With more and more Australian’s retiring earlier and living longer, planning for retirement or what we like to refer to as ‘having choice’ has become especially relevant in recent times.
Retirement sees you entering into a new phase of your life. It is important to ensure you have the capacity to generate sufficient income without outliving your capital, whilst enjoying the lifestyle you have always dreamed about.
This should be an exciting and pleasantly anticipated period, however, for most, it can be very daunting. The feeling of uncertainty is mainly brought about by inadequate retirement planning.
so what is retirement planning?
Retirement planning is getting yourself well organised both personally and financially now to make sure you are ‘on track’ for the future. It involves the integration of a range of disciplines, including taxation, debt structuring, succession planning, superannuation, asset protection, wealth creation, estate planning, insurances and personal mental and physical health.
Your retirement should come down to ‘Choice’. The ultimate outcome being your ability to choose:
- whether or not to work full time or part time;
- when to actually leave the workforce;
- how much will be required for your retirement;
- appropriate protection of my assets;
- what will I do; etc..
Through appropriate planning and the creation of a tailored framework you can expect to eliminate the worry and have peace of mind knowing that you will be able to make informed decisions that won’t affect your long term objectives in retirement.
Whilst your financial positioning is important, retirement planning isn’t all about the money. There are many other factors that need to be considered when planning for your day of choice. Generally it will take a coordinated approach from your accountant, solicitor and financial planner.
Rather than worrying about what things will be like in your retirement years, it is prudent to begin planning and commence appropriate actions. Needless to say the earlier action is taken the more choices may become available.
Recent newspapers have painted doom and gloom over the plight of the stock market. Despite a 50% gain over two years, a negative month in March was greeted with negative headlines and the usual doomsdayers.
It is typical for markets to display volatility. It reflects the optimism and pessimism of the market as a whole as to the state of the domestic economy and corporate profits. It is important during these periods to look through the noise to identify the truth as to the outlook for economic health.
The reason we invest in shares is to enjoy the long term growth associated with this asset class. Compared to other asset classes, companies can re-invest a proportion of their profits back into their business to create growth. This creates a compounding benefit over the longer term. Historically share markets have delivered a return of around 10% pa over a ten year period.
So if you are looking to invest in shares or stay invested the first decision is the likely long term health of the Australian economy. In this respect we can point to a number of favourable trends including the following:
- Australia is well positioned both geographically and economically to benefit from growth in Asia. In particular growth in exports via Chinese demand for both hard (mining) and soft (farming) commodities will produce lasting benefits for our economy.
- The world is moving ever so slowly towards loosening trade restrictions on farming. This is being caused by moral / political pressures to support developing countries who rely on agricultural exports. As well as via economic realities that regions such as Europe cannot compete and are creating severe imbalances in their own economies.
- Higher levels of immigration to support Australia’s tight labour market has positive implications for economic growth.
- High levels of Government spending on infrastructure will be a reality in the next ten years. Australian Governments have little debt and will be expanding infrastructure in roads, rail, ports and other areas. This will provide lasting benefits to our economic activity.
All of these factors point to a solid rate of economic expansion over a ten year period. However there is no doubt in our mind that the short term risks of investing in equities have increased of late. The key factors that lead to this view are as follows:
- Demand is slowing due to the Reserve Bank’s move to increase interest rates and due to a slowdown in housing after an unsustainable bubble in recent years.
- The Australian consumer (feeling wealthy due to the price of their houses) has gorged themselves on debt and consumer goods. This effect could unwind as housing prices soften.
- Australian unemployment is low by historical standards and a tight labour market is making it difficult for large scale projects to be completed on time and on budget.
- Higher oil prices is making it difficult for manufacturers particularly oil prices.
We have seen smaller companies begin to issue profit downgrades in response to these pressures. Smaller companies lack pricing power and market position and are typically the first to notice a profit impact. We expect margins and profits to be under pressure over the next year as the Australian economy adjusts to these pressures.
There are a number of responses an investor can make in order to position themselves for more volatile and riskier markets. These include:
- Migrating the portfolio to higher quality investments. This means selling the speculative stocks and focusing on those stocks which you have confidence will continue to meet profit growth expectations. Even if these stocks are sold down they will typically bounce back quickly as they are the types of stocks investors want to own over the longer term. Examples might include stocks such as Tabcorp, Macquarie Infrastructure Group, or Promina.
- Increase the cash holdings. Warren Buffet is quoted as saying “you need a loaded gun to be able to bag an elephant.” By that he means you need cash to be able to invest in stocks which become over sold. So extra cash is handy at present.
- Look at stocks which are not solely reliant on the domestic economy for their profit growth. This might include a stock such as Computershare or Singapore Telecom.
In conclusion while the risks of investing have definitely increased of late, the long term benefits of investing in share markets remain – solid growth, and strong tax effective dividends. Remember however, when investing in shares they typically have a negative year every four or five years so a long term view is a necessary precursor before investing.
This article was contributed by Gary Fraser of Fitzpatricks Dealer Group Pty Limited. Fitzpatricks are a financial services provider servicing niche clientele and specialise in the creation of personalised and financial strategies that enable their clients to be financially well organised. (Authorised Representative No. 284099, Fitzpatricks Dealer Group Pty Limited AFSL No.247249 ).