Retirees, Rock Stars & Rugby Players

Most people are either accumulating to create wealth or they are recently ‘well off’.  By that I mean – Lotto winners, recent inheritors, retirees, people who have sold a business, sold an investment property or are suddenly big income earners.  Retirees are likely to be the predominant demographic considering our ageing population.  There are two key issues facing these people.  The first, being their budget and the second, their lack of knowledge and trust of any investment other than banking or property.

Let’s deal with the budget issue first.  Up until retirement most families and individuals operate financially within cash flow – from employment.  Income and expenditure is correlated – and they know if they overspend this month – they can adjust next month due to a regular income.  In other words their lifestyle is determined by when they receive their income and how much.

Retirees know that inevitably incoming money will stop (apart from the pension).  (Rock stars and sports people have the same dilemma – their star status will wane.)  That brings the second issue into question.  How to supplement the pension or reduced income.  Or how much money (budget) is needed on a weekly – monthly basis when no regular income from paid employment is coming into the bank account.  That’s the kicker.  Term deposits and bank account savings are fine in the short term – but statistics tell us that retirement can be anything from 25-35 years.  To last 25-35 years or even longer, if multi generational wealth is the goal – a ‘real’ return is necessary.  Investment therefore requires a ‘real return’ – that is a return over inflation and tax which enables continued purchasing power – and therefore a continued level of lifestyle.  The majority of retirees adjust their lifestyle to match – what is now their diminishing capital and diminishing purchasing power.  They don’t run out of money – they run out of life.  Retirees, rock stars and rugby players.

This scenario is most common in NZ because the majority of retirees are a product of parents who lived through the depression and WWII.  The scripting of their progeny (the now baby boomers – born 1946-1964) is incredibly powerful.  Most retiree baby boomers therefore focus to the retention of capital – when they should be focused to the retention of purchasing power.  They are not the same thing.

When focused to retention of capital you rely only on yield for your income.  That is the return (interest) received.  When focused to purchasing power retention you are looking for growth (to match inflation) and yield (to provide a return).  Therefore by having the correct goal in mind – it gives the investment strategy more clarity.

An example of retirees (baby boomers) focused to yield historically, was the huge investment into finance companies prior to 2007/2008.  Retirees were looking for a higher yield than bank deposits – and they expected to get back their capital (because they thought the ‘debentures’ they were investing into were – as safe as term deposits).  As a consequence ‘retirees’ are now once again heavily focused to term deposits – a retention of capital focus.

The recently rich (non retirees) are often a tragic case of

a) lack of life experience

b) lack of financial literacy.

They seldom make smart financial decisions because of their naivety and are easy prey to product spruikers and well oiled marketing machines.  Common scenarios among these situations are residential investment property, syndicated property (commercial – multi ownership), offshore property, mentoring and coaching programmes, online trading, foreign exchange dealing, derivatives (futures and options), business ventures (hotels, cafes, start ups, online, IT).  This group falls into: recently rich;

a) a sizeable increase in income or recently rich

b) inheritors, Lotto winners, business sale.

People who could represent;

a) are: rock stars, sports people, business successes with ongoing large incomes.  People who represent type

b) are: inheritors, Lotto winners – business sales – however, both groups share similar threats and opportunities.

What to do with recent windfalls – either, income, capital or both – without self destructing from over indulgence.  The biggest issue with these people is daily decisions and daily disciplines.  Health, relationships and money are all either – at risk or wonderfully enjoyable.

For both scenarios – Winners and Retirees.  Newly rich (from income or capital) and people with money in the bank – what is needed is time and due diligence.  The average New Zealander thinks the wealthy make fast decisions.  That is not the case – they take time to analyse and set time framed goals which are measurable.  The wealthy know five key investment secrets:

1. Behaviour.  95% of success with investing comes from your behaviour.  Create a plan.  Take advice.  Work as a team.  Avoid big mistakes.
2. Accumulate.  Keep putting money aside.  Reserves, alternative funds.
3. Time.  Time is the best friend of investors if compounding interest is given the time to work.
4. Inflation.  Is the enemy.  Purchasing power retention is critical.
5. Avoid the Big Mistakes.  Panic (media beat ups).  Over confidence.  Under diversification.  Focus only to yield and not total return.  Speculation.  Over leverage.  Letting costs, fees, tax determine investment decisions.

There is no one off silver bullet with investing.  Just as there is no one off silver bullet with health and fitness and no one off silver bullet with relationships.  On the other hand a one off ‘Big Mistake’ can seriously disaffect all three.

The wealthy know how to mitigate those risks and it is seldom because they have more discipline than the ‘not so well off’.  They just have a better team around them.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.