INVESTMENT HEALTH CHECK: 6 QUESTIONS YOU NEED TO ASK
Long gone are the days when you'd put your retirement investments in a drawer and forget about them until it was time to cash them in. The investment environment is complicated by bouts of volatility alternating with unnerving periods of calm. On top of that, retirees face low returns on fixed-interest securities, and changes to superannuation legislation.
Your retirement nest egg should be reviewed every six months. Here are six questions to ask:
- Are you reaching your target?
The government’s MoneySmart website has an excellent online planning tool that can help track progress towards your retirement income goal.
- Are you benefiting from high dividends?
According to Dr Anthony Asher, convener of the Actuaries Institute's retirement incomes working group, many people want to remain in equities in the current environment because of the relatively high dividend yields from this asset class. “If you put your money into equities at the moment, with franking credits you’re probably getting about 6 per cent dividend return on your investment,” he says.
“Dividends have been more stable than interest rates, but they have dropped by 30 per cent twice in the past 30 years."
He continues: "You can take your annual retirement income target, increase it by about 20 to 30 per cent to be on the safe side, and multiply it by 20.
“If dividends grow as they have historically, this should probably be sufficient to give you enough retirement income for life,” Asher says.
- Are there clouds on your investment horizon?
Your six-monthly review should look at whether there are any significant threats to your savings. For example, many people are heavily invested in a few stocks that have historically paid high dividends. But this may not last forever.
“I would tend to diversify,” Asher says.
- Are your expenses as low as they can go?
It’s important to keep your investment expenses low. If you put your money into managed funds or a superannuation fund you’re probably paying half to 1 per cent (50 to 100 basis points) in management costs, which is quite expensive. Try to find funds where the fees are between 30 and 40 basis points.
- Are you aware of your behavioural bias?
If you want to actively manage your own assets, you need to be acutely aware of your behavioural biases. Many mum-and-dad investors tend to hold on to losers and prematurely cash in winners. What should be long-term investments are turned into cash, which isn’t reinvested in time to benefit from the next upswing.
“There are lots of reasons to distrust yourself when you're investing on your own account," Asher says. "I’ve often spoken to people with self-managed super funds and asked them whether they’d beaten the market − and they all said they have."
"It may be," he says, "that they’re not prepared to admit to me that they haven’t. But if you’re going to invest for yourself, it’s a good idea to measure your performance against the market.”
- Should you move into annuities?
“I think longevity insurance is important but most wealthy people won’t need annuities,” Asher says.
“The only annuities permitted in Australia are fixed/inflation-linked annuities that don’t seem to offer very good value," he says.
"The general belief seems to be that you're better in share dividends until an advanced age, say 90, when you might be happy to convert into annuities," he says. "As soon as you’re incapable of making any decisions, that’s the time!”
The upshot is that, at least when it comes to investments, you cannot live forever off assumptions made when you were in a different stage of life. Try to re-think your investments every now and again, preferably with your adviser. But even running through a quick check-list by yourself is probably better than a total hands-off-the-steering-wheel approach.