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Financial Happenings Blog
Wednesday, December 16 2015

Probably the most important question when it comes to whether you have enough in savings to retire is what level of cash flow will you need through your retirement years.  For many this is a difficult question to answer.  However there are some tools to help in determining what this magic number might be.

1) A percentage of pre-retirement income

One rule of thumb is to look at your pre-retirement cash flow (spending) and estimate that this will reduce to approximately 70% to 80% of that level once in retirement.  So if you are spending at the rate of $100,000 you might estimate an $80,000 annual base spend through your retirement years.

Why might spending be lower in retirement?

The school of thought is that certain expenses will no longer be required or at least reduced especially in relation to work related expenditure.  Items such as transport to and from work, spending on work clothes and income protection insurance are a few of the costs that might disappear.

However there are also going to be costs to fill in the time that you now have available to you.

2) Create a budget

This is a really good exercise for anyone but particularly those preparing for retirement.  If nothing else the process should help identify what you are currently spending funds on and what you would like to be spending those funds on.  This exercise might actually shine a light not only on the financial implications regarding retirement but also how you intend on spending your time during those years.

A useful tool to get the buget started is through the ASIC Money Smart site's Budget Planner -

Unfortunately many find this exercise difficult so there is a third option that might not only help develop your personal budget but also shine a light on whether your spending plans are in the right ballpark.

3) Refer to ASFA’s Retirement Standard

Even if you are comfortable using one of the above methods you might well ask – but is my current spending pattern / budget realistic or indeed efficient?

This is where ASFA’s Retirement Standard may be a useful reference.  The Retirement Standard sets out the budget for a modest and comfortable lifestyle for a single and couple.  The numbers are updated every quarter to take into account price movements (inflation).

The current numbers as at the end of September 2015 were:

Modest lifestyle

Comfortable lifestyle





Total per year





So for a comfortable lifestyle in retirement for a couple aged approximately 65 the budget is just under $59,000.

The bottom line annual amount provides a simple number to focus your attention.  However, included with the bottom line amount is a budget that sets out how these broad brush figures were generated.

To find the detailed budgets take a look at

Concluding Comments

I would encourage those preparing for retirement, as well as those already in retirement but wanting to review cash flow requirements, to reflect on the budgets set out in the Retirement Standard.  Everyone’s budget will be unique but this resource provides a useful starting point for those seeking greater clarity.



Posted by: Scott Keefer AT 08:51 am   |  Permalink   |  Email
Tuesday, May 13 2014

The first budget for the new coalition government has as expected provided some significant changes as well as confirming changes that had been widely anticipated.   This summary will look at the following major changes grouped into three main areas – tax planning, retirement planning and government benefit planning.  The full summary can be found at our 2014 Budget - Personal Finance Summary page.

Posted by: Scott Keefer AT 10:43 am   |  Permalink   |  Email
Thursday, October 24 2013

It has been a number of months since we updated the website with Scott Francis' articles published in the Eureka report.  We have now caught up and welcome you to take a look at these pieces - 17 in total.


Posted by: Scott Keefer AT 03:54 pm   |  Permalink   |  Email
Monday, July 01 2013

For many years I have followed the writings and podcasts of Paul Merriman, a financial adviser based in the USA.  Recently Merriman has retired but continues to write and publish on financial advice particularly investment advice topics.  In a recent article 10 do's and don'ts for retirement investors he looks at 5 key dos and 5 key dont's in retireement.  Even though the comments are focussed on retirees in the US the broad concepts are just as relevent for us here in Australia.  So here are the 10 items for your consideration:

Retirement do’s

  1. Do take advantage of “the only free lunch on Wall Street” by building a diversified portfolio of mutual funds (managed funds in Australia). This will reduce your risk and probably increase your returns.

  2. Do buy funds with the lowest possible expenses. The average equity fund charges more than 1.3% a year, yet you can get most of the asset classes you need in good funds for a full percentage point less than that. This is equally important for bond funds.

  3. Do buy index funds instead of actively managed ones. This will be a big help in achieving both of the prior “do’s” I mentioned.

