Category: Provision Newsletter Articles

Advice for my twenty-something self

Date: Feb 07th, 2020

When I was in my 20s, I flirted with dreams of becoming a race car driver or a foreign correspondent. Whether by choice or chance, neither dream eventuated into reality and somehow the lottery numbers that would deliver instant wealth never fell my way either.

What did eventuate however was starting my first full-time job and discovering the freedom of a steady income stream, the revelation that you could be paid while on holidays and a small but practical epiphany that water doesn’t flow from your taps without paying the monthly bill.

Your experience might have been similar to mine; our twenties are usually a period of substantial growth and for better or for worse, a time when we come face-to-face with new financial responsibilities.

Looking back life seems a lot simpler back then. Budgeting was primarily handled by remembering to go to the bank on a Friday to withdraw enough cash to get you through the weekend’s activities and phones were things screwed to the wall at home or housed in dedicated booths on major street corners. They certainly were not a source of instant cash.

But if I were to give some general financial advice to my twenty-something self, it’d probably be themed around the following:

Talk about money… often!

Money can often be an awkward topic to broach but it can also be a valuable conversation to have with friends and family. Starting a dialogue about finances with and getting advice from people you trust can encourage you to think more proactively about how you manage, save and invest your own money.

For example, if you are thinking of investing for the first time and unsure as to where to begin, it is likely that your peers are going through or have recently been through a similar experience. If that’s the case, they might often be a good source of information as the knowledge you share is more likely to be the right level of detail and complexity.

Alternatively, talking about finances with older family members can yield helpful tips and insights as they’d have had the benefit of hindsight. It is amazing the amount of new information you can pick up just by hearing from those around you.

Although one caveat here is that everyone has their own bias so good to challenge perceived accepted wisdom. In my case the family background was conservative and based around property and bank term deposits so attending an early ASX seminar on sharemarket investing was both an eye-opener and the start of a lifelong journey.

From savvy budgeting tips to providing the motivation you need to finally sort out your superannuation, simply having a chat about money can not only compound your interest in the topic, but might also set you up better for the lifestyle you want in the future.

If you are still unsure as to where best to start, sometimes having an initial discussion with a licensed financial adviser can help you better define and work towards your financial goals.

Don’t procrastinate

You may have heard the saying that the best time to invest was yesterday, or that time in the market beats market timing. While it is always important to do your research before making an investment decision, it is also easy to get caught up in the mountains of information out there and be paralysed by procrastination and choice. You can have the right intentions to be financially responsible but all intentions are merely that without the action.

The right time to sort out your finances is now and the right time to invest is when you feel that you are in a position to do so, not necessarily if the market is up or down. Because there is no hard deadline for when you need to consolidate your super and stop paying fees on three different accounts, or no crystal ball to predict the date you’ll experience a financial emergency, it’s easy to put it all off and continue to be financially complacent.

And of course being twenty something means you have something incredibly valuable – time to ride out market cycles because nothing is guaranteed.

It’s all about balance

Being financially responsible doesn’t mean never treating yourself. It’s about figuring out a balance that allows you to live your best life both now and in the future.

A widely-used rule is “60-20-20” where 60 per cent of your income goes towards daily living costs such as food, utilities, rent or mortgage, 20 per cent is allocated towards your savings and the other 20 per cent can be spent on discretionary items like entertainment, travel or dining out.

This rule is even easier to follow if you set up different bank accounts for each bucket and automate the transfers for when you receive your pay so it splits between accounts accordingly. Of course, this is only a general guide and you should find the allocation that works best for your financial situation.

The above might sound like just common sense but getting on top of your finances really is as simple as having a little interest and discipline. And who knows, being financially responsible earlier on might mean you have the resources later in life to finally become the race car driver of your dreams.

Please contact us on |PHONE| if you seek further assistance on this topic.

Source : Vanguard

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd.

