Can You Predict the Future?

Can You Predict The Future?

I can, well, sort of.

No, I’m not some weirdo that can tell what the future’s going to hold.

However, what I can do is tell you what can happen if you take a certain path when it comes to your retirement journey.

When I’m meeting with my clients, I usually hold all my meetings in the same meeting room.  Around a large table with plenty of room to spread out.  It’s in the front corner of the office building I work from.

It has a light green colour rolling landscape image around the glass windows to provide us with plenty of privacy.

It’s in this meeting room where some of my clients think I can predict the future.

We would be sitting around the table catching up on what’s happened since the last meeting.

And, all of a sudden, usually the husband, will turn to me and say enough of that, what’s the market going to do?.

So, I turn around and look over my shoulder and say “I’ll just check my crystal ball”.

I’ll turn around and look back at the husband and say, nope, didn’t bring it with me today.  Then we all have a little giggle about it.

This is true dinkum, it happens a couple of times a year.

While I cannot predict what’s going to happen to investment markets, predict world events or know what governments are going to do, I know how to prepare for such events.

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What I do know is how to protect clients in extreme volatility and chaos.

I’m not telling you this to brag but rather to point out there is the right way and a wrong way of setting up your retirement income.

One where you can sail through stormy waters that will come with no impact on your lifestyle.  Sure, you might be a little anxious and freaking out, but’ you’ll be ok.

Just like going on a roller coaster, you start off smoothly only to be thrashed from side to side, up and down at breakneck speeds.  Feeling sick to the core knowing you could throw up at any stage, but you know you are going to be ok.

Compared to going into retirement blind.  You don’t know what you don’t know, right?

You sail into rocky seas, only to find out you have no sails to sail through the storm, only to drift further into the storm…

Now, I know you don’t want that one.

Sailing into a Dangerous path…

I recently received an email from someone reaching out.  They had read one of my latest posts.

They wanted to know how much I charged.

At the time I thought it was a little direct given we didn’t know each other, nor did I know whether we could help.

So, I answered the question with a range, given I had no idea about their circumstances.

Curious, I then asked, “What questions are you looking for answers too?”

This person came back with some simple answers.

They had roughly a $1m in super, looking to retire age 60, single, no debt, wanted an income of approx $40k pa, enough for trips overseas every year.

They went on to say their circumstances were quite simple, aka, I don’t need advice.

Here’s where this really worries me, you don’t know what you don’t know, right?

They were nervous about how much they would need.

Another question was fired at me, “How much would income would someone like me need?”.

It’s like me calling up the doctor and saying I’ve got a headache, what do I need to make it go away?

Without doing the right tests, it could be something more than a headache.

Wanting to help this person out further, I requested we jump on the phone to get to the bottom of what they really wanted and point in them in the right direction.

They came back with, I’ve just been to my super fund and they said they will pay me $40k pa, so I’ll be ok.  And that was the end of that.

Here’s where I tell you about the Future…

I just want to preface this first.  I’m not sharing this story to scare you or to brag.

I’m sharing it because it is a common mistake that could end in disaster.  You’ve worked too hard to make mistakes such as this at a critical stage in your life.

Here is where I see it going all wrong…

  1. There is no emergency account in place.  This person only had their super and little cash on the side.  Not enough in my opinion to cover potential emergencies that can arise.
  2. No cash flow plan in place.  What I mean by that is there was no structure on how the income was going to flow through while protecting the capital in their super fund.

I’m going to expand on that last point a little further as it is a critical one.

Their super fund was what I call a pooled super fund, much like a lot of super funds.

That is, you have half a dozen options to choose from and that’s it.

Now, that is fine while you are working and accumulating assets.

But retirement is a cash flow game, not an accumulation game.  You need to follow a different path to make it work.

When you take your monthly income, generally you need to sell units in the investments to fund the income payments.

Ok, but that’s fine isn’t it Glenn?

Sure, if your investments are increasing every month when you need to sell them down to fund your income.

