Superannuation

When I speak to my clients, the No. 1 reason for why they hadn’t started investing sooner is their faith that superannuation will provide for them during retirement. let it suffice to say that superannuation is designed to meet the basic level of human needs. The Labor government introduced compulsory superannuation in 1992 to take pressure off the social welfare system, not to ensure everyone retires wealthy.

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The common misconception I hear amongst my younger clients is that their cost of living will substantially lower after retirement. They believe superannuation, no matter how small, will be sufficient to fund their retirement. People often believe that when they are in their 60’s, they will have their house and car paid off. They will not be working and therefore transportation costs will be down and hopefully their children will have moved out of home.

For anyone under the age of 50, I implore you to go and speak to someone aged over 60 and ask them how true the above statements are. Let’s break it down and analyse the truth of post-retirement costs of living. Firstly, let’s talk about the house you have paid off. Anyone who has dealt with retirement villages would know that the house is the first to go. Prior to moving into a retirement village, many seniors are forced to sell their house and use the money to pay for a bond. Further, they are then expected to pay an ongoing monthly fee as well.

What about the car? Well if you retire at 60 and live to be 80 then I would suggest you will be buying a new car at least once in the following 20 years. Unless you are happy driving an old bomb, that may break down at any second. Finally, the children; whilst they should have moved out at this stage, I dare say that grandchildren and maybe even great-grandchildren will be coming to visit and they will cost you money.

Now let’s make a quick list of extra expenses old age brings that you may not have considered. Higher health insurance premiums, home maintenance, mobility aids, travel, inheritance for the kids, funeral expenses and nursing care. As you can see, cost of living in retirement can actually increase in direct contrast to what many people believe.

Adviser’s Tip: Go to https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/retirement-planner and complete the retirement calculator to discover how much you will need to retire comfortably.

Lack of earnings

As with all people they believe that they do not get paid enough to invest. This couldn’t be any further from the truth. The amount of money you should set aside for investing is a percentage of your pay and therefore can be spared no matter what your salary.

I’ve had clients on welfare whom I’ve helped to find some extra money to put aside for investing, so if they can do it, so can you. The key is budgeting, honestly and diligently, and keeping to that budget as rigorously as you can.

Lack of time

My No. 1 favourite excuse for not investing is a lack of time. I enjoy hearing this excuse because it is never really the case and therefore easy to overcome. Perhaps it is the misconception that actively investing money takes an exorbitant amount of time. This may cause some people to feel that the few minutes a day they have to spare is not enough. However, taking an active interest in your future and your finances can take as little as a few hours each year. There are certain investment strategies that allow you to go months without paying attention to them and require only a small amount of attention when you return.

Adviser’s Tip: To overcome this hurdle, it is best to sit down with a financial planner and discuss your goals. The planner will then be able to calculate the time you will need to devote to investing in order to reach your goals.

Mistrust of financial markets

Humans have a very difficult time assessing and interpreting risk. Our self-bias makes many of us believe that whilst a risk may be real, there is no way it will happen to us. Let’s use shark attacks as an example to demonstrate how easily risk perception can be skewed. For many of us, our aversion to horrific events makes us perceive the risk of a shark attack to be much greater than it is. More people drown whilst swimming than get bitten by a shark. Yet most of us are more scared of what is in the water, than the water itself. However, a surfer may display a self-bias and believe that, although shark attacks occur, there is no chance of it happening to him. Then, after surfing all his life, his perception of risk becomes so reduced due to risk familiarity that when a shark alarm is raised at the beach, he continues surfing without a care in the world. Now let’s apply this theory to investing: We hear stories of retirees who have lost everything in an investment that went wrong and our fear of horrific outcomes heightens our perception of risk. Then we dip our toe into the financial waters and find it isn’t as scary as we first thought. After some time, we become confident in our ability and in the market’s stability and our aversion to risk reduces further. Eventually we can become cocky, make poor financial choices, suffer a loss and end up being cautious of investing again. The moral of this story is to be risk aware, not risk averse. An intelligent investor unemotionally weighs up the risks of an investment and decides if he or she is willing to accept its potential volatility.

Of course not everyone’s mistrust of the financial industry is due to a mistrust of the financial markets. Some people have heard stories of professional misconduct that makes them apprehensive and mistrusting of the professionals who work in the industry. Whilst there are unethical professionals in every industry, our mistrust of financial professionals is exacerbated for two reasons. The first reason is our aversion to events that we can’t control. When we hear of a mechanic who has overcharged for parts, or a car salesman and his record for not disclosing defaults in a car, we do not become overly afraid. This is because many of us believe that we could spot a dodgy mechanic or pick up when a car salesman is trying to sell us a lemon. But when we hear about investors losing money on derivatives trading due to the collapse in the sub-prime mortgage market, we panic. Most of us know so little of these concepts that the sheer complexity makes us doubt we would ever be able to spot a dodgy financial deal. The second reason why unethical financial professionals scare us more than any other industry professional is because of the sheer scale of the misconduct we see on the TV. Whilst a dodgy mechanic or car salesman may rip us off by a few thousand dollars, wayward financial deals run into the millions. So how do you safeguard yourself against unethical financial professionals? Luckily, there are a number of tell-tale signs that someone is offering you a scam:

