Your money makeover guide for 2020: Part 3

Every day is a weekend when you’re retired. You’ve spent years taking care of everybody else. At this stage of life, it’s all about you. But there is one thing that bothers you. And it’s a question that bothers a lot of retirees: “Will I run out of money in retirement?”

In this final part of our 3-part series, we tackle the concerns and financial worries of a retiree couple with an unusual approach to investing. The problem is that while they have almost $1 million in assets, they are concerned about cash. Let’s meet Bob and Jill.

Bob and Jill’s dilemma

An excessively-aggressive investing strategy threatened to derail Bob and Jill’s retirement. In hopes of growing their money faster, they embarked on an aggressive investing style over the last 10 years and only invested in direct property and blue-chip shares (with big brand names they’re familiar with).

Bob, 64, had always been keen to do his own thing. Being an electrical engineer, he designed and developed electrical systems and worked on large-scale electrical systems all his life. A prolific reader, he felt he knew something about everything. He’d follow the property market and share market whenever he can. So, when asked about his financials, his reply was “I know what I’m doing.”

Jill, 62, was a legal secretary for a number of years until a hip procedure prevented her from commuting to work every day and soon moved to casual work locally. Jill wasn’t as convinced as Bob about shares and had opted to invest her superannuation conservatively. “She’s always been conservative. That’s ok. I know what I’m doing”, Bob remarked.

The family home is paid off and they have no other debts. They hold a jointly-owned investment property with a market value of approximately $600,000, a combined balance of around $500,000 in their superannuation accounts and a parcel of shares valued at around $200,000.

The problem

Bob and Jill have always managed their own investments. Money was never an issue and they never went without. Now that they’re retired, they had difficulty understanding how much income to draw to meet expenses and have been selling down their shares with no thought of tax implications.

They’ve now stopped work, and while rent continues to come in, they have been selling down some shares to meet the cash shortfall. They have been talking to their neighbours, Alan and Pam, whom retired 3 years ago, about drawing from their superannuation.

They have a portfolio worth just over $1 million but they have no cash! Would they need to sell their investment property to free up some cash? They want to feel secure knowing that their investments will provide them enough income to last them throughout their golden years. Bob and Jill want to know their options.

3 money makeover tips for Bob and Jill

Here’s how Bob and Jill can get back on track without sacrificing potential growth on their retirement portfolio:

• Restructure to reduce risk. They have plenty of assets but it could be better structured. They manage the property themselves and hold around 30 different shares. Their superannuation are in default options. Overall, their asset allocation is suitable for growth style investors. Staying in this position can be detrimental to their portfolio as they have too much risk. They will not have time to recover from setbacks. While Bob classifies himself as an aggressive investor, Jill is more conservative. They’ll need to find an approach they’re comfortable with. For example, a well-balanced portfolio with enough exposure to equities to combat inflation and sufficient exposure to fixed interest and cash to provide income payments. They may also need to consider transferring assets to superannuation to take advantage of tax-free earnings and capital gains when in pension mode. Before cash runs out, it may be necessary to sell the investment property as well.
• Know your numbers. When you have an idea of how long you’ll be retired for, how much you need for living expenses and for discretionary spending, you’ll be better placed to work out how much you need to draw from your assets and how much return you need to make it last. Budget for at least 85% to 100% of pre-retirement income since the first few years of retirement is always more expensive – because you’re likely to do more of the things on your bucket list in the first 2 years. It’s also important to assume the age pension as a back-up, and not your main source of income. In addition, think carefully before gifting to children as this can create a big dent in your portfolio. Australians are living longer and healthier lives, so expect to live another 20 -30 years after retirement. That’s a long time to ensure your investments work as hard as they can to generate enough growth and income to support you.
• Constantly review your investments. Please don’t do this weekly. Check for under-performers, compare alternatives and eliminate unnecessary fees that may erode your capital over the long term. This is not an easy task as you need to know where to get reliable information from and that you’re making like-for-like comparisons. It may be beneficial to consolidate your assets using a portfolio manager product, in order to have a clear and disciplined approach to investing. This will reduce your paperwork and provide more transparency when it comes to knowing your investment returns, taxation and fees. If in doubt, call in the experts.

A message of hope

Managing your retirement portfolio is just one element of financial planning. It might seem scary doing it all yourself. But there’s good news, and we’ve got a message of hope for you.  Because hope is greater than fear.

When you’re in a crisis, facts are your friends. It makes sense to consult a Financial Planner who will help guide you to the facts so that you stand a greater chance to experience a more successful and enjoyable retirement.

If you have questions about these action plan ideas, or need some reassurance, we are here to help you. We can provide you with the investment and financial planning strategies—and sympathetic ear—that you may need right now. Reach out to the JBS Financial team here.

We wish you good health and safety.