Martin Hawes is a highly regarded financial expert and best-selling author. He provides financial coaching to allow his clients to create the time and wealth they need to pursue their dreams.

Investing For Twenty Good Summers

Making Your Money Work So You Don’t Have To

By Martin Hawes

Allen & Unwin

Copyright © 2009 Martin Hawes
All rights reserved.
ISBN: 978-1-74175-689-0

Contents

Introduction,
Fifteen good summers,
1 All change,
Getting ready for some good summers,
2 A whole new life, a whole new investment strategy,
3 Only four investments,
4 Investment risk,
5 Managing risk,
Asset allocation,
6 Get offshore,
7 Managing risk,
Lakes and rivers,
8 Managing your investments,
9 Timing,
Boom or gloom?,
10 The place of debt assets,
Bonds and deposits,
11 The place of ownership assets,
Shares and property,
Afterword,

CHAPTER 1

All change

Getting ready for some good summers

If you look at financial literature, you’ll soon notice that nearly all of it is about building up wealth. Almost everything that is written about money assumes that you do not have enough money and that you need more. Financial seminars and courses are the same: they are aimed at making people rich (or at least better off). Almost all advice comes from the basic premise that you do not have enough money and that you need an investment growth strategy. However, this is not always true. There is a group who has quite different goals and risk profiles. This group — those who have fewer good summers left — needs a much less risky strategy and one that will give them income fairly reliably. This book is written for that group — baby boomers whose goal is no longer wealth accumulation but income from wealth.

From discussions with clients and questions I’m asked at conferences and seminars, I have learned two main things:

1. People really struggle with rearranging their money and investing differently. Most of us have had a lifetime of investing with the aim of building up wealth and starting to use capital to derive income requires a whole new approach.

2. Although most people are delighted when they are given a plan that will mean they don’t have to go back into the office on Monday, there are some who are not so thrilled. These are people who really struggle to make the break, to change what they have done for decades. I do not think that this major change comes easily to anyone — just about everyone has some difficulties making it. And it is especially difficult later in life when no change comes easily. Some people find the idea of making the break to a new life so frightening that they don’t make the change and carry on battling away in their work or business.

Sometimes these two difficulties are connected: some people struggle to make the break because they lack confidence that their investment capital can be used safely to give them the reliable income that they need. There is no doubt that money matters — and not simply a lack of money — stop people from making the move towards living the life of their dreams.

It is little wonder that a significant number of people do not feel that they can go boldly into a new life confident that they will have the income to fund it. People approaching retirement know that the way that they invest their money is important — they are at an age when they cannot afford any mistakes. They are wary of changing from earning their income through work (as they may have done for 40 years) to having it all come from investments. This is a major change.

People are right to be nervous of this change not only because using capital to derive income is a new experience but also because a whole new financial strategy needs to be devised. Gearing (borrowing to buy investments) is a good idea for younger people looking to build wealth but is a seriously bad idea for older people wanting income. A strong emphasis on one asset class (for example, property or shares) may be acceptable for people in their thirties and forties, but is ridiculous for people in their sixties for whom diversification is essential. However, the habits of a lifetime are not easy to break, and I often struggle to convince clients that they should sell some of their properties or shares so that they can repay debt and have greater diversification. Again, the literature and seminars do not help: they are extolling the virtues of gearing or of owning several properties. They are, of course, right — gearing does work well. However, it is for wealth-building younger people and it is not for those of us who want to ease back and enjoy some summers.

Money and finance are about people and that’s what keeps me engaged in the industry. The financial adviser’s job is to find out what people’s dreams and goals are and then to help them arrange their finances and investments to give them the life of their dreams. If we were all the same — if everyone had the same financial plan — I would have long since left the industry. I am still working as a financial adviser because I love to fit people with the right financial arrangements to help improve their lives. You need to acknowledge that you and your position are different from others and therefore recognise that some of the ideas and strategies that are laid out in books, article and seminars may not apply to you. To live well when you have started to ease back, you will have to unlearn much of what you learned about finance and investment to date, and put on blinkers and ear muffs so that you do not see and listen to information that is designed for other (usually much younger) people.