  4. Do invest in equity asset classes with long histories of successful returns. Based on years of careful study by academics I trust, this means U.S. large-cap blend, U.S. large-cap value, U.S. small-cap, U.S. small-cap value, international large-cap blend, international large-cap value, international small-cap blend, international small-cap value, and emerging markets. And for tax-deferred accounts only, it means U.S. REITs. (In Australia the asset classes include Australian large-cap companies, Australian value style companies, Australian small-cap companies, International large/value/small cap companies, emerging markets and Australian and international REITs)

  5. Do invest in the most tax-efficient manner. Unless you have unusual circumstances, that means maximizing your IRA and 401(k) accounts and (when you’re living off your money in retirement) using up your taxable accounts first. (In the Australian context this is about effectively utilising superannuation and superannuation pension accounts)

Retirement don’ts

  1. Don’t pay a sales commission to buy or sell a mutual fund. The commission is money that’s gone forever from your nest egg, and it inevitably and permanently diminishes the return you will get. (In Australia you can no longer buy funds that have commissions attached but any existing managed funds may still maintain a commission structure.)

  2. Don’t buy funds in asset classes with low expected returns or high levels of risk relative to their expected returns. Among the most prominent examples of asset classes you should avoid are commodities, gold and technology stocks. In addition, I think you should steer clear of pure growth funds, whether they invest in large-cap, midcap or small-cap stocks — and this includes international funds as well as U.S. funds.

  3. No matter how much you are attracted to an active manager, don’t buy actively managed funds. This is really another way of stating my third point above. Actively managed funds are guaranteed to have higher expenses than index funds, and their returns aren’t likely to be as high as those of index funds.

  4. Don’t speculate with your portfolio, even a small part of it “for fun.” If you have a properly diversified portfolio along the lines that I recommend, your investments will include all the “great opportunities” you will ever need. Speculating and playing the market will almost surely reduce your long-term returns. 

    If you absolutely can’t resist trying your luck, then spend (notice I am not saying “invest”) a bit of money that you can afford to lose and buy a lottery ticket.

  5. Don’t get snookered into thinking you have found a guru or anybody else who knows what will happen to the market in the future beyond statements such as “Stocks will go up in the long run.” Many people claim to have that knowledge, but nobody does. The sooner you can accept this fact the sooner you will be in touch with reality. 

    When you are in touch with reality, you are likely to invest more intelligently and productively.


These are great insights from a man with many more years of experience than me and well worth consideration for you investment portfolio.




Posted by: AT 10:13 am   |  Permalink   |  Email
Friday, May 10 2013

The Association of Superannuation Funds of Australia (ASFA) has just released new data regarding indicative costs in retirement relating to the period ending 31st of March 2013.  The media release suggests that health and energy costs rose over the March quarter whilst food and leisure goods and services fell.

I believe the information provided by ASFA can be useful in 2 key ways:

- assisting clients to determine what their budget should be when reaching retirement
- providing a gauge of inflation for those preparing for or in retirement

The study includes indicative budgets for 4 groups as follows:

A single person with a modest lifestyle                $22,641
A single person with a comfortable lifestyle         $41,169
A couple with a modest lifestyle                         $32,603
A couple with a comfortable lifestyle                  $56,317

When using the breakdown of budgets provided care should be taken in seeing whether they fit your requirements.

In terms of inflation the latest data suggests there has been only slight changes with the two comfortable lifestyle budgets actually falling slightly.  However the annual change was between 2.16% and 3.17% due to a large jump in costs in the September quarter of 2012.

This inflation data can be really useful for assisting with determining what level of total return will be required to meet the goal of making sure assets last long enough through retirement years.

Using this data you can add a required drawdown rate - say 5% - and add the level of fees you are paying - say 1.25% - to work out what you need your portfolio to be generating in total returns - 9.25% using the example data.

This can then be a really useful starting point to see what style of portfolio you require to reach that total return target.  In particular how much risk needs to be incorporated into a portfolio.  In particular, if you are targetting a 9.25% total return, you should be considering what style of portfolio has provided that return through history with the least amount of volatility (risk).

For anyone contemplating or in retirement taking a look at the ASFA Retirement Standard data could be a really valuable use of time and a great starting point for retirement planning.


