Looking back over the last quarter of a century, the main theme – despite the enormous changes during the period – has been history repeating itself. Bust follows boom, boom follows bust, and today’s investment fashion is quickly replaced by another.
In fact, when I was at the State Library of Queensland researching newspapers back to 1988, I was struck by how often the same headlines kept popping up.
But there are two crucial factors that are unique to the world we live in today – rising life expectancies and record low interest rates. It is the perfect storm, because people retiring now face the daunting prospect of making their money last as long as they do. Many are averse to growth assets like property and shares, which they regard as ‘risky’, but the grim reality is that sticking with low-earning cash may be the riskiest strategy of all over the long-term.
By 2017 a couple with assets in excess of $823,000 (excluding the family home) will not be eligible for the aged pension. Yet, if all they have is $900,000 in bank accounts, their income may be just $18,000 a year – not much more than half the aged pension that is paid to a couple with no assets. And running down capital to become eligible for the aged pension is a dangerous strategy indeed. The present rate of aged pension is unsustainable in the long term, which means further tightening of pension eligibility is a certainty. There may well come a time, sooner rather than later, when the question will be asked “Why should a couple with $500,000 of financial assets be eligible for welfare?”
And there’s more. Already there are moves to remove the asset test exemption for the family home currently enjoyed by age pensioners, to bring in universal land tax on the family home, and to tinker with superannuation even further. These ideas will gather momentum as the number of retirees grows, and government budgets come under further pressure. All spell tougher times for senior citizens.
Fortunately, there are lessons to be learned too: one for each main stage of life.
If you are young it is surely obvious that you will need to rely on your own investments when you retire; governments around the world are running out of money. Understand that you have one unique advantage – time – and start a savings and investment programme now to give compound interest time to work its magic.
If you are middle-aged, medical advances sure to occur in the next 30 years make it an odds-on bet that you will make it to 100. Therefore, it makes sense to form a relationship with a good financial adviser as a matter of urgency and get yourself a quality growth-orientated portfolio. It is my strong belief that shares are the only asset that will give you the returns you are going to need and the sooner you get acquainted with them, the less scared you will be when markets go through their regular down periods and the papers have a field day with scary headlines.
If you are elderly, dramatic medical advances may come too late for you. It is quite likely that you will face the challenge of running two homes, with one partner in care. It’s natural to dodge this issue of accommodation but the sooner you face it the better you may be able to cope. Home care is becoming the norm and will be much easier if your home is able to be equipped for people who need assistance.
For everybody, building or retaining wealth is an important part of achieving a comfortable family lifestyle now and in the future. This means being aware of probable futures and having the resources to cope with whatever challenges lie ahead. It is my fervent hope that my new book will make a significant contribution to helping you take control of your future, and achieve your goals.
Noel Whittaker has been a great supporter of Cuffelinks since the day we started. He ran his own financial advice company, Whittaker Macnaught, for 30 years, and in 2011, he was made a Member of the Order of Australia for raising awareness in personal finance. For more than 25 years, his articles have been published in leading newspapers and journals. He has personally selected his highlights and brought them together in one book, ’25 years of Whitt and Wisdom’, which can be ordered on the link here.