Entering retirement should be exciting: a world of new opportunities. It’s a time when you determine how you will transition from your business or career, what investment plan will be best for the future, what you will pass on to the next generation and what shape the rest of your life will take.
But the world is becoming more complex, and in a globalised world fast-evolving trends play a powerful role in people’s retirement experience. Fractures in the global economy, demographic shifts and changing superannuation rules are making planning more complex.
A long-term outlook requires an understanding of major trends. Whether planning for retirement or already in retirement, Australians need to pay active attention to the what is shaping their future.
Era of low returns
The interconnectedness of financial markets, politics and economies today means one event can often have a cascading effect. We need to be more careful than ever in monitoring and managing our investments. Yields on most bonds, cash and property have plunged around the world as the global economy wonders where growth is going to come from next.
Term-deposit rates for an investment of $10,000 in Australia averaged just 2.15 per cent in August 2016, the lowest in the history of records kept by the Reserve Bank. In Europe, investors have put money into 50-year Swiss bonds at negative interest rates. Bond yields are also currently negative in Japan and Germany.
“The prospect of an extended period of low returns is frightening for anyone who has modelled their long-term investments with old assumptions about rates of return. But an investment strategy has to take into account changes in buying power over time,” says superannuation veteran Rodney Maddock, a professor at Monash and Victoria universities.
“People tend not to think in inflation-adjusted terms. In real terms I don’t think returns are going to fall far at all. They are down at the moment but not nearly as far as in nominal terms,” says Professor Maddock.
Australian investors can take some solace from the consumer price index, a measure of inflation. It has sunk to record lows in recent years, including a fall of 0.2 per cent in the March quarter of 2016. Lower inflation means whatever return you are getting looks even better once you adjust it for inflation.
Diversify and be strategic
“The real solution to lower returns requires more than hoping for weak inflation,” Professor Maddock says, “it means you have to deploy the right investment strategy for you.”
“People have been caught out using ‘naïve allocation’,” he adds.
“What is interesting is how important diversification has been. I don’t think people – especially self-managed super people – have understood that. Most self-managed super funds at the moment are massively overweight in Australian equities and cash.”
Maddock describes what he calls “horror stories” of investors who have had 100 per cent cash allocations in recent years. “Diversifying investments across asset classes and economies throughout the long period of time it takes to grow retirement savings is the best strategy against low returns,” he says.
Maddock offers the example of China and India, which have shown that emerging markets have the possibility of growing far faster than developed markets.
“Talking about diversifying is easy. Doing it is harder and a big impediment is fear,” says ANZ senior private wealth adviser Ross Falconer. He believes over-abundant information – like the thousands of calamitous stories about Brexit – can cause decision paralysis.
“Getting access to research is good but right now people are getting so bombarded by information that it is actually hindering their decision-making. We see clients that are just sitting on cash. Every day they read all the articles and they just sit there because they don’t know what to do. It makes it even more difficult [for them] to plan for their future.”
The message is clear – analysis is important but it has to act as a complement to action, not a substitute. Make a clear long-term investment strategy, implement and monitor.