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

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Category: Provision Newsletter Articles
Author: Provision Wealth

The safe withdrawal rate

Date: Feb 07th, 2020

The safe withdrawal rate. It’s an alluring concept. An amount you can spend each year and yet be sure you’ll never run out of money in retirement.

It’s an enduring concept too – ever since a financial planner did a comprehensive study in the mid 90s. And even better it’s got a simple number attached – 4 per cent.

That’s how much of your money you’re supposed to be able to spend each year and never run out.

The concept and that simple number have become so popular they have entered investing folklore. There are more than 13,000 videos on YouTube explaining the “4 per cent rule” as it’s become known.

But today’s investing world with low interest rates and a subdued outlook for equities markets looks very different from the 1990s and investors are beginning to ask if the so-called safe withdrawal rate remains safe.

The origins of the 4 per cent rule are a paper by Californian financial planner William Bengen. He worked out that over 75 years of actual market returns, people who withdrew 4 per cent of their savings in the first year of retirement and then adjusted the withdrawal for inflation every year after that stood a very high chance of not running out of money before they died.

The 4 per cent figure is also mirrored in the federal government’s minimum drawdown factor for superannuation. Based on a different theory to Bengen’s, the federal government’s recommendation is designed to ensure most of the money saved in a low tax environment is spent in retirement.

The minimum drawdown factor starts at 4 per cent, based on advice from Australian Government Actuary which determined most people would spend about three quarters of their super at that rate and not leave an unseemly amount of money for the children when they die.

The problem with both these numbers is that investment returns higher than 4 per cent are becoming increasingly difficult to achieve. Bond yields have fallen from as high as 6 per cent in 1998 to below 1.5 per cent today. A 50:50 stocks and bond portfolio yielded more than 4 per cent in 1998, but in today’s environment would yield only half that.

Happily, we’re living longer too, however that also means our money needs to last longer.

At the time Bengen was writing, an Australian man retiring at 65 could expect to live to 81. Today, a man retiring at 65 can expect to live to 85. Women live even longer. And life expectancy keeps rising.

These are important issues because the impact of running out of super in retirement can be severe.

And what’s often unsung is the reverse problem of people unnecessarily constraining their lifestyle in retirement for fear of running out of money. There’s no fun in living on chips and beans only to leave it all to the kids.

So if 4 per cent is no longer the safe withdrawal rate, what is?

Unfortunately, it’s not that simple.

The first question is understanding your goals.

Choosing an appropriate spending goal has four elements: your basic living expenses, a contingency reserve for unexpected events, discretionary spending so you can enjoy yourself, and any legacy you want to leave to your heirs.

These are deeply personal questions, but a retiree’s views on these four goals and the relative importance of each of them is crucial to understanding and projecting retirement.

Then, there are four factors driving what your personal safe withdrawal rate looks like.

How long you expect to live? Could you tolerate running out of money completely? What’s your asset allocation? Are you willing to pull back spending in years that deliver bad market returns?

Clearly the shorter the time horizon, the more money you can withdraw each year, but for most retirees that’s an unpleasant unknown. And most of us contemplating these questions aren’t planning to run out of money before we go.

What’s more controllable is asset allocation. The more conservative an asset allocation – say more in bonds and cash and less in stocks – the lower the expected returns and the less you can safely withdraw each year. More risky investments come with potentially higher returns and the ability to spend more money, but a higher risk of market shocks impacting the portfolio value and raising the risk of running out of money earlier.

But the most powerful lever is your spending flexibility.

Vanguard crunched the numbers and came up with a range suitable for most investors – 3.5 per cent to 5 per cent depending on how conservative the portfolio was.

Those people willing to be flexible in year-to-year spending – pulling back in negative return years and spending more in good ones – dramatically increase their chances of not running out of money.

Being flexible even allows them to lift their safe withdrawal rate well above the 4 per cent benchmark.

In fact, a retiree who is willing to cut back spending in bad years by just 2.5 per cent can lift their starting safe withdrawal rate as high as 5 per cent of their savings – without increasing the chances of running out of money.