I know that making a break to a whole new life is scary. I know that the idea of living off the income from your investments is also scary. Perhaps you think that you do not have enough. Perhaps you know the volatility of the markets and wonder how you will cope when the investment returns do not appear in your account reliably every second Thursday. These worries (and others like them) can form a barrier that can stop you having the life that you want. Although these concerns can seem overwhelming when all rolled in together, when you isolate each one and then examine it carefully, none really has the ability to be a showstopper. This is true of most worries that you might have in the financial area. I have found that people’s worries about their finances are mostly a fear of the unknown, a fear that can be solved, rather than a dead end on the path to a better life.

Compromise for the life that you want

Most of the clients who I have seen over the last few years overestimate the amount of money that they need in order to start to ease back. Some have been people with millions of dollars of investment capital who have believed that they do not have enough to live on comfortably. Yet there have been others with much more modest amounts who have happily committed to a new life dependent on investment returns for income.

I believe that the difference in people’s readiness to ease back is mostly about how much they want to change and therefore how much and what they are prepared to compromise to get the things that are really important to them. Some people know the lives that they want — they have a very clear picture in their head of what it will be like when they are no longer working full-time — and are prepared to sacrifice some things to get the life of their dreams.

This is really about prioritisation and therefore about compromise. No one can have everything. We all have to decide what is important to us and trade some things off for others. This is much easier if you are very clear about what you do want — it is hard when you are not sure. The reason that I have been able to help people into retirement is because I usually spend a good bit of time clarifying exactly what it is that the client wants. When we know that, it becomes easier to make the compromises that are necessary.

In Twenty Good Summers — Live more, work less and make the most of your money I discussed how much money was enough. I said that the amount that I thought was needed to ease back was less than the amount that many financial advisers would say. The reason for that was that I identified seven variables which could be looked at and adjusted to make the numbers fit. These variables mean many people are able to reply to the question ‘Do we have enough?’ with the answer ‘YES!’

People often put too much emphasis on money. Now, that might sound strange coming from someone like me, however I do think it important that you remain conscious of what the end game is. The end game is not a certain amount of money — it is the life that you want. Money is merely a tool to help you live the life that you want. It’s a means to an end. Money is important and a certain amount of money will give you the life that you want. However, you may be able to achieve that life with a lesser amount of money. This can be really important if some kind of compromise or adjustment means that you can get on with the life of your dreams sooner than you might otherwise have thought possible.

To me, the most valuable thing that we have is time (followed closely by health). It seems crazy to me that you’d postpone having the life that you want if some relatively small compromise meant you could have it now. For example, you might be planning to ease back and semiretire in five years time, and only do a four-month work contract each year. You have established the five-year time frame because you know that at that time you will have $250,000 invested and that this will give you $20,000 per annum income. Another way of doing this might be to do a bit more work — perhaps two three-month contracts instead of one four-month contract. This would let you ease back now rather than waiting for half a decade. It is relatively small compromises like this that can let you get on with the things that you are burning to do now rather than waiting (and running the risk that something derails your plans). The baby boomers have always been the ‘now’ generation — given the ever-diminishing number of summers that we have, I think it’s better for you to get on with things now than wait.

However, first it’s important for you to work out what it is you do want. Only if you are clear about that can you decide what you will give up to have it. Once you’re clear on what you want, you need to consider the factors that allow you to answer the question ‘do we have enough?’ Of these factors there are five that deserve particular scrutiny. It is these five factors that are the areas where you can compromise. Each of these factors can be adjusted or played with so that you can make the numbers work and, in turn, change your life.

1. Lifestyle. Whatever your desired lifestyle, you will have to work out what it will cost. Do a budget for when you retire — the budget puts numbers around the lifestyle that you want or can afford. In doing that, you may be able to compromise on some spending if you cannot make the numbers work. For example, your desired lifestyle might include overseas travel twice a year. However, if you plan to only travel once a year (or even every second year) you may be able to ease back now. Is the travel really that important? If it is, you will probably have to keep working for a few more years so that you can grow your capital further, or look to compromise in some of the areas below.

2. House. Many people plan to downsize their houses to help them fund their retirement. However, when the time comes, this can be hard to do. It is not easy to give up that special location or the swimming pool that you put in a few years ago. Again, you have to decide what is important to you: do you want more time for family, golf and fishing now or do you want the swimming pool? Now is the time to think about what you really want.

