Retirement PlanningPlanning for your retirement is probably one of the most important financial decisions you ever make. Most people equate the purchase of their home as the most important financial decision they make and they then spend 20-30 years making it happen. With retirement planning people seem to take the opposite approach and sit on their hands. At Centre Capital, we believe in planning for financial security from day one as it is time and the correct strategy that can make all of these financial aspirations achievable.
Importantly, all these financial objectives are interrelated and by having the correct strategy we can achieve a lot more than if we take a piece meal approach by trying to put together bits and pieces as you go.
Financial security is having a passive income stream that allows you to fund your lifestyle. In your working days you need to “work” to earn that income where as in retirement you want to sit on the beach, go fishing or be on the golf course to earn that income.
Importantly, this passive income stream needs to increase every year especially if you are going to be retired for 20-30 years otherwise you will become relatively poorer each year.
The Basic Maths Of RetirementNo different to when we were working; you “need to make more than you spend”.
Remember when petrol was $0.32 per litre , $0.70 per litre, $1.00 per litre and is now $1.50 per litre? It's not just petrol that has increased, most things we buy increase over time with inflation - bread, milk, meat, golf memberships, car registration.
The graphic illustration below provides an apt reminder of what we are trying to achieve as your financial planners, creating and protecting your wealth for life.
The graph below shows two options for investing $100,000 in 1980 for 27 years. One option was investing the funds in term deposits and the other investing in the share market.
At commencement you would have been receiving approximately $9,000 interest from the term deposits, and slightly less from the share portfolio.
The income generated by each investment diverges with the share income (represented by blue columns) climbing dramatically, as company profits increase, compared to the term deposit whose income remains relatively stable. Over time the capital value of the shares will fluctuate (such as is happening now) while the term deposit remains static.
At the end of 27 years the value of the share investment is now $1,800,000 whereas the term deposit has remained static. But more importantly the income generated from the share investments is now approximately $78,000 per annum whereas the income from the term deposit is only $8,000 per annum which would not offset the effect of inflation (rising prices) over the 27 years. Even allowing for the financial meltdown that occurred in 2008 and 2009 the income of the share portfolio may have fell say a 1/3 to $50,000 which is still way ahead of the term deposit alternative.
Which income stream would you prefer? In fact which income stream do you need in retirement that will last for 20-30 years?
Over the long term it is the access to this income stream that will provide you with financial security.
If you purchased that income stream in 1980 for $80,000 or $ 120,000 the income stream would still be the same and would have provided you with an adequate return. The moral of the story is that when assets are attractively priced we don't need to get to cute in trying to pick highs and lows (which is impossible) as over time the difference becomes negligible.
Presently we can take advantage of the market volatility by purchasing the same income stream for the next 30-50 years for a considerable discount.