Posted by: AT 09:21 am   |  Permalink   |  Email
Wednesday, May 01 2013

A key issue when analysing whether you have enough invested to retire is how much you expect costs of living to increase by through your years of retirement.

This is a tough number to determine.   Many economists have trouble enough identifying what it has been historically yet alone trying to predict what it might be for the next 20 or 40 years.

Using history as a gauge

Economists tend to start their analysis using the Consumer Price Index (CPI).  In Australia the Australian Bureau of Statistics  (ABS) has the responsibility of determining this index level every quarter using a pre-defined basket of goods.  It calculates the cost of that basket of goods and compares this with previous levels to calculate how much prices have changed.

The database I looked at placed the CPI at a rate of 5.27% since October 1948.    However this period was marked by extremely high inflation through the 70s, 80s & early 90s.  (Inflation was close to 10% on average from the beginning of 1973 until the end of the 80s) Since then central banks and governments around the world have implemented inflation targeting as a core economic policy and through doing so have driven inflation down. (It has averaged 2.7% from the beginning of 1990 until the end of March 2013 in Australia.)

In Australia the Reserve Bank of Australia target rate of inflation is somewhere between 2 and 3% over the course of the economic cycle. Hopefully a firm lid can be kept on inflation so that it will not climb back to the levels experienced in the 70s and 80s.

What is current level of inflation?

The most recent reading of the Consumer Price index suggests that the cost of living rose by 2.5% for the 12 months to the end of March 2013.

Some commentators suggest that the basket of goods used by the Australian Bureau of Statistic might not provide an accurate reading of cost rises for retirees.  I also look at 2 other measures to see how costs are faring for retirees:

1) The ASFA Retirement Standard
2) The Australian Bureau of Statistics Selected Living Cost Indexes

ASFA Retirement Standard

Every quarter the Association of Superannuation Funds of Australia (ASFA) commission a report conducted by Westpac to gauge the cost of living in retirement for singles or couples with a modest or comfortable lifestyle.

Figures to the end of December 2012 suggest that costs have risen by:

2.99%  for a single person with a modest lifestyle

1.93%  for a single person with a comfortable lifestyle

2.78%  for a couple with a modest lifestyle

1.97%  for a couple with a comfortable lifestyle

For me this suggests that cost s for those in retirement are rising basically in line with the official CPI figures and with in the Reserve Bank target.

The Australian Bureau of Statistics Selected Living Cost Indexes

The ABS has started to release living cost indexes on a quarterly basis for a number of broad groups.  The latest data release for the period ending March 2013 suggests the annual increase in costs have been:

2.7%  Pensioners & Beneficiaries
2.8%  Age Pensioners
2.3%  Self Funded Retirees

So again these numbers fall close to the broad CPI figure and with the Reserve Bank’s 2 to 3% target.

So what level of inflation should be used for predictive purposes?

My approach is to start with the current rates of inflation.  If these levels are below the 3% Reserve Bank threshold  (which they currently are) I would use 3% .  If they are above the 3% threshold I would tend to use the current levels.  i.e. I try to use the worse rate to hopefully build in a level of conservatism.

If you are an inflation bear, you might want to use a rate more like 5% on average.

If you can use a higher level of inflation and still meet your retirement goals all the better.

But how will investments respond in different inflationary environments?

A final aspect to consider is how might investment returns behave in various inflationary environments?

Historically, over the long term, returns on asset classes tend to be within percentage bandwidths from the prevailing level of inflation.  For example an oft-used rule of thumb is that shares should provide a return of 6 to 7% above inflation.

The real art is to make sure that your investment mix  has enough exposure to investments that tend to perform better in inflationary periods.

Unfortunately there is not enough time to go into details now but I will come back to it in another day.


Posted by: AT 05:25 am   |  Permalink   |  Email
Monday, April 29 2013

No matter what your opinion is on where investment markets will go next, one area of agreement is that markets have been volatile in recent years.   Nobel Prize Winner – William Sharpe – has recently provided his thoughts on investing in a turbulent market for the Stanford Graduate School of Business where he is a professor emeritus of finance - William Sharpe: How to Invest In a Turbulent Market

We think highly of Sharpe’s work and it forms a major part of the investment philosophy we use to develop investment portfolios for clients.