3. Inheritances. Most of us want to leave some kind of legacy — only a few people are genuinely happy to plan to go out on the last dollar and let the cheque for the undertaker bounce. However, the amount that you plan to leave your children will have a bearing on when you can start to ease back and the lifestyle that you will then have. Preparedness to spend capital (as opposed to simply spending income from capital) is a matter of degree — you can choose the amount that you are going to leave your family. For example, some people will plan to leave all of their wealth in inflation adjusted terms to the children; others might choose to spend all of their investment capital and then use a home equity release product to access some of the capital that they have in their house. Whatever you choose, this is another area where you may be prepared to compromise.

4. Work. This is a big one. The amount of work that you are happy to do when semi-retired is something that very easily lends itself to a compromise of sorts. For a few people, this is non-negotiable — they are not going to work at all. However, statistics show that more and more people are happy to do some work and for these people a compromise may be that they work an extra day, week or month a year so that they can start to enjoy some good summers sooner rather than later.

5. Investment returns. The investment returns that you expect to get can be adjusted to provide some compromise, however I would recommend caution. The risk and return equation is immutable: the greater the expected return, the greater the risk you will be taking. As will become clear later in this book, shares and property will give you the best returns and if you have a greater proportion of your portfolio in these areas you will, over long periods of time, have more income. However, these investments are also volatile — the returns will not be smooth and you could have months and years where you receive very little income. Therefore, you may invest a little more aggressively (i.e. have a little more in shares and property) but I do not think that you should take this too far.

Work out what your end game is — what do you really want? If you have a very clear picture of your dream life, you will know what you are heading towards and be able to make some of the hard compromises. More importantly, perhaps, if you know what it is that you really want, you will know what you will not compromise on. There are some things that you will not want to give away and there are others which will not make much difference to your overall happiness.

Remember that the important thing is not money. It is the quality of your life: your happiness, contentedness, satisfaction — call it what you will. That means working out the things that are important to you and letting money serve them. Money has no value in its own right but is only important for the quality of lifestyle that it can give you. More money usually means a better lifestyle but not always — some things do not require a lot of money. In any event, if you are prepared to compromise or go without some things, you may be able to have the things that are most important to you right now.

This book is not designed for wealth creators but for those with quite different goals. It is designed for those wanting income from their investments to fund their retirement. As such, it has a number of threads:

* It is likely that you will be dependent on your investment capital for at least some of your income. It is likely that you will continue to work to some extent (a very desirable thing for a number of reasons in my view). It is possible that you will have income from other areas (e.g. superannuation). Nevertheless, some of your income will come from the capital that you have built up over the decades. It is critical to the life that you want to lead that this income does not stop. You need to arrange your finances so that your investment returns are as smooth as possible and that you are never in a position where you can’t buy the groceries.

* You are a risk-averse investor. Therefore you need to invest very safely and surely. Over the years, I have seen many people’s lives destroyed by poor investment in retirement, their dreams shattered by a major investment loss. This book tries to make sure that this does not happen to you by recommending you adopt a ‘safety first’, highly diversified approach.

* You should go into retirement with no debts. Gearing (or borrowing) for investment purposes may have helped to build up wealth. However, the first step to lowering risk is to get rid of any debts.

* One of the big risks that people in retirement face is inflation. Although inflation is nothing like as bad as it was in the 1970s and 1980s, there is always the risk that it will get away again and erode the spending power of your capital and income. This is underlined by the fact that you are likely to be dependent on income from your capital for a long time — life expectancy is improving and some people go into semi-retirement much earlier than previous generations did. My response to the risk of inflation is to make sure that you have some investments in property and shares, things that will give both income growth and capital growth and so help to keep up with inflation.

* Aversion to risk and the threat of inflation mean that asset allocation is very important. In fact, it is more than just ‘very important’, it is likely to be the make-or-break for your financial success. Asset allocation is simply how much of your capital you allocate to each of the different asset classes — that is, how much to shares or bonds and how much to put into emerging markets or property. Research shows that asset allocation makes the greatest difference between success and failure. Therefore you must — absolutely must! — get your asset allocation right from the start and then keep it right throughout your retirement.

(Continues…)Excerpted from Investing For Twenty Good Summers by Martin Hawes. Copyright © 2009 Martin Hawes. Excerpted by permission of Allen & Unwin.
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