But we know that’s not true.  They don’t go up in a straight line.

Let’s say for the first couple of years things are still going well.  You are drawing 4% and you’ve made 6% after costs.  So, your capital’s gone up a little.

Then a market correction comes. 

The portfolio drops 15%, you draw 4%, now the portfolio is down 19%.  You’re also forced to sell your investments at depressed prices, never to recoup those losses.

So, in the next year, you have to make 19% plus the 4% you take each month (in fact it’ll be more than the 4% as the balance has dropped) to make it 23%.  Now you start to pedal backwards, making it harder and harder to move forward.

What if this goes on for a few more years?

We only have to look back to the Global Financial Crisis where many were in similar circumstances. It can be devastating.

It’s a little like a runaway train out of control.

Very few recover from such events.

See how this can turn very quickly.

You start to panic and even think about withdrawing the whole lot and placing it in a bank account because you are afraid you’re going to lose the lot.

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Are you looking for answers to these questions?

  1. Will I have enough?/Do I have enough?
  2. When can I Retire?/If Retired will it last?
  3. Will I be ok?/Will I outlive my money?
  4. If something happens to me will my spouse and family be ok?

It’s hard to decipher all the information and work out which way to go.

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It dosn’t have to be that way…

As we do with all our clients transitioning into retirement, we create a cash flow plan. 

A strategy that allows the portfolio to generate income.

That allows enough in reserves that our clients could go 2 yrs, 3 yrs and even up to 5 yrs without needing to sell a single growth investment.

Growth investments are protected and given time to recover.  No need to deplete them in down markets.  They have every opportunity to recover as you’re not forced to sell them.

Why? Because it’s been structured to take into account the uncertain events in retirement.

The biggest risk facing anyone entering retirement is what we have explained, it’s what we call sequencing risk.

The critical period is five years prior and five years post-retirement.

How do I know?

I’ve walked the journey with hundreds of clients over 2o yrs and we know what works.

It’s simple yet effective in preserving not only your nest egg but more importantly the lifestyle you’ve spent most of your life working tirelessly for.

There’s one more thing…

There’s another point to make here.

While this person may outlive their money, quite the opposite could be true.

What happens if they pass away 10 yrs from now?

The money held in super will pass to their estate minus 15% tax.  I call it the hidden death tax.  Something that’s not often talked about.

While to some, it’s not that important.  After all, you’re not going to be around to worry about?

Talking through these issues with clients, most want to leave as much as they can to their kids.

They don’t want the tax office to get any more than they have too.

Let’s say this person had $800,000 left in their super fund in five years time.

The whole amount is what we call a taxable component, essentially made up of employer and salary sacrifice contributions.

As the amount would need to pass to the estate, as there is no direct dependant, in this case, the whole amount would be taxed at 15%.

That’s a whopping $120,000 in tax.  A $120,000 less to your kids.

That’s a big chunk off a mortgage to be paid down.

Enough to put grandkids through schooling.

A couple of years worth of living expenses.

That’s what this person could be giving up when with a little planning this could be avoided.

As I mentioned earlier, I ‘m not telling you this to brag, but more importantly to point out what can go wrong.

If you are not an expert in this space and you get it wrong it’s going to cost you big time if you get it wrong…

Hope that’s been useful.

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Make it a great Life!

Challenging the Status Quo!

Glenn Doherty – CFP – Founder & Financial Organiser at Jigsaw Private Wealth

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Advice Disclaimer: Any reference in this publication to the provision of advice refers to advice of a generic nature, and should not be taken as product or investment recommendations. Before any action is taken based on the information provided, independent financial advice from a licensed financial adviser should be sought. Financial Freedom Project Pty Ltd ATF GA & DC Doherty Family Trust Trading as Jigsaw Private Wealth is a Corporate Authorised Representative of Exelsuper Advice Pty Ltd. The information contained in this publication is of a factual nature only and is not intended to constitute financial product advice. Information is current as at date of publication. This is an online information blog. It does not imply an offering of securities.

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