So has Sharpe’s views changed since the GFC started in late 2007?  
In a word, NO.

In the Stanford article Sharpe provides an overview of his four pillars of investing -
Diversify, economize, personalize, and contextualize.

In a nutshell these pillars are:

– invest in a broad range of shares and bonds – preferably all of them.

– keep costs low.

– make invest decisions that are most appropriate for your own situation.

– the price of an investment reflects the average opinion of investors about its future.  You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it.

Sharpe provides some really important concepts that in our opinion should be the basis for developing a successful investment philosophy.


Posted by: AT 08:42 am   |  Permalink   |  Email
Wednesday, November 21 2012
I have recently written in a blog about a problem I have with unitised "big bucket" super funds in pension phase - the way they force you to sell down growth assets at times that might not be ideal to do so.

Scott Francis in his recent Eureka Report - Feeling the pension pinch - thrashes this issue out in greater detail.

The solution is to build a distinct cash hub from where pension payments can be drawn and interest and income can be paid into, supported by a significant defensive fixed interest component.

An investor should never be forced to sell growth assets to pay pension payments at the wrong time.

Posted by: AT 07:22 am   |  Permalink   |  Email
Monday, November 12 2012
The latest ASFA Retirement Standard has been published looking at the period ending 30th September 2012.

The latest figures suggest:

A modest lifestyle for a single person will cost $22,539 per annum
A comfortable lifestyle for a single person will cost $41,090 per annum

A modest lifestyle for a couple will cost $32,511 per annum
A comfortable lifestyle for a single person will cost $56,236 per annum

An interesting aspect to consider is the level of increase or inflation in these levels from one year to the next.

The increases for the past year have been:

A modest lifestyle for a single person - 2.65%
A comfortable lifestyle for a single person - 1.68%

A modest lifestyle for a couple - 2.34%
A comfortable lifestyle for a single person - 1.66%

The official Australian Bureau of Statistics data for Consumer Price Inflation (CPI) for the period ending the 30th of September 2012 saw prices increase by 2.0%.

The Retirement Standard data suggests that prices are rising faster than CPI for those living a modest lifestyle whilst those living more comfortably seeing prices rise less.

The ABS data suggests as much with two of the largest rises in prices over the past 12 months being in the area of health and housing (including electiricty & gas).

How to apply this data?

The cost of living in retirement differes from one household to the next but the retirement standard provides a useful benchmark to test your level of planned and real expenditure in retirement.

The other major use is to get a sense of rising costs in retirement and to plan accordingly?

How to plan to protect against inflation in retirement?

Unfortunately the firt major lesson is that investing all of your income producing assets in cash is unlikely to successfully fight inflation through 20 to 40 years of retirement.  We all need to build in other asset classes that will help fight inflation.  We believe a major component of these assets for Australians are dividending yielding company shares along with carefully structure fixed interest (bond) investments.

If you would like to knowmore about our approach please be in contact.

Posted by: Scott Keefer AT 06:51 pm   |  Permalink   |  Email
Tuesday, October 30 2012
Click on the link to be taken to a PDF version ofthis blog including diagrams

A lot has been written and served up to us through advertising channels about the benefits of the low cost industry super fund network.  At A Clear Direction we think that some industry super funds offer a good option for clients especially with low balance beginning their superannuation savings journey.

However, a major issue I have with the “Big Bucket” investment approach offered by these and other superannuation offerings comes to when you want to start drawing down on the balance to sustain your cost of living and lifestyle in retirement.

By Big Bucket approach I mean whereby you have a range of investment choices which hold a diversified pool of assets and you get to choose one or two of these choices.

The problem comes once you start to draw down.  A few years ago you did not have the choice of targeting where to draw your payments from so you were forced into selling down a percentage of all the asset classes held in the fund.  This thankfully has improved so now a member could have a cash option and draw all payments from there along with a balanced, moderate or conservative diversified option.

So a suggested structure within these big bucket fund is to have a holding of cash alongside a diversified investment option matching your required asset allocation.

