Investing for Retirement in Australia
“Everything should be made as simple as possible, but no simpler.”
– Albert Einstein
The quote above is widely attributed to Mr Einstein, although there’s no proof that he did in fact ever actually utter those words. But it’s clear from a number of his writings and first-hand accounts that he was in agreement with the concept.
As far as investing goes, we’re with Albert. The professional investing world, however, is full of people who are not Einstein. They think they can achieve brilliant results if they just make things more complicated. It rarely works well, and it rarely adds any significant value. Complicated strategies are usually designed to reduce risk but have the unfortunate side effect of also dampening returns.
In contrast, many of the world’s best investors use quite simple methods, along with a healthy dose of patience and the ability to go against the herd when necessary. Investing is as much of an art as a science. All successful investment involves a process. But the best processes make some room for the subtle application of discretion, judgement, and qualitative analysis. The intangibles matter.
So, the good news is that investing for retirement in Australia need not be complicated. Almost anyone can provide themselves with the financial resource for a long and happy retirement by doing six simple things as well as possible. Here they are.
Start saving and investing as early as possible.
Every day you put it off costs you more than almost any other factor. We wrote more about the miracle of compounding in this article. It’s an incredibly powerful force.
So, start early. Preferably no later than when you start working. But even if you haven’t managed to do that, start now. And encourage those younger than you – your children, grandchildren and others, to start early as well. That one piece of advice is probably the best financial gift you can give your loved ones.
Have a plan.
Take the time to think about your investment goals. Write them down. What would you like to achieve and by when? What’s your plan to get there and is it reasonable? Asking these questions can help you formulate a long term investment plan for you. It might start out as a single page. Or half a page. But once you’ve made a start and taken the first steps, you can build on it over time.
A word of caution. If you’re expecting long-term returns above 7-8%, that may be unrealistic. Achieving returns above that level consistently will require a mix of exceptional investment skill and/or taking risks. The first is rare. The second can be devastating when the unexpected happens.
Save regularly throughout your working life.
Make sure you put a consistent percentage of your income towards your retirement savings every time you get paid. We’re not talking here about savings that you put away for a rainy day or to spend on a holiday or a car. That’s separate. We’re talking about funds that you can invest until retirement, whenever that is for you.
Luckily, our guaranteed superannuation system in Australia does a lot of the work for you if you’re an employee. But if you’re employed casually, a contractor, self-employed or otherwise not getting super paid on your behalf, try to make sure you’re putting money away regularly. If you’re already getting paid super, try to top that up with additional savings if you can.
How much you save depends on what you can afford, how long you’ve got until retirement, and what your retirement goals are. But whatever you can manage, do it and do it consistently.
Invest consistently and monitor your progress towards your retirement goals.
Many investors start small, taking advantage of investment products which provide easy diversification (like our Affluence Investment Fund). As your nest egg grows, and your knowledge improves, you can expand your investments.
When investing, most of us have preferences. Some are comfortable with shares. Others with property. Some like to take more risk than others. It’s fine to invest more of your wealth in things you prefer and understand well. But make sure you’re not closing yourself off to other opportunities. Having everything in shares when the share market falls 20% is not that much fun. Aim to spread at least some of your investment funds out, so that you better placed to withstand bumps in the road.
Sit down at least once a year, and preferably more often, to review your portfolio, your results and your progress towards your retirement goals. Are you on track? What went right, and wrong? What can you learn from the mistakes? How susceptible is your portfolio to market corrections and how will you handle these setbacks? Asking these questions and making adjustments based on the answers will make you a much better investor.
Maximise your investment returns while managing fees, costs and taxes.
We know that over time, higher investment returns and lower fees, costs and taxes can make a very significant difference to your retirement portfolio.
Always make sure you’re getting the best returns on your cash holdings.
Are you holding investments that are not likely to deliver an acceptable long-term return? Consider moving them on. Are you holding investments that have underperformed? Try to understand why that is. If it’s cyclical and likely to rebound, it might be worth holding on. If not, it may be time to sell.
Review the fees being charged on your investments. Is the manager or advisor adding at least that much long-term value over and above what you might get from a passive or index-based investment? If not, it might be time to consider a change.
As your investment portfolio grows, tax can also be a big additional cost. Get yourself a good accountant and a good financial advisor, particularly if one or more of your family members has a low income and could take advantage of income splitting strategies.
Continually educate yourself.
You want your understanding to improve as your wealth increases and retirement approaches. How much time to devote to education is up to you. But try to at least do a little bit regularly – even if it’s reading the finance section of the Sunday paper. There’s a wide range of information online. Start with ASIC’s Moneysmart website, which now has a range of information not only on investing, but all aspects of managing your money.
As your understanding improves, you will open yourself to a wider range of potential investment options. This can help over time to diversify, which spreads out the risk and hopefully lets you achieve even better returns.
Despite what some will tell you, successful investing is simple, and it doesn’t have to take a lot of your time. It does, however, require patience and discipline. Which means it’s not easy. It helps if you have a long term goal and a long term focus. Success in investing doesn’t usually happen quickly, but as a result of consistently doing the right things for a long time.
Take care and all the best with your investing.
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