How Have You Enjoyed Your ‘Practice Retirement’?
For many of us, these last weeks have been remarkably similar to being retired. We didn’t have the regular commute and familiar routine of the working week, we were at home 24/7, and, for many, our regular income has been severely curtailed.
What a great opportunity to give some serious thought to what life in your actual retirement is going to be like!
Research shows that the earlier you start planning for your retirement (ideally in your forties), the better prepared you will be, financially and mentally, for what is one of the biggest lifestyle changes you’ll ever face.
The most obvious of these (but surprisingly not necessarily the most significant), is your finances.
Your Money in Retirement
The three major stressors that affect many people as they enter retirement are their health, their relationships, and their financial security. And of these three, financial security is the one that many feel they have less knowledge about and less control over.
Your financial health will play a very important role in your overall retirement happiness and it is valuable to think about how you view money, investing, and your “financial comfort.”
Regardless of whether you have a great deal of it or believe that you don’t have enough, money can be a source of stress. This may arise from the belief that money is a reflection of success or failure in life. In fact, having money is often confused with “being happy”— “the more money I have, the happier I will be.”
Worries about money in retirement are often compounded by the fact that many people don’t have a clear picture of how much money they will actually need for the sort of retirement they envisage. This is where talking to a qualified financial planner can be very helpful – and the earlier you do this the better.
The Role Money Plays in Retirement
During our working lives, money is often a source of pride and a way to keep score of our growing success in earning and saving.
But when you reach retirement, money has a different emotional impact:
* • Money equals security. This is your ability to sleep at night and to know that regardless of what happens, you are going to be all right.
* • Money dictates lifestyle. Your spending tends to reflect the income you have. In retirement, your ability to do some of the things that you want to do is tied to whether you can afford it.
* • Money provides independence. As you get older, independence becomes more of a challenge and a goal. Your financial resources can dictate how much independence you really have.
* • Money helps family. Whether it is your ability to help a family member in need, provide caregiving for a spouse or distribute your assets as part of your estate, your money will dictate whether you can be there for your family.
* • Money creates a legacy. When you think about the causes that are important to you, the community you wish to help, or the legacy you wish to leave your family, the strength of your financial resources will determine the legacy you create.
Defining ‘Financial Comfort’ In Retirement
We define financial comfort as living with a financial situation that does not cause you undue stress on a daily basis!
* • You can do the things you want to do given the lifestyle you have created.
* • You can handle unexpected challenges to your financial situation.
* • You spend your money in a way that is congruent with your core values.
Most people work to achieve an income that will allow them to be financially comfortable. However, there isn’t one definition of financial comfort; it means different things to different people. And while many people can easily identify what being uncomfortable financially means to them, they have not really clarified what they mean by “financial comfort.”
The key to financial comfort isn’t how much money you have, it is how you feel about your financial situation. And what impacts how you feel about your financial situation is your definition of financial security, how that definition translates into what you want your money to do for you, how much control you feel you have over your financial situation, and how much you know about making your money work for you.
This information is taken from Cambridge Partners’ book ‘So You Think You Are Ready To Retire?’ written in conjunction with international retirement lifestyle expert Barry LaValley. Click here for your free electronic copy of this book or to talk to an Adviser.
Business Will Never Go Out Of Business
By Pip Kean, Cambridge Partners Senior Adviser
Benjamin Roth was a lawyer in Youngstown, Ohio, when the stock market crashed in 1929. Two years later he decided to keep a diary to detail the effects that the financial collapse had on himself, his neighbours, and the nation. He kept his diary for ten years. In the late 1930s, when the depression had mostly passed, he summarised a few points he had learned from the experience.
He wrote: “Business will always come back. It will remain neither depressed nor exalted…. Depression is a time of greatest profit. The investor who has liquid funds and the courage to act can lay the basis for great profits.”
Whether a depression or recession, some businesses will fail. They could be businesses chasing unprofitable objectives, or overloaded with debt, or suffering from poor management.
A mere week after the COVID-19 lockdown, Bauer Media announced it was closing its New Zealand business. Bauer had indicated for some time that they were facing challenges around the viability of their operations. The decision was made at the same time as the pandemic but was not because of it.
Another media institution, NZME’s Radio Sport, abruptly ceased broadcasting on 30 March this year. The fact is that Radio Sport had been balancing on a fiscal knife edge for most of its existence.
In February, NZME chose not to renew the rights to broadcast live cricket commentary, which revealed the vulnerable position the station was already in.
The fact is some businesses will fail while some businesses will ride out the storm and come through the other side stronger. Entrepreneurs and start-ups will emerge with new ideas and innovations. For instance, following the 2008 crash, startups like Uber, Airbnb and WhatsApp appeared. We also have Kiwi successes – such as Xero, Rocket Lab and PowerbyProxi.
The trading of goods and resources has never gone out of business, and the fact is, it never will. Throughout every crisis in history, business has survived and thrived every time; Covid-19 is no different.
It was true in the 1930’s and it’s just as true today: “Whilst any business can go out of business. Business itself will never go out of business.”
Sources: Consilium, Stuff & NZ Herald, Market Falls and Recoveries
Coronavirus Update from Cambridge Partners March 19th 2020
Presented by Richard Austin, Cambridge Partners Managing Partner
Watch Richard’s video presentation below, or read on for a detailed analysis.
These are extraordinary times. It has been just two weeks since we provided our last update, but a lot has changed.
