As we transitioned to full retirement, my wife and I decided to take charge of our future and opted some years ago to manage our own super. One of the primary reasons for this was to ensure that the assets reflected our very conservative nature – that is, 90% shares.
This may sound contradictory to many, but after 45 years in the financial services industry, I had learnt some very important lessons.
Outliving your super
The word ‘risk’ is bandied about, but many don’t truly understand the investment risks associated with retirement. Leaving it to an industry that also doesn’t understand it didn’t appeal to us. Our primary risk is not losing money, but outliving it!
When discussing whether we could afford me ceasing full-time work, the consideration wasn’t how much money we had, but how much income we needed. We looked at the three assets available – cash, property and shares – considered their income prospects, both present and future, and opted for shares.
The income they generated would meet our immediate needs without having to rely on selling, thus maintaining the integrity of our asset base. Also, over the long term, I knew the dividends from a diversified portfolio of shares had and would grow in a relatively stable way; being linked to the productive efforts of the nation, they would be superior to the income from other sources.
Ten years on…
With more than a decade behind us now and the Global Financial Crisis (GFC) to add some spice, we can now look at our strategy being tested in real time. As painful as it was to watch our portfolio almost halve in value, the income only dropped by 20%. As we held enough in cash to cover two years worth of pension withdrawals, we simply followed our parents’ example who, when times were tough, simply tightened their belts.
The chart of my portfolio below is worth a thousand words. The dividends, during the 1980’s and 1990’s, whilst I was still working, were being reinvested. When I quit the industry in 2000, it was simply a matter of redirecting the dividend stream from reinvestment to pension mode.
[1]Then the GFC hit. Two years later and our income was almost back to where it was before the GFC, although the portfolio value still hasn’t recovered fully.
The importance of never having to rely on cashing your asset base to provide income can’t be impressed enough. Too many retire with too little, too early and leave themselves exposed to the disaster that is cashing in when prices have retreated.
By focussing only on the income and not the prices of our shares, we have avoided much of the angst associated with the GFC. Also, as longevity appears to be a genetic advantage that we enjoy, I need to be sure that the asset base remains intact and the income stream continues to grow for the next few decades.
I have watched as my parents, in-laws and many of their peers were reduced to living totally on the old age pension because they had initially relied on bank deposits in what they thought was the ‘safe’ option. The nail in the coffin as far as I was concerned was watching as the two respective family homes were sold as neither widow (the husbands having pre-deceased their spouses) could afford to maintain them.
As the probability is that my wife will survive me, we will continue to invest solely in shares – the conservative option – as I’m determined that she will live with dignity.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.
Also in the Switzer Super Report
- Peter Switzer: Opinion is split on what lies ahead [2]
- Charlie Aitken: Iron ore slumps. Time to buy Atlas Iron? [3]
- Ron Bewley: How my stocks performed this season [4]
- Jo Heighway: Ask the auditor: the top 5 questions SMSFs ask [5]
- Andrew Bloore: SMSFs can’t borrow money, except… [6]