Retirement is one of life's longer-term challenges. And the performance of investment markets in the past 12 months has not made achieving a self-funding retirement any easier.
But time waits for no man or woman - particularly if you are a member of that demographic group born after World War II and up to 1960. For baby boomers this global financial crisis has the potential to significantly affect their lifestyle in retirement.
Demography is destiny and the reality is that the leading edge of the baby boomers are heading into retirement and with the heavy falls across major asset classes wiping out the last four year's returns on the Australian sharemarket they will have to face some stark choices depending on their particular circumstances. Options include continue working - at least part-time - or reducing lifestyle spending in retirement to ensure the super nest egg is not eroded too quickly.
The financial services industry focuses on the baby boomers for obvious reasons - that is where the assets are and the need greatest in terms of financial advice and retirement products.
But a sad (and potentially expensive) legacy out of the market events of the past year would be if younger generations tuned out to the idea of investing for retirement.
As investors we all make mistakes but learning from other's mistakes is infinitely preferable and a lot cheaper than making your own. For baby boomers one of the key mistakes they can identify with is not starting early enough with their retirement planning.
Now our compulsory super system provides a strong framework for people's retirement savings with the compulsory 9% contributions but one of the hardest questions for anyone to answer is how much is enough to retire on comfortably. As recent retirees can attest even when you retire with what looks like a reasonable portfolio markets can impact it significantly.
Vanguard in the US recently published results of a study of 55,000 investors to better understand what they had done well and what mistakes they may have made with their retirement plans.
Two key measures were used - the ratio of assets to income and ratio of assets to expenses. There were clear age-related patterns in the ratio of assets to expenses and not surprisingly younger people had relatively small assets to expenses ratios. But among retired clients aged 60 and over the ratio was around 20 meaning that expenses amounted to 5% of the portfolio value.
At the moment investor's are understandably focusing on portfolio values and market moves. But one of the key findings from the study was that 60% of the investors were either already retired or were less than a year away from retiring when they sought financial planning assistance about their retirement. Planning late is better than no planning at all but starting early greatly increases the chances of success.
So rather than filing away that super fund statement perhaps investors should be using the market shocks of the past year as motivation to get a long-term financial plan in place.
A financial plan does not need to be long or complex. But there is a hidden value to having a written financial plan at times like these - it can act as a compass to keep you heading in the right, long-term direction.
21st-November-2008 | 