This article will highlight why cash may actually be a threat to your retirement and not a safe bet.
A common misconception I see (particularly in retirees or those preparing for retirement) is the heavy weight in cash because it’s 'low risk'. They see their savings accounts and term deposits as secure, “cant go down”, government backed assets – and therefor low risk.
But really when we look at investing for retirement – what do you need? Income! Both now in the future. This income will pay your living expenses, fund your holidays, pay your medical costs, help the kids and really, at the end: it’s there to allow you to enjoy the life you’ve worked hard for.
Without this income, retirement isn’t going to be a whole lot of fun – real risk in retirement is not having it.
I remember back to 2013, interest rates had just hit around 3.5% and I was sitting in my office with a lady who had her entire life savings in a term deposit returning 5.5%. For her, on the $600,000 she had in the bank, she earned $33,000 a year. Not a great deal, but combined with the small pension she got – she could pay rent, buy groceries and occasionally have coffee with her granddaughter (who usually paid anyway).
This term deposit matured - and the best rate we could get was 3.6%. Her income was now to drop to $21,600 per year. She didn’t gain any aged pension because of her assets – so she was out of pocket $11,400 a year in income. This meant she would have to spent her savings just to get by - but she refused to put it anywhere but a term deposit.
Interest rates are now around 2.5% - returning around $15,000 a year. I often wonder how she is doing these days.
Cost of living
When we look long term there is more to worry about. There is often an idea that although cash doesn’t grow, it cannot go backwards. The balance itself may not, but it’s buying power is dropping every year.
The average life expectancy is about 80 for men and 84 for women. That means that 50% of people will live longer than age 80/84. There is all likelihood that your retirement will be 20 or even 30 years long.
Think back 30 years ago – how much as changed? How much more expensive is it to live now versus back then? What will that look like in 30 years? I could do the numbers, but I don’t need to to illustrate my point. Inflation eats away at the value of money every year, and when money becomes really finite – that’s a worry.
What I’m showing you with all this is not to scare you – but to illustrate that the volatility in your money is not the risk – The real risk in retirement is not being able to enjoy your retirement, do what is important to you and even just pay your bills.
What can you do?
In the following months I will publish follow up articles around our philosophy on generating retirement lifestyle (income) and your options in this regard.
If you can’t wait that long or want personalised advice on how to retire with piece of mind – please give me a call on 03 9801 8822 or email me at firstname.lastname@example.org.