Taking more than you need from your nest egg?
August 19, 2016 | Robin Bowerman, Vanguard Investments Australia
A common way to measure the sustainability of retirement income is to calculate an annual withdrawal rate - the amount of income as a proportion of a retiree's total capital.
For instance, drawing an income of $4,000 a year from savings of $100,000 is, of course, a four per cent withdrawal rate.
And a leading topic of discussion in the retirement services industry is identifying an optimal drawdown rate so that a retiree's capital lasts as long as possible.
Recently-published research from Vanguard in the US goes a step further by looking how much of annual retirement drawdowns by retirees are actually spent. The findings may surprise you.
The researchers found that a high percentage of retirees receive larger withdrawals from their various retirement, investment and savings accounts (including the equivalent of our super) than needed to finance their spending over the year examined.
In turn, their findings may influence how we think further about how much to drawdown from our retirement savings each year and truly underline the importance of giving sufficient weight to retirees' actual spending habits.
The research focuses on the withdrawal and spending patterns of retiree households with a minimum of $US100,000 in financial assets. This minimum was set so participating retirees had "meaningful" financial assets to draw upon and did not rely entirely on a government age pension for an income in retirement. More than 2600 retiree households with members aged 60 to 79 took part in the survey, which was conducted in 2012 and then analysed. The retiree households had a median income of about $US69,500 (including government pensions) and median wealth in financial accounts of $US419,000.
One quarter of the retirement incomes of this sample of retirees came from their retirement, investment and savings accounts.
The researchers concentrated on 10 types of financial accounts: including personal retirement savings accounts; employer-sponsored retirement, defined-contribution plans; managed investment funds; bank accounts; and money-market accounts. (These accounts do not include, of course, guaranteed income from social security and guaranteed pensions.)
On average, the income of these households comprises: 26 per cent from financial account drawdowns, 53 per cent guaranteed income, 11 per cent wages and 10 per cent from other sources such as real estate rents and trusts.
The researchers make the point that "some or all" of compulsory minimum withdrawals from certain retirement accounts (as with pensions from Australian superannuation funds) are not always spent but reinvested in another financial account.
Key findings include:
- Three-quarters of the retiree households in the sample made withdrawals from their financial accounts. Yet only seven out of 10 households spent the money.
- A "full" 66 per cent of retiree households had spending rates of less than three per cent of their capital in these accounts (including not spending anything).
- Some 23 per cent of retiree households had a spending rate of five per cent or more of their capital. "This means that close to one-quarter of households are at risk of seriously depleting their financial assets if the observed one-year spending is sustained," the report comments.
The actual spending of retirees is obviously a critical consideration when attempting to determine how long retirement savings may last.
Can you answer this fundamental personal finance question?
August 19, 2016 | Robin Bowerman, Vanguard Investments Australia
Do you know your superannuation balance - even approximately?
This must be one of the most fundamental questions in personal finance given that close to 18 million Australians hold at least one super account.
Certainly, there are numerous fund members, including many with SMSFs, who can immediately call up spreadsheets giving the latest-available values for the assets in their portfolios including directly-held assets such as property. And members of large funds can, or course, get immediate online access to their balances.
Between March and August last year, the Financial attitudes and behaviour tracker - a continuing research program coordinated by the Australian Securities & Investments Commission (ASIC) - asked members of large APRA-regulated funds and SMSFs if they knew the balances of their main super accounts.
It is hardly surprisingly that the majority of SMSF members surveyed knew their super balances or had a reasonable idea. The fact that these members have established an SMSF in the first place would tend to show a strong interest in super.
The researchers found that 55 per cent of SMSF members responding to the survey knew the balance of their main super either exactly or almost exactly, 40 per cent had a "rough idea" while 5 per cent did not know their balance. In other words, 95 per cent of SMSF members surveyed kept an eye on the size of their super savings.
Again, perhaps not surprisingly, the survey confirmed that a lower proportion of non-SMSF members knew their super balances. The researchers found that 34 per cent of these survey respondents knew the balance of their main fund exactly or almost exactly, 40 per cent had a "rough idea" while 26 per cent did not know their balance.
It is worth keeping noting that super fund researcher SuperRatings reports that 60 to 70 per cent of members in major funds are in default investment options. And their levels of interest in super would markedly vary.
If fund members haven't an approximate idea of their main super balance, it seems unlikely that they would now how their super savings are invested. And they are less likely to know how their funds have performed over the medium-to-long term compared to other super funds with similar asset allocations.
Further, such fund members are less likely to have addressed such issues as whether they are saving enough to achieve an acceptable standard of living in retirement.
Clearly, the interest of members in their super, including their super balances, would tend to increase with age. (The ASIC research found that members under 35 were less likely to know their super balances.)