- The World Health Organisation officially declared Coronavirus a ‘pandemic’ on 11 March 2020
- Travel bans have been put in place around the world, schools are being shut and large events cancelled
- Anyone coming to New Zealand, except those from some Pacific Islands, must go into self-isolation for 14 days
- In the US the Federal Reserve cut its overnight rate to between 0% and 0.25%
- Closer to home, the Reserve Bank of NZ has made an emergency cut to the official cash rate this week, from 1.0% to 0.25% (a drop of 0.75%), which will last for at least the next 12 months
Governments in NZ and around the world are putting in place financial packages to help support business. This may help reduce the impact of the slowdown, but it is likely the economic effects of the virus will be widespread for weeks and months to come.
What is happening in markets?
Share markets react to new information and reflect general investor sentiment. As the scale of the effects of the virus have become known, markets have priced in the expected reduction in company earnings and outlook, causing share prices to fall.
As we release this update, the fall in the US S&P 500 from its recent peak in February has been around 30%. While the Dow Jones has fallen 33%. Returns differ depending on each country, but the falls are of a similar magnitude around the world.
It’s fair to say that investor sentiment has turned almost 180 degrees from being very positive at the start of 2020, following nearly 10 years of gains, to one of being fearful and full of uncertainty.
As we know we know markets are driven by both fear and greed, and we are now seeing a high level of fear return to markets.
What effect will the downturn have on my portfolio?
New Zealand is a relatively small economy and as a net exporter, we are exposed to events that happen around the world.
However, our portfolios contain many thousands of underlying investments to ensure we are not overly exposed to any one specific company, sector of the economy or country.
We also have an approach of holding a high proportion of the portfolios in offshore assets. The benefits of this approach are generally two-fold – our clients receive greater country diversification, but also any losses experienced offshore are dampened if the New Zealand dollar falls.
In addition to holding growth assets like shares, our portfolios also hold defensive assets, such as New Zealand and International Fixed Interest. In times like these, the aim of the defensive assets is to reduce the overall effect of the fall in share prices.
For example, a 50/50 portfolio with 50% in growth assets and 50% in defensive assets is down around 13% from the recent peak in February and around 6% over the past 12 months.
Whilst these are significant falls, and no doubt concerning for investors, its less than the 30% fall that equity markets are experiencing.
Should I sell shares and reduce risk?
Share prices react very quickly to new information. A good starting point is to assume that all the information that is currently known about the virus and other events around the world is effectively ‘priced in’.
As new information becomes available – markets react. If the news is negative or worse than previously predicted, markets generally fall, whereas if the news is positive, or not as bad, markets generally rise.
Whilst we cannot predict tomorrow’s news, or events that are yet to happen, we do know that if investors sell in times of market stress such as these, they are much more likely to lose money, than to gain.
Not only have you got to predict the best time to sell, you have to predict the best time to buy. When investors try and do this, or base decisions on the emotions of fear and greed, they sell after markets have fallen, and buy only after markets have gone up. This is a sure fire way to lose money.
As a client of Cambridge Partners, it is also worth remembering the planning process you went through with your adviser, when you initially determined what type of investment strategy was suitable for your needs and objectives.
This strategy was designed knowing that events like this can, and sometimes do, happen. This means if your plans or objectives haven’t changed, your portfolio may still be appropriate for your long-term objectives.
How long will it take for things to recover?
The short answer is that nobody knows.
However, it looks like the next three months could be rough for the global economy, financial markets and investors. It’s likely that we’ll see plenty of profit warnings from companies and some economies in recession.
But at some point, things will get better. In the Northern Hemisphere the summer will arrive, which may take some sting out of the virus and, at some point, a vaccine may emerge.
It’s important to bear in mind that no one waves a flag, or blows a whistle, when the markets hit their peaks or come off their lows. But at some point, markets will recover – and it is normally before we’ve seen hard evidence of the global economy improving.
If we remember the Global Financial Crisis that started in late 2007, the S&P 500 hit its low in March 2009, while the world was still in the depths of recession and investors couldn’t see a way out.
However, six months later the S&P 500 had rallied 53% – anyone who was sitting on the side lines waiting for firm evidence of the improvement, missed out.
The message here is that abandoning your longer-term investment strategy and reacting to your fears, may hurt your portfolio’s overall performance.
Is there anything I should be doing now?
If you are feeling concerned or anxious – that’s OK and perfectly normal. We encourage you to reach out to your adviser.
There is a heightened level of uncertainty and anxiety at present, but what we do know is that, at some point, markets will recover. However, what we don’t know is exactly when.
In interim, there are some practical measures you could consider:
- If you are regular taking money out of your portfolio, then consider reducing the amount you are withdrawing, or suspend withdrawals for the next few months.
- While it may seem perverse, if you are holding cash in your portfolio, the fall in markets, does represent the opportunity to re-balance into growth assets at these lower prices.
- Work with your adviser to review your current investment strategy and objectives against the outlook for your portfolio.
We also encourage you not to let fear drive your decisions and sell after markets have fallen.
It is a difficult time right now, but we know from experience that you’re much more likely to lose money than to gain, if you try and time the low and high points in markets.
How will the virus affect Cambridge Partners?
Last month as part of our Business Continuity Plan we conducted tests on our processes in the event we had an outbreak of Coronavirus in the office. This included how we would communicate with clients and manage the effects within the office, along with maintaining business as usual.
We’re pleased to advise that our tests were successful and with laptops, mobile phones and secure internet connections we are confident that we will be able to continue to operate at close to normal capacity if we are required to work elsewhere.
We are very conscious of all the health warnings and have advised staff to stay at home if they are feeling at all unwell.
Meetings are still being held in the office and we are monitoring the appropriateness of this daily.
We aim to continue to provide updates as the situation develops. But if you have any questions or concerns, please reach out to your adviser or one of the team.