This all sounds pretty reasonable.  The problem in the structure is that the investment earnings generated by a particular investment option are not able to be directed back into the cash option to top it up.  Rather they get automatically re-invested back into the investment choice from which they were generated.  The end result is that you quickly see the cash component dwindle.

So what this means is that a member has to manually sell down assets from the diversified balanced, moderate or conservative option to top up the cash account.  What you are doing is selling a range of asset classes.  This includes selling down growth style assets such as shares and property.

If those investments have been steadily growing this is not a problem as we would be undertaking effective rebalancing.  Unfortunately when growth asset markets are struggling, selling down these assets is locking in the losses or poor performance that has occurred.

Take the past 5 years as an example.  We are still well away from seeing shares and listed property assets regaining the levels of late 2007.  If we are forced sellers now we are locking those paper losses into real losses.

In my opinion a much more effective arrangement is to take control of where the income generated by assets is invested and in doing so reducing the need to be forced sellers of assets at a point in time.

Another interesting side issue is to know where administrative fees are being taken from in “Big bucket” accounts.  Most likely it is across the investments proportionately.  Here is another situation when you can become forced sellers when ideally it would be better not to do so.

At A Clear Direction we believe that you can have the benefits of a low cost superannuation service along with the necessary control to make sure you are not forced into making poor investment decisions along the way. 


Posted by: Scott Keefer AT 07:00 am   |  Permalink   |  Email
Wednesday, May 09 2012

In the present political climate it is easy to get caught up in the debate over whether it is the right time for the government to be moving to a fiscal surplus.  Rather than focus on the politics of the Budget, we think it is best to focus onthe practical implications and look at how changes impact on individual financial planning strategies.

The budget has provided a number of significant changes impacting on financial planning strategies.  These have been outlined in this summary.  The major changes include:

  • Deferral of higher concessional contributions cap for individuals aged 50 and over from 1 July 2012
  • Higher tax on concessional contributions for very high income earners from 1 July 2012
  • Mature age worker tax offset (MAWTO) to be phased out from 1 July 2012
  • Increased Medicare levy low income thresholds from 1 July 2011
  • Means testing of net medical expenses tax offset (NMETO) from 1 July 2012
  • FTB Part A increase
  • Family Tax Benefit (FTB) A eligibility from January 2013
  • Supplementary Allowance
  • Schoolkids Bonus
  • Aged care reform from 1 July 2014
  • Accelerated real estate review from 1 July 2012
  • Reduced payment period of Australian Government Payments for people who are temporarily absent from Australia from 1 January 2013
  • Australian residency requirements for the Age Pension from 1 January 2014
  • Removal of the capital gains tax discount for non-residents
  • Changes to tax rates for non-residents
  • Company Loss Carry Back
  • Small Business Immediate Write-Off Extension
  • Previous proposals shelved
    • Reduction of the corporate tax rate to 28%. The corporate tax rate will remain at 30%.
    • Standard tax deduction of $1,000 for work-related expenses and the cost of managing tax affairs.
    • 50% discount for the first $1,000 of interest income.

The following changes announced since last year’s budget have also been confirmed

  • Confirmation of changes to marginal income tax rates & thresholds
  • The minimum draw down relief for superannuation pension holders will be extended next year with minimums being 75% of the original rules and returning to the normal rates from July 1 2013.
  • Changes to co-contribution arrangements
  • Superannuation guarantee rate to progressively rise from 9% to 12%
  • Maximum age limit for the superannuation guarantee to be abolished
  • Low income superannuation boost
  • Allowances & supplements  to reduce the impact of the introduction of a price on carbon

Each of the above items has been addressed in a little more detail our 2012 Budget - Personal Finance Summary.