One of obstacles to fund members knowing their super balance is the holding of multiple super accounts. Actuaries Rice Warner estimates that 17.7 million fund members hold 29.9 million accounts. In a large part, this would stem from members joining new default funds when changing employers.
By consolidating unnecessary super accounts, members should find it much easier to track their super balances.
Being informed about the state of our super savings can be critical to achieving investment success and an acceptable standard of living in retirement. Do you know your super balance - even approximately?
Superannuation is, of course, a very long-term exercise and fund members should not be thrown off course by short-term movements in their super balances.
'Brexit': What's next for investors?
July 05, 2016 | Robin Bowerman, Vanguard Investments Australia
The votes have been cast and counted, and the people of the United Kingdom (UK) have chosen to exit the European Union (EU).
We expect this vote to have significant impact on the global economy, but it will take considerable time before the effects of 'Brexit' are fully felt in Australia. The most immediate ramification is likely to be political change in the UK, given the bitterness of the referendum campaigns. However, the referendum is not itself a binding decision but will need to be incorporated into an act of the British parliament. Under the terms of the Lisbon Treaty, the UK will then give formal notice to the EU, after which a two-year (extendible) negotiation will be held to decide on the actual terms and conditions of the exit.
Market volatility and investor uncertainty:
In the weeks leading up to the vote, speculation caused increased market volatility, especially for assets denominated in British pounds. Some studies suggested that Brexit could cause the pound to weaken further against the Australian dollar and other currencies, perhaps by up to 20%. (As at 22 June, the pound was trading at about A$1.96, down from A$2.20 last August, according to XE.com.) This might suggest that Australian investors should avoid allocating their assets to the UK. But of course, by now, some of this effect is already priced in by the markets.
We also need to bear in mind that Brexit will have global effects, so merely moving out of UK assets might not achieve the desired result. While the short-term impact of the vote is likely to disrupt the markets, it's less clear how significant this will be for a long-term Australian investor holding a well-diversified global portfolio.
The UK economy:
One important dimension of Brexit is how it will affect the UK economy and, by extension, the incomes of UK citizens. There's a range of estimates on how the UK economy will be affected; some are positive but the majority are negative.
Post-Brexit, the UK will lose its automatic right to the favourable trade terms that EU membership bestows. This might discourage inward flows of direct investment by overseas firms – for example, Australian companies wanting to establish a UK base to access the broader European market. There could also be a negative impact from restrictions on the number of EU citizens coming to work in Britain, something that has boosted the UK economy and tax revenues in recent years.
The argument that Brexit will increase British GDP assumes that trade with Australia and other non-EU countries could increase (even though such trading opportunities already exist under current regulations). The anti-EU camp also argued that removing excessive EU regulation could allow higher growth. But the UK is already one of the least regulated economies in the EU. What's more, many of the existing EU regulations that have applied to UK businesses were initiated or supported by the UK government. In some cases, the British government has introduced rules over and above those that apply elsewhere in the EU.
Finally, on immigration, it will still be possible for EU citizens to work in the UK post-Brexit, but the choice of who works in Britain will now likely be in the hands of the UK government. So this could be better (from the British perspective, at least) than unrestricted access to workers of all types.
Costs of doing business:
Brexit will probably mean higher costs for investors. The ability to 'passport' financial services has allowed Vanguard and other asset managers whose European operations are based in Britain to distribute funds into the EU cheaply and efficiently. In the absence of these passporting arrangements, asset managers might need to set up additional offices in continental Europe, and it's likely that the cost of doing this would be passed on to the end investor.
The alternative argument is that the cost of investing in the United Kingdom could fall due to a removal of regulatory costs imposed by the European Union. Overall, the net effect is still probably to increase costs, but this is another area where the impact is not clear-cut.
Taking all these factors together, the pros and cons of Brexit for Australian investors will be affected by a wide range of factors. As ever, the best approach is to be clear on your goals, to take a long-term view and ensure that your portfolio is well diversified.
Planning for political shocks
July 05, 2016 | Robin Bowerman, Vanguard Investments Australia
Political shocks by their nature provoke strong reactions from investment markets.
Uncertainty, courtesy of political or regulatory risk, feeds market volatility as investors - professional and individual - try to decode the meaning of the changing environment and how to value assets accordingly.
Because the outcome was unexpected the Brexit vote sent shockwaves through global markets with the ongoing political leadership instability in the UK providing daily - if not hourly - instalments to feed the global media interest.
A strong tone that has punctuated public commentary this year has been one of upheaval: voters are unhappy with the status quo - whether that's in the US, Britain or any number of developed nations.