Vanguard calls this a “dynamic spending strategy”.

So how much more can you spend in a good year?

The Vanguard numbers show the best result comes from capping your spending increases each year at 5 per cent– even if your portfolio grows faster than that.

A person who has spent $40,000 in the previous year can safely lift spending up to $42,000 if the next year is a good year (e.g. $40,000 plus 5 per cent). But in a poor year, they should cut spending to $39,000 ($40,000 less 2.5 per cent). Using this ‘cap and floor’ approach to calculate each year’s spending allows retirees more certainty that they won’t run out of cash before they die.

So, here’s how you work out a safe withdrawal rate from your savings in a low interest rate world: be diversified, but include stocks in your portfolio; know what you need to live; be willing to spend a little less in bad market years; and be happy to spend a bit more when things are going well.

As for Mr Bengen who kicked off the whole debate, he doubled down a few years later, lifting his projected safe withdrawal rate to 4.5 per cent over a 30-year retirement.

But he included a warning – in the event of a prolonged market downturn, even he plans to change his mind and revise that number a little lower.

Please contact us on |PHONE| if you seek assistance on this topic.

Source : Vanguard January 2020

Reproduced with permission of Vanguard Investments Australia Ltd

Category: Provision Newsletter Articles
Author: Provision Wealth

How to trick yourself into saving money

Date: Jan 23rd, 2020

Impulse purchases and buyer’s remorse often go hand in hand. But if you take a week (or a month) to reflect on your spending, you could see a noticeable boost in the funds accumulating in your savings account. Enter, the Seven-day Rule.

Don’t reply to text messages after you’ve had a glass of wine, and take a deep breath before confronting someone when you’re upset. These are both common social strategies relied upon to make you think – with reflection and clarity – before making a rash decision that could cost you something you value. Think of the ‘Seven-day Rule’ as the financial equivalent of pressing pause on your reply, or putting your phone down before hitting send.

Impulse purchases

Most of us have been in a situation where we spot something shiny and expensive that we’d really like to have: a new phone, some make-up, an expensive outfit, or maybe a new pair of skis. But in these impulse situations we often spend money based on emotions, rather than our budgeting goals. We get swept up in the excitement of having a new toy.

Many of us go ahead and make the purchase. In fact, 84 % of all shoppers have made impulse purchases, with this equating to almost 40 % of all money spent on e-commerce¹. Research also shows that about half of us regret the purchase almost as soon as we’ve made it².

Delay gratification

The goal of the ‘Seven-day Rule’ is to stop impulse purchasing, and give yourself a ‘cooling-off’ period to think about how much joy the item will bring to your life. You’re not denying yourself – you’re just delaying the potential gratification.

The idea is surprisingly simple: If you see something you want to buy, but haven’t budgeted for it, walk away for a week.

Over this time, ask yourself if you really need the item. If, after seven days, the answer is yes, you can go back and buy it. If you’ve forgotten about it, then your time away from the stores has saved you from facing buyer’s remorse.

Cooling-off period

When you’ve put the item back on the shelf (or closed that online shopping browser), do a few things:

Write what you want to buy on a piece of paper, along with the price, date and store name.
Stick the note on your fridge, so you can re-address it in a week.
Do some further research online – chances are you can find significant discounts or better models elsewhere.
You could then consider transferring the cost of the item from your everyday bank account to your savings account.
Do you really want to buy that jacket in a week and spend money that is now going toward a larger savings goal, like purchasing a new car?

The ‘30-day rule’

The Seven-day Rule concept won’t work for every purchase you make, so set yourself a financial hurdle – say, walk away if the item in question costs more than $100. Then make this hurdle scalable: if your potential purchase is $300 or more, elevate the cooling-off period to 30 days.

Giving yourself a month to evaluate your spend also means you have the time to set yourself a financial challenge. Say you have your heart set on a pair of shoes that costs $350. Rather than taking the money from your savings account, why not see if you can save that amount from scratch?