The key strategy considerations stemming from these changes include:

  • Those in the workforce who are 50 or older to reconsider salary sacrifice strategies to ensure that concessional contributions in excess of $25,000 are not made and how to be prepare to make the most of increased contribution thresholds come July 2014.
  • Those earning more than $300,000 of income to consider whether superannuation contributions need to be lifted to replace the extra tax payable on concessional contributions.
  • Non-residents to take extra care in the disposal of assets with realisable capital gains.
  • Salary sacrifice strategies to be re-assessed under the new marginal tax threshold levels and rates.
  • Personal superannuation contributions in order to access the government co-contribution need to be re-assessed in light of the changed thresholds and rate.
  • Those turning 70 to consider the benefits of the continued superannuation guarantee contributions.
  • Continued consideration of pension payment draw downs if looking to draw only the minimum allowed.
  • Small business owners to consider the timing of discretionary capital purchases.
If you would like to discuss the implications for your personal situation please do not hesitate to be in contact.



Posted by: Scott Keefer AT 12:23 am   |  Permalink   |  Email
Thursday, April 19 2012

I have just sat down to a cup of coffee at Starbucks and began reading through some reports I downloaded over recent months.

I found HSBC’s The Future of Retirement Why family matters report very interesting especially as it looked at surveys conducted with 17,000 people across 17 countries but not Australia.  As I read I pondered whether the findings were relevant to Australian families and quickly came to the conclusion that the vast majority of findings would probably be consistent with responses from Australians.

The key findings for me were:

-       65% of men said that they make all or most of the financial decisions in the house without any input from others, compared to just 53% of women who said that they were the sole decision-maker.  This gender gap is apparent across all age groups.

-       The only area where women are more likely to be the sole decision-maker is in household budgeting. Even here, the gender gap disappears among those in their thirties, with younger men taking a stronger interest in this aspect of financial planning than older men.

-       Significantly, women are far more likely to stop working full-time when they have children (47%), compared to just 1-in-6 (15%) men. The onset of parenthood not only reduces women’s role in the workplace, it also reduces their role in making financial decisions in the home. When looking at financial decision-making, the gender gap is greatest among men and women who have children.

-       A major gender gap exists in financial planning: only 44% of women stated that they had a financial plan in place for their own or their family’s future, compared to 54% of men.

-       Married people plan ahead in greater numbers and experience a smaller gender gap when looking at who exercises financial responsibility – 55% of married women and 62% of married men have made a financial plan.

-       In spite of the changing financial needs throughout people’s lives, 60% of respondents have never sought professional financial advice to help them, relying instead on their own knowledge or that of friends and family.

-       The majority of households have a predominantly risk-averse attitude, and are more likely to forego the benefits of long-term investing in favour of security in the short term. This view is particularly prominent among women especially in Western countries.

-       (Somewhat surprisingly) Only 13% of men and 18% of women thought that investing in stocks and shares was extremely risky.

From their findings, the writers suggest 4 key points of action households can implement to improve future financial well being :

1. Share decision-making. It is important that household financial planning is shared and takes into account the family unit and the potential financial needs of spouses, children and any other dependent relatives.

2. Review financial plans in light of major life events. Financial planning should not be static. Family events like births, deaths and marriages should act as triggers to start or review the family’s financial arrangements.

3. Sense-check decisions with a professional financial adviser. Even where plans are put in place, they will contain gaps. Seeking professional advice can help to identify and plug any gaps that might arise.

4. Take a balanced approach to managing investment risk. Households should balance the need to protect their investments in the short and medium term with the need to generate an adequate retirement income in the long term.

These are pretty common sense steps for households.  If you would like to discuss details further or engage an adviser to work with you on securing your future financial well being please do not hesitate to get in cotact. 


Posted by: Scott Keefer AT 07:00 pm   |  Permalink   |  Email
Thursday, March 08 2012
If you had held cash during the past 4 years of equity market turmoil you would probably be pretty happy with yourself.  Some may even be contemplating staying in cash or at least a lot larger allocations of cash going forward.  Unfortunately just as there are risks when investing in shares, holding cash has its own key risk - preserving purchasing power.  The official cash rate at present is 4.25%.  With inflation running at 3%, probably higher for those in retirement, you can quickly see that cash is not offering much of a return above inflation.

Brad Steiman from the Canadian branch of Dimensional has looked at the tension between two key goals of most investors - Preserving Capital or Preserving Purchasing Power.  He has looked at data spanning back 111 years which is made available though the Dimson Marsh Staunton database.  The key conclusion is that the risks from investing in shares are discernible immediately whereas the risks from investing too much in cash, which is just as great a risk, may only be identified many years later.

