Taking Aim at The Wrong Target

About eight years ago I met a retiree named David. A really nice guy who had been a maths teacher for forty plus years. Not surprisingly, he’d accumulated a sizeable amount in his super (or the equivalent of).

When I met David, we were in the depths of the GFC and he was five years into retirement. However, he didn’t approach me for advice, he wanted to know if I knew anyone that had some part-time work available for a bloke in his late sixties.

Importantly, he couldn’t work weekends because he had to take his wife to and from work. She was a similar age and he felt rotten they were in this position. My heart sank for the poor bloke.

Eventually David told me what happened. In short, he was focused on the wrong target which in turn meant he had the wrong investment strategy in place for his retirement.

The Problem
David relied on his investments to continually appreciate in value so he and his wife could live off the capital gain. Unfortunately most retirees do the same thing.

In David’s situation, it looked like this. Let’s say he had $500,000 in super and he expected the market to go up 7% pa. That would mean $35,000 pa in capital gain for he and his wife to live off each year. But when the GFC arrived, not only was there no capital gain to fund his retirement, he had to start eating into his capital as well. He began to spiral downward.

In financial terms, he ate himself alive.

Relying on your investments going up in value to fund your retirement doesn’t work for two reasons:

1.    You can’t control the markets.
2.    You don’t know how long you will live which means you run the risk of out-living your money.

The Solution
Unfortunately it was too late for David to do anything. But what he should have done initially is turn his lump sum amount into a goose so he could live off the golden eggs.

If David implemented an investment strategy that generated dividend income instead of focusing on capital gain it would have changed everything for him. Best of all, it would have meant not worrying about the markets going up and down all the time.

Again, let’s suppose David had $500,000 in super. If his investments generated a dividend yield of 6% it would have given him income of $30,000 pa regardless of what the markets do. Not only would his income have been more regular it would have been far more reliable and stress free. It’s a much better strategy.

It’s the same as living off the rent of an investment property instead selling the property and living off the capital gain. Regardless of any fluctuations in the value of the property, the rental income remains pretty constant.

It’s easy to get sucked into thinking retirement is all about having a lump sum value and living off the capital gain. But it’s high risk and too often it doesn’t work. Capital gain might give us a warm fuzzy feeling inside but it doesn’t always pay the bills. It’s too unreliable.

Ironically, if David had of changed his approach, not only would he still be receiving plenty of income, he would still be exposed to blue-chip assets which would have appreciated in value as well.

Unfortunately he was aiming at the wrong target.

Have a great weekend!

Adam

Back paddock – I’ve just been reading Adam Spencer’s new book – ‘World of Numbers’. It’s a great read so I thought I would share a few finds…

• The average temperature during the daytime on the surface of the Earth’s Moon is 101 degrees Celsius.

• The average BHP rail train (fully loaded with iron ore) weighs 99,700 tonne…that’s 1/60 of the Great Pyramid of Giza.

And how about this one…

• Marble Bar in Western Australia recorded the most consecutive days above 100 degrees Fahrenheit (37.8 degree Celsius) between 31 October 1923 – 7 April 1924!