  • They offer attendees the secret to becoming rich;
  • They give vague information for free then make you pay for the specifics;
  • They downplay the potential risks of investing or even offer riskfree strategies;
  • They offer exclusive free tickets to attend the first seminar with subsequent seminars requiring very high fees;
  • They offer loans to cover the costs of both the investment and further investment seminars;
  • The strategies do not consider your personal circumstance;
  • They discourage you from seeking independent financial advice;
  • They employ high pressure sales tactics and offer heavy discounts for signing up on the spot.

To further safeguard yourself from unethical professionals; it is wise to seek advice from a registered financial expert. Many financial professions have a professional body that offers registration under a strict set of ethical and educational regulations. By choosing a professional who is registered with a state or national body, you can ensure you are receiving advice from someone who must adhere to a minimum standard of education, rigorous testing, annual compliance and continued professional development.

Lack of knowledge

A lack of knowledge is a major reason why many people do not invest. The world of money and finance can be a confusing and daunting one. It seems many parents and almost all educational institutions aren’t able to offer much in the way of financial education for young Australians. As a result, most of us go through life without ever understanding the need or the value of investing. For those with the inclination to safeguard their future, it can be an overwhelming task trying to discern credible and reliable financial advice from speculative babble and financial product sales pitches.

Lack of knowledge can also be expressed as a lack of belief in your ability to achieve financial freedom. When we do not understand something, it is human nature to consider it to be too complex for us to ever master and so we neglect it altogether. When faced with a new task, negative thoughts start to creep in like “I’m no good with money” or “I’m not smart enough to invest”. These self-limiting beliefs can be overcome by rephrasing them. Instead of “I’m no good with money” think “I need to learn money management techniques”. This practice changes your perspective. Instead of the self-limiting belief that you can’t manage money, you identify a need to learn new techniques.

The idea of investing may seem daunting at first and the concept of financial freedom may seem so intangible that you believe it isn’t worth perusing. By considering your weakness to be a lack of knowledge rather than a lack of ability, you can easily break down your self-imposed barriers to discover that financial freedom is a real possibility.

Reading this book and many like it will help you to gain the knowledge required to overcome this barrier. Books about personal finance and money management are the first and most vital step towards improving your understanding of investing. By the time you finish reading this book, you should have a broad understanding of the different asset classes available to you and some basic knowledge regarding investment strategies that you can employ instantly on your journey towards financial freedom. Furthermore, by the end of this book, you should come to realise that financial freedom is a very real and very achievable goal for all personnel.

Fear of Missing Out (FOMO)

I commonly hear my younger clients say “what if I get hit by a bus tomorrow and die? All of this investing would be for nothing”. To which I say “what if you get hit by a bus and live? Wouldn’t you like to have the financial security to pay for the best medical treatment?” These are usually young, single people with no children, and they believe that saving for the future is pointless because they don’t know what the future may hold. What they are really displaying is a fear of missing out (FOMO). FOMO can manifest itself in many ways, but it is basically when someone is afraid that putting money aside to invest means that they will not have that money to buy the things they want today. To some of us this may seem to be an irrational thought. As children, we were taught that we must save our pocket money in order to purchase lollies or toys. We seem to lose sight of this notion as we age. People often find themselves in a mass of credit card debt from purchasing all the things they ‘need’ as soon as possible with no regard for the future.

Perhaps this fear comes from listening to disaster stories that we have all heard about a friend of a friend who put all his money into a ‘sure thing’ and ended up losing it all. Whilst there are definitely risks associated with investing, the real risk is not investing at all. Financial apathy today is a guaranteed way to end up missing out on the truly important things later in life.

To overcome this hurdle you need to sit down with a mentor. Your mentor will tell you that getting to where they are has taken a great deal of sacrifice and they had to miss out on some things as they worked toward their dreams. But they will also tell you that achieving their goals and living out their dreams was worth the relatively small sacrifices and in hindsight, what seemed important to them when they were younger, doesn’t seem anywhere near as important now.

What has stopped you from investing up until now? If you have already begun investing, then ask yourself: Are any of the above excuses holding you back from truly achieving your financial goals. Are you honestly investing with as much dedication as you would like and achieving the goals you have set for yourself? If not, then perhaps you still suffer from one of the fears above. Take the time now to write down what has been holding you back. Either choose from the top five reasons above, or if none of them apply to you, dig deep and attempt to identify your own hurdles. Then decide and document what actions you can take today to overcome these hurdles.