Please find Brad's article following.

The Tradeoff: Preserving Capital or Preserving Purchasing Power

Brad Steiman, Northern Exposure

Director and Head of Canadian Financial Advisor Services and Vice President

Click on the following link to listen to a podcast of this article - podcast

Many aspects of life require careful consideration and balancing of the tradeoffs that arise from competing demands. For example, a common lifestyle tradeoff is working longer hours versus spending more time with your family. The competing demands within this decision are the income necessary to provide a suitable quality of life for your family versus the immeasurable benefits of quality time with your family. There is no right answer, but most people understand the tradeoff and attempt to find the balance that is right for them.

Successful investing and financial planning also require balancing tradeoffs. For example, a common investment tradeoff is that of risk and return. One of the competing demands is preservation of capital versus preservation of purchasing power. The former may allow for a better night's sleep during periods of heightened uncertainty and corresponding volatility, but the latter helps ensure you'll have a comfortable bed in the future when accounting for rising prices from inflation. Once again, there is no right answer, no "optimal" solution. Understanding the tradeoffs between preserving capital and preserving purchasing power will help investors find the balance that is right for them. This balance will depend on their definition of risk and attitude towards it.

Some investors may consider risk to be volatility. They have difficulty stomaching the daily ups and downs associated with investing in asset classes that experience significant price fluctuations, such as equities, because declining prices are often accompanied by predominantly negative headlines. Although information will be reflected in prices before one can react to it, this is little solace to investors who extrapolate the recent past into the future and see the bad news as an indicator of what's to come rather than a commentary on what has already happened. These investors yearn for short-term preservation of capital.

Other investors may define risk as a diminishing standard of living. They have long-term financial obligations, such as spending during their retirement years, and their primary goal is building wealth to meet those future expenses. They recognize that, while the cumulative effects of inflation are sometimes glacially slow or even undetectable in real time, inflation can be the silent killer of a financial plan. These investors desire long-term preservation of purchasing power.

Investing is relatively straightforward when the definition of risk and attitude toward it are so black and white. For example, you can virtually guarantee the preservation of capital by investing in the equivalent of Treasury bills as long as you accept the corresponding potential for the loss of purchasing power. On the other hand, you can preserve purchasing power by investing in asset classes with expected returns exceeding inflation, providing you accept price fluctuations that can temporarily impair your capital.

Unfortunately, in practice, investing isn't that simple. Individual investors rarely have black and white objectives or well-defined definitions of and attitudes towards risk. Some expect long-term preservation of purchasing power and short-term preservation of capital. Making matters worse is the tendency for the priority and relative importance of their competing demands to change through time, often in response to what's happened in the recent past.

Investors who succumb to the cycle of fear and greed end up chasing a moving target. Advisors can try to mitigate this destructive behavior by focusing investors on the tradeoffs that were made at the outset when determining their balance between assets that are expected to grow faster than inflation and those that stabilize the portfolio and reduce its fluctuations. So if an investor is now fearful and therefore more focused on capital preservation, it is time to reframe the tradeoffs by emphasizing why growth assets were in the portfolio to begin with and how the so-called "riskless" asset (i.e., bills) can actually be extremely risky in the long run.

For example, Table 1 contains annualized returns from Australia, Canada, the US, and the UK for more than a century. Bills only slightly beat inflation before tax, but this small return advantage can easily disappear on an after-tax basis.1 Nonetheless, the table clearly demonstrates that equities have delivered returns exceeding both bills and inflation by a wide margin, even when accounting for taxes.2

Table 1: Annualized Nominal Returns (1900–2010)





















In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

However, the tradeoff for pursuing higher expected returns of equities is accepting the risk of substantial declines compared to the relative stability of bills. Table 2 shows that equity values in the four markets have dropped from 50–69% over a two- to six-year period, whereas bills have always been flat or better (if you consider minus 2 basis points a rounding error).