As Vanguard's global chief economist Joe Davis said recently: "What we saw recently [in the UK] is just confirmation of some longer term trends, some of them economic in nature, which I think are leading to some change across the world in the political arena."
By comparison our own federal election process appears almost reassuringly normal - despite the closeness of the result bringing its own form of uncertainty.
Investors will have no shortage of geo-political issues to occupy their attention in the coming months, if not years.
When you look forward the US presidential campaign will provide stiff competition to Brexit developments for investor attention though the second half of the year.
And we should expect some bumps and surprises as the unparalleled process of the UK exiting the EU is negotiated.
Now that we have got over the initial shock factor of the Brexit vote three lessons for investors have stood out.
The first is the overriding value of having a written financial plan.
At times of market stress and/or crisis when the market drama and sense of urgency is clamouring for your attention and driving a strong sense of needing to do something….
Being able to pull out your personal financial plan, refer to the goals that have been captured in calmer times and check whether you are on track can be a powerful antidote to the sense of market turmoil.
The second is the need to be globally diversified. As Vanguard's chief economist in Europe, Peter Westaway, says investors who were overly concentrated on UK assets probably had the most regret in the immediate fallout from the vote.
"We also need to bear in mind that Brexit will have global effects, so merely moving out of UK assets might not achieve the desired result,"Westaway says. "While the short-term impact of the vote is likely to disrupt the markets, it's less clear how significant this will be for a long-term Australian investor holding a well-diversified global portfolio," Westaway says.
The third is the value of taking a long-term perspective. A week out from the vote and markets have settled somewhat but clearly the uncertainly level will be high potentially for several years so we should expect other bumps and setbacks to impact markets.
The good news is that since the result of the vote became public, investors largely seem to have stayed on course.
Trading volumes for Vanguard ETFs were significantly higher on Friday 24 June, the day the Brexit votes were counted and results filtered through to media, but the data showed more buying activity than selling. By Monday ETF trading volumes were back to within normal ranges.
And now, as our attention has turned back to political developments at home, it looks as though we will have possibly a week or two of uncertainty as we await a final result of the Federal election outcome.
The final outcome of the Federal election and what our new government might look like is clearly important but it is worth remembering that while political shocks can affect markets, they shouldn't drive your long-term investment plan.
The insidious side of low interest rates
June 05, 2016 | Robin Bowerman, Vanguard Investments Australia
Many investors might be worried about a low return environment - but something far worse than a sluggish economy may threaten your personal wealth.
Amid low interest rates and volatile market conditions, criminals using fake investment schemes are an increasing risk to investors hungry for higher returns, according to a major report "Targeting Scams" released this week by the Australian Competition and Consumer Commission (ACCC).
With many investors chasing the best yields they can get - particularly SMSFs in retirement, who are reliant on investment income - attractive, high yield opportunities can seem like a tempting avenue to get higher returns.
According to the ACCC, common ploys fraudsters use to entice investors include offering high-yields, quick returns, low up-front investments, low or no risk and inside information. Often, these scams are spruiked to the unwary by telemarketers cold-calling, use slick, scripted pitches to cover any and all angles available.
One of the many sobering statistics quoted in the ACCC report was that more than 40 per cent of the reported scams were inflicted on people over 55 years old. The total number of scams reported to the ACCC's Scamwatch website was 105,200 with total scam losses exceeding $229 million last year.
The ACCC said in reality the total will be higher as many scams go unreported.
The advice to anyone who thinks they are being targeted by such a call is simple: hang up the phone. If the person on the other end of the line can't answer a few simple questions around their organisation, like its financial services licence (AFSL) or credit licence (ACL) numbers, or their business address, then the conversation should end there.
An excellent resource for learning more about investment scams and appraising investment opportunities is ASIC's MoneySmart website. A first-line of defence with any offer is a simple check on the ASIC website that the company offering the product has an Australian financial services licence.
Illegal investment scams are at the extreme end of the spectrum, but investors should be suitably sceptical of anyone claiming to have the secret to high yields in a low-return environment. The ACCC report also warns of high-pressure sales techniques at "investment seminars" and urges investors not to sign up for anything at a seminar but rather take the time to consider and research what is being offered.
Years of investment data, such as that in the annual SPIVA scorecard, tell us that even highly-skilled and sophisticated money managers are rarely able to out-perform average market returns year-in and year-out, let alone guarantee astronomical returns.
Even if a financial product or its issuer is legitimate, any investment that promises outperformance of the market should be carefully analysed. It is likely that a high-yield product carries with it higher risk - not to mention high costs.
Although investors with a longer time horizon might be comfortable taking on a high amount of risk to ensure they have the potential to see higher returns on their investment, investors who rely on income should be wary of over-exposing their portfolio by chasing yield.
Because if something seems too good to be true, it almost certainly is.
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