weekend Edition

ALSO THIS WEEK in Markets and Money

Using the Habit of Optimism to Find Great Investment Opportunities
By Dan Denning

That is a polite way of telling savers to shut up and buy shares already. This is the bargain central bankers are willing to make these days. They agree to create asset bubbles in housing and stocks if we agree to shut up about inflation, lost purchasing power, and the inability to plan (and save) for a rainy day. It’s a bit like a bribe, or the Godfather making you an offer you can’t refuse.

Why the Stock Market Couldn’t Care Less About Obama’s Win
By Greg Canavan

We humans are (mostly) an inquisitive bunch, so wanting to know ‘why’ the stock market moved up or down for the day is a natural tendency. But for investors the daily ‘why’ is pointless. It will just cloud your judgment. In fact, that’s the whole point of the stock market. The whole operation is an emotional torturer designed to cloud your judgement…to suck you in right at the worst possible time and drag you out right at the bottom.

Why Government Debt Blows Up
By Bill Bonner

Richard Koo knows what’s going on. At least, to a point. He’s a fool, but not an idiot. In Bastiat’s terms, he sees the effects of a debt deflation. As for the unseen consequences of the government’s efforts to fix it, he doesn’t even bother to look. He’s the chief economist for Nomura Research Institute in Tokyo and formerly an employee of the Fed. And for the last 22 years he’s lived with an economy in what appears to be eternal sleep.

The Superannuation Gravy Train
By Greg Canavan

The bottom line is that the superannuation system is beginning to feed on itself. We will see more fee and tax grabs in the years ahead as a cash strapped government slowly chips away at the money you’ve saved for your retirement. There’s not a great deal you can do about this…after all, we don’t know when the changes will come. But if you’re looking for ideas that will make your retirement years more pleasurable, check out Nick Hubble’s new Money for Life, Port Phillip Publishing’s exclusively retirement focussed newsletter.

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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