Every time the RBA cuts interest rates, the news will run a little segment on how this is great for borrowers and bad for retirees as their income on their cash investments has reduced.
The goal for a retiree would be to invest to ensure they have adequate income to live on for their entire retirement. If a retiree with $1,000,000 in the late 80's (they would have been considered a very wealthy retiree at that time) had invested in cash, they would have been enjoying income of about $140,000 per annum at the start of their retirement. By 2008 that would have been down to about $50,000 per annum and now they would be struggling to get $30,000 per annum. A fall of over 75% in income!!
Is that not the biggest crash ever? To have your income fall by 75% in a period where living expenses have more than doubled.
Not to mention, inflation has halved the real value of your capital over that time.
And cash is meant to be the safe investment, and shares are the risky investment, right?
If that retiree had invested their full retirement savings in the ASX 200 at the time and just left it there, living off the dividends each year, their retirement savings would be about $10M today and they would have income of about $500,000 per annum. HALF A MILLION $ PER ANNUM! As opposed to the guy who took the safe option now receiving $30,000.
Sure the first few years they would have received less income but I'm sure anyone looking at these numbers would choose less income for a few years.
Retirees really need to change their thinking when it comes to investing in retirement. They really need to invest less of their savings into the risky cash and allocate a large portion of their wealth to the safe shares.
QSuper have changed their default investments to the lifetime investments options. This now means anyone over 58 (who hasn't made an election) now has between 50 - 75% of their retirement savings in CASH!!! A 58 year old could have 40 years of investing ahead of them. The example above, back to the late 80's, is less than 30 years. I think you get my drift on what I think of this.
In other news, the government has already come out ahead of the budget to announce the Age Pension asset test will be tightening. I've been saying this for a long time. And expect to see the principle residence included in some way at some point in the future. What does this mean? Simply, if you want a comfortable retirement, you need to take control and plan to be completely self funded. The Age Pension will be only for those people on very limited income in retirement.
If you would like to discuss your retirement plans and investments with an independently owned and licensed, fee for service, financial planner, contact me on 1300 200 012 or www.precisionwm.com.au
