The Weekend Edition includes a market update plus Morningstar adds links to two additional articles.
Advisers and newsletters like ours inevitably focus on financial strategies that can help people prepare for, and thrive in, retirement. Managing risk is a core part of these strategies.
Recently, John Kalkman penned a fantastic article in Firstlinks outlining the long list of financial risks that retirees face, including longevity risk, inflation risk, sequencing risk, and legislative risk. He suggested that for those with account-based pensions, these risks were real, and they were central to why retirees are significantly underspending their super and leaving large bequests of savings.
In this week’s edition of Firstlinks, Ron Bird has a different take on the issue. He says high mandatory super rates are forcing people to give up too much consumption during their working life, resulting in them accumulating more savings than what they require to fund their consumption in retirement. The implication being that mandatory super causes them to enjoy a more modest lifestyle while working and they don’t want to drastically change that lifestyle when able to in retirement resulting in them leaving relatively large estates.
Both articles highlight how our retirement system is quite paternal. It nudges us to act and behave in certain ways.
They also highlight how we often focus exclusively on the financial risks of retirement. This neglects the non-financial risks, that are perhaps even more important.
Let’s look at some of the key challenges, aside from money, that retirees face:
1. Health. Obviously, if you're in better health, you're going to have a more satisfying retirement because it lets you do so many more things. It also saves money on medical bills. That’s why it’s important to invest in health early in life, through exercise and diet, to give you better odds of being healthy later in life.
2. Loss of identity. Finding an identity after work can be a real issue. For some, work is their identity. Scientific studies show that this can be a big problem, especially for men. I wonder though if the work-from-home trend may loosen the hold that work has on people’s identities. That is, the less time spent in workplaces could result in employees feeling less connection to their employer. Let’s wait and see…
3. Lack of purpose. This relates to loss of identity. Work gives a sense of purpose and structure. Without work, people can struggle to adapt and find another purpose or purposes.
4. Uncertainty about how to spend time. Without a purpose, there can be uncertainty about how to spend time in retirement. That’s why it’s important to find a hobby to fill the breach.
Bill Perkins in his book, Die with Zero, offers a different perspective. He thinks people should spend more money on ‘experiences’ and aim to die with nothing in their bank accounts. He says that by aiming to die with zero, you’ll forever change your autopilot focus from earning and saving and maximizing your wealth to living the best life you possibly can:
“Why wait until your health and life energy have begun to wane? Rather than just focusing on saving up for a big pot full of money that you will most likely not be able to spend in your lifetime, live your life to the fullest now: Chase memorable life experiences, give money to your kids when they can best use it, donate money to charity while you’re still alive. That’s the way to live life.”
It's a good perspective though misses a key point: it’s not so much about the hobby or experience, it’s about who you spend it with. Things that deepen your connection to people will help you have a better retirement.
For example, buying a motorbike and becoming part of a motorcycle club isn’t about the bike itself or the experience of travelling far and wide, as nice as these things may be. The real satisfaction is going to come from being part of a social group of like-minded people.
5. Relationships. This is the biggest challenge, and research has shown it is the strongest predictor of a happy retirement. First, there’s the relationship with your spouse or partner. Retirement researcher, Dr. Michael Finke, offers an intriguing fact on this subject: the happiest group of retirees is women who get divorced between the ages of 60 and 65. He outlines why this is:
“I think that relates to a problem that very often happens in a relationship when people retire. And that is that men tend to have a more limited social network and oftentimes that social network revolves around their work. And women tend to do a better job of investing in relationships that they can then draw from in retirement outside of the workplace. And so, what that means is that women oftentimes want to be able to maintain those relationships in retirement. Men all of a sudden become far more – in an opposite sex couple, they become far more reliant on their relationship with their wife. And the wife is often struggling to be able to manage her existing relationships and this perceived obligation that she has to her husband. And oftentimes they may not have developed the capabilities to spend all day with each other. They get married, and they see each other for breakfast and dinner, but not necessarily for lunch.”
Our other crucial relationship is with friends. Robin Dunbar, the world-renowned evolutionary psychologist who famously discovered Dunbar’s number, says our capacity for friendship is limited to around 150 people. These are akin to the people who might attend your wedding or funeral.
However, it’s the five closest friends – including your spouse or partner - who are most important, according to Dunbar. He terms these as ‘cry on your shoulder’ friends:
“The best predictor of your mental health and physical health well-being, and even how long you're going to live into the future from today is predicted by the number and quality of friendships you have in that layer. The five is an average. So if you only have three don't panic yet, because introverts tend to prefer to have fewer people but have stronger friendships.”
A financial plan and a life plan
Retirees face many challenges, and money is just one of them. That’s why it’s vital to not only have a financial plan but a life plan. And the financial plan should serve the life plan rather than the other way around.
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In my article this week, I explore the two best ways to maximise your dividend income.
James Gruber
Also in this week's edition...
Since the time of Reagan and Thatcher, most business leaders and investors have clung to a dogmatic belief that lower taxes bring higher profits and economic growth. Joachim Klement says that the truth is more complicated than that.
Thanks to new rules introduced late last year, many people with old-style super pensions - known as ‘legacy pensions’ - will look to wind them up this year. Meg Heffron offers a guide for how to best proceed.
Cameron Murray has a great piece looking at the Torrens title property system. An Australian invention, the system hasn't been adopted elsewhere despite it being a cheap, low-risk way to handle property dealings. Murray looks at why this is.
DigiCo REIT was the hottest IPO in Australia late last year and Stuart Cartledge of Phoenix Portfolios assesses the stock and the broader data centre opportunity.