For example, you’d need to set aside around $12 a day for 30 days to save $350. Check out the articles below for tips on how to save money on everyday items.

Please contact us on |PHONE| if you seek further discussion on this topic.

1-2 https://www.invespcro.com/blog/impulse-buying/

Source : AMP January 2020

Important:
This information is provided by AMP Life Limited. It is general information only and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances and the relevant Product Disclosure Statement or Terms and Conditions, available by calling |PHONE|, before deciding what’s right for you.

All information in this article is subject to change without notice. Although the information is from sources considered reliable, AMP and our company do not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP and our company do not accept any liability for any resulting loss or damage of the reader or any other person.

Category: Provision Newsletter Articles
Author: Provision Wealth

Time to consider green investing?

Date: Jan 23rd, 2020

How to build environmental and social considerations into your investments.

In the wake of recent ferocious bushfires, the climate change debate has climbed the news agenda, with many Australians now considering what they can do to help.

If you’d like your money to make a difference to the environment as well as your future, now might be the time to consider ethical investing.

It’s a growing trend. More than half of all investments in Australia are already invested responsibly and ethically according to the Responsible Investment Association of Australia (RIAA)¹ .

AMP financial adviser Di Charman says, “Every little bit counts and for those wanting to take action on the environment, money is a powerful language that can be a force for good”.

“Whether it’s through super, investments or savings, more and more people are reviewing their financial arrangements to ensure their funds are put to work in a way that does no harm, and ideally leaves the world in a better place”.

“Responsible investment takes into account environmental, social and governance (ESG) factors into the investment process of research, analysis, selection and monitoring of investments.

Here are some tips to help Australians who want their finances to be environmentally friendly.

Understand what matters to you.

Everyone’s values are different, so you need to first work out what’s most important to you. Do you feel strongly about not investing in fossil fuels? Are you interested in discovering cutting-edge solutions for climate change or is improving energy efficiency a greater priority for you? How will these preferences affect your investment performance? From here you can identify the areas where you don’t want to invest or, conversely, where you’d rather put your money to make a positive impact.

Do your research and get to know the ESG principles.

Each investment manager has its own investment policy when it comes to ESG investing. For instance, some may apply a ‘negative screening’ or ‘exclusion’ policy, meaning that they steer clear of certain sectors like fossil fuels. Be mindful of exclusion policies as they may lead to increased volatility in your portfolio. Climate change investing tends to be a form of ‘positive screening’—in other words, actively choosing to invest in companies that are making a difference in areas such as renewable energy. RIAA is a good resource to use when you’re starting on this journey as it details the investment strategies of ethical and sustainable funds. Many super funds or investment managers also now have information about sustainability and ESG on their websites. Look to see if they have signed the United Nations backed Principles of Responsible Investing and whether they have published their scorecard.

Start with super.

Do you know where your super is invested? Does it offer a socially responsible investment (SRI) option? Make sure you read all the information provided by your super fund about the particular sectors, businesses and investment activities considered for investment. It’s worthwhile knowing that some people believe many SRI options don’t go far enough. Again, it pays to know what matters most to you and then you can find an option that aligns with your values.

Don’t forget the eggs rule.

One of the key principles of good investing is diversification—not putting all your eggs in one basket. It spreads risks and ensures you’re not exposed to any single investment or asset class. So consider the risks of crafting a portfolio that’s too narrow and concentrated. Climate-themed funds also haven’t been around for a long time, with many having only launched several years ago. This makes their performance hard to assess.

Ask for help.

Being a more responsible investor involves a lot of research and working out exactly how far you want your investment decisions to reflect your sustainable and ethical concerns and can be a minefield (pun intended). For example, you might not want to invest in coal companies, metallurgical coal miners and mining companies, but what about transport companies that freight coal, coal seam gas, oil and conventional gas, electricity generators, or diversified energy generators that may have large investments in renewables as well as coal?