Table 2: Worst Performing Periods for Equities and Bills, Nominal Returns (1900–2010)






Total Return


Total Return





















In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

The risk and return relationship from a preservation of capital perspective is apparent in these nominal returns, but the picture is a bit different after considering the impact of inflation. In terms of preserving purchasing power, now the "riskless" asset looks far from risk free.

Table 3 contains the biggest peak-to-trough declines, in real terms, for equities in these four countries over the same time period. It likely comes as no surprise that the magnitude of the real declines is substantial, with stock prices dropping anywhere from 55–71% after inflation. However, the duration of the declines is still relatively short, ranging from two to five years, and it took equity investors in these countries anywhere from three to eleven years to break even.

Table 3: Worst Performing Periods for Equities, Real Returns (1900–2010)


Peak to Trough Decline

Subsequent Recovery



Total Return























In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

In contrast, the data in Table 4 for bills, or the "riskless" asset, in these four countries is revealing. The biggest peak-to-trough declines after inflation now remarkably range from 44–61%, a similar order of magnitude to equities. Furthermore, the duration of the declines extends to a range of seven to forty-one years with investors in bills waiting an astounding seven to forty-eight years to recover!

Table 4: Worst Performing Periods for Bills, Real Returns (1900–2010)


Peak to Trough Decline

Subsequent Recovery



Total Return























In local currency. Dimson Marsh Staunton (DMS) Global Returns Database. Past performance is no guarantee of future results.

Click on the following link to see this data in graphical format - Preserving Capital v Preserving Purchasing Power in Australia.

More than ever, comparisons like these are needed when discussing the tradeoff of preserving capital versus preserving purchasing power. Investors feel the risk of equities in real time. Volatility is immediate and apparent as their portfolio value shows up in the mail every month or on their computer screen every day. Conversely, the risk of investing in bills and other low-volatility assets is less discernible and may take time to detect as it shows up when investors open their wallet at the grocery store or gas station many years later.

Investors may still want to revisit the tradeoffs they made and alter course if appropriate. However, changes to a long-term plan should reflect an informed decision rather than an emotional one. Fear and greed are powerful forces, but we should resist letting them dictate the tradeoffs we make in our lives or in our portfolios.

Many thanks to Marlena Lee for compiling this data from the Dimson Marsh Staunton (DMS) Global Returns Database.

1. Returns in this table are pre-tax, but actual consumption, as represented by inflation, requires after-tax dollars; therefore, if the marginal tax rate on interest income exceeds [1 – (Inflation/Bill Return)], the real return is negative. (e.g., Canada: [1 – (3.0/4.7)] = 36% but the highest marginal tax rate on income is roughly 45%.)

2. The difference in the real return of equities versus bills would increase after taxes in countries where the tax rate on income exceeds the tax rate on dividends and capital gains.

Posted by: Scott Keefer AT 12:45 pm   |  Permalink   |  Email
Tuesday, November 15 2011
The latest edition of the ASFA Retirement Standard has been published today - ASFA Retirement Standard September 2011.  The details show that the costs of living for singles and couple in retirement continue to rise.

The key annual figures are:

Modest lifestyle for a single - $21,957
Comfortable lifestyle for a single - $31,767
Modest lifestyle for a couple - $40,412
Comfortable lifestyle for a couple - $55,316

These figures show that the rate of inflation over the 12 months to the end of September has been between 2.82% (Modest lifestyle for a couple) and 3.96% (Comfortable lifestyle for a single).

These figures provide a useful guide for those preparing for retirement both in terms of absolute income requirements but also the rate of inflation being experienced by retirees.

I don't think that it comes as any surprise that the cost of living for those in retirement tends to be growing at a faster rate than the Australian Bureau of Statistics inflation gauge - the Consumer Price Index.  Over recent periods this gauge has shown that the costs of food and energy (something that retirees spend a large percentage of their income paying) are rising whereas the costs of buying electronics and cars (things that retirees don't tend to spend a lot on) are not rising as much or even falling.

The other potential use of the quarterly report is to provide a budgeting tool to compare your spending against that of the report contained in the Budget Breakdowns.

Well worth a look for those planning for or in the retirement phase of life!!


Posted by: AT 02:26 am   |  Permalink   |  Email
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