Over the next decade, three million Australians will shift from accumulating wealth to living off it. Chad Padowitz says they will need a sound strategy that delivers sustainable income and protection from market bumps.
Two extra articles from Morningstar this weekend. Shane Ponraj weighs up CSL after its reporting season wobble and Joseph Taylor highlights two ASX shares that look expensive after earnings.
Finally, in this week's whitepaper, the World Gold Council outlines the latest trends in the gold industry.
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Weekend market update
in the US on Friday, Treasurys caught a bull-steepening bid with 2- and 30-year yields dipping five and three basis points, respectively, to 4.26% and 4.69%, while stocks wandered near unchanged on the S&P 500 to wrap up the week with a 1% gain. WTI crude retreated below US$71 a barrel, gold pulled back to US$2,884 per ounce, bitcoin remained near US$97,000 and the VIX settled south of 15.
From AAP netdesk:
The local share market on Friday hit a new record for a third day this week, despite double-digit losses for Cochlear and AMP following disappointing earnings results.
The benchmark S&P/ASX200 index on Friday finished up 0.34% to 8,568.6, while the broader All Ordinaries climbed 0.24% to 8,825.1. The index rose 0.5% for the week, its fifth week of gains out of the past six. So far in this young year, the market is up 4.9% after rising 7.5% in the previous 12 months
Returning to the ASX, three of its 11 sectors finished in the green, with financials and health care down slightly and energy falling 0.7%.
Consumer staples was the biggest gainer, rising 1.9% as Endeavour Group climbed 4% and Woolworths added 1.8%.
In the financial sector, AMP plunged 14.9% to $1.49 after the wealth manager reported its underlying net profit was up 15.1% to $236 million. Elsewhere in the sector, GQG Partners hit a near three-month high of $2.44 after announcing it had $US153 billion in funds under management at year end, up 26.9% from a year ago.
The big four banks finished mixed, with NAB down 0.6% to $40.99 and CBA dropping 0.8% to $165.44, while Westpac and ANZ both gained 0.2%, to $34.71 and $31.29.
In health care, Cochlear sunk 13.7% to a 15-month low of $262.73 after the hearing aid company announced its underlying full-year profit would likely be at the lower end of guidance of $410 million to $430 million. The company blamed lower services revenue as fewer people upgraded to the latest version of its sound processor, along with higher cloud-related investments.
In the heavyweight mining sector, BHP dropped 0.2% to $40.92 and Fortescue fell 0.7% to $19.52 while Rio Tinto added 0.7% to $121.17.
From Shane Oliver, AMP:
- Fed caution on rates accentuated by hotter US inflation. The past week saw Fed Chair Powell repeat his message that the Fed is in wait and see mode and in no hurry to cut rates again as inflation has made progress but is still elevated and the economy is still strong. Higher than expected inflation for January, with the core CPI up 0.4%mom or 3.3%yoy with goods price inflation picking up as services slows, reinforced this caution.
- Fortunately, some of the upside surprise in January US inflation looks due to seasonal distortions around year end/new year, shelter inflation is continuing to cool, based on producer and import price inflation data core private final consumption deflator inflation looks like it will be lower at 0.26%mom or 2.5%yoy and our Inflation Indicator points to inflation around the Fed’s 2% inflation target.
- And mentions of inflation in US company earnings calls is continuing to trend down which is a good sign. (Of course, tariffs may change this.)
- So, US inflation numbers may start to look better again in the next few months and the money market moving to wind back expectations to just one Fed rate cut this year may be over-reacting. That said the Fed is likely to remain cautious until it gets clear evidence inflation is cooling again, and it gets more visibility over the impact of Trump’s tariffs. Of course, other major central banks are still on track to continue cutting rates reflecting weaker economic conditions, a clearer downtrend in inflation and fewer risk of a boost to inflation from tariffs.
- In Australia, we expect the RBA to start cutting rates in the week ahead with a 0.25% cut on the back of increasing confidence that inflation is moving sustainably back to target backed up by downwards revisions to its inflation, wages and GDP forecasts but with low unemployment and the weak $A seeing it provide cautious and non-committal guidance around future moves. We expect three rate cuts this year but its likely to be a gradual process with the next move unlikely until May, which will be well clear of the upcoming Federal election. See the “What to watch over the week ahead” section below for more details around our expectations regarding the RBA decision.
- We expect the start of an RBA rate cutting cycle to support a modest uptick in economic growth over the year ahead but not enough to reignite inflation and to drive an uptick in property prices. In particular, a 0.25% rate cut will cut $100 off monthly mortgage payments on a $600,000 mortgage freeing up some spending power. However, the impact is likely to be minor at least initially: as it takes a while for interest rate moves to start impacting spending as we saw with the initial hikes in 2022; rate cuts this year are expected to reverse only 3 of the 13 hikes (or 0.75% of the 4.25% rise); and rate cuts will be gradual particularly compared to the rapid fire rate hikes back in 2022 which may dampen expectations. Our forecasts for the ASX 200 to rise to around 8800 and for residential property prices to rise 3% this year were predicated on three rate cuts this year so a rate cut in the week ahead is unlikely to alter our expectations.
Curated by James Gruber and Leisa Bell
A full PDF version of this week’s newsletter articles will be loaded into this editorial on our website by midday.
Latest updates
PDF version of Firstlinks Newsletter
ASX Listed Bond and Hybrid rate sheet from NAB/nabtrade
Listed Investment Company (LIC) Indicative NTA Report from Bell Potter
Monthly Investment Products update from ASX
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