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Warning: big promise = big risk

Retirement planning should be a piece of cake, but it isn't - the collapse of Fincorp, which was a big radio advertiser, demonstrates how hard building up a retirement nest egg really is.
The fingers crossed approach
The problem starts with procrastination with many of us starting late. Secondly, we've failed to plan and therefore we keep our fingers crossed that our overall assets minus our debts will be enough to retire on comfortably.
The awakening years
By the time many people get serious, they are in their 40s or 50s and have to turbo charge their super or equivalent assets, and then they take risks. This involves going into investments, schemes or so-called assets, which can be a trap for inexperienced players.
In for the punt
Consider those who have been caught in the Fincorp demise and even the Westpoint collapse before that. In both cases the investors, who were really punters but didn't know it, were rolling the dice on ordinary investments. Why? The promised price offered by financial planners was attractive and there was talk of security, capital guarantees and anything else to fool novices!
Gamblers beware!
By the way, have a look at broadsheet newspapers and you'll see companies still promising to pay 8, 9 or even 10% and they have great sounding safe names, but we don't know how safe they are.
Where are the safe guards?
It isn't clear what they're investing in and how sound they are. Mind you I don't think they want to go broke, but the safeguards aren't there to minimise it.
Why 9.5%?
My quick survey of fixed interest deposits for $100,000 over a year revealed CBA was giving 6.5% and was one of the best. Gateway Credit Union was offering 6.6% but personally I don't know much about them. For debentures, Esanda was 6.5% and a mob called St Andrew was promising 9.5% but I've never heard of them!
Desperate people can do desperate things
You have to do your homework when you play ball with unknown brands paying really good rates of return, but people who are behind in the retirement planning stakes get desperate and this can lead to mistakes.
How much do I need in retirement?
I'm often asked, "How much do I need to retire with?" My answer is: what do you want to spend each year when you retire? That means working out your current spending and taking out things like home loan repayments, as these can often be knocked out using super or other windfalls.
I want an annual overseas trip .
All of our clients tell us they want an overseas holiday each year. I'm thinking about opening a travel agency to cash in on the business from retiring baby boomers carrying a travel bug!
Doing the retirement numbers
If you need $75,000 a year then you'll need about $1 million in super, as the safe annual average return is about 7.5%. If you want more or less you should push up or pull down your super target.
But what if you're aged 45 on $150,000 at work with $180,000 in super? You will have $705,000 by age 65 from your compulsory super, if you are an employee. This will give a pension of $53,000 based on 7.5% return and the super industry experts regard this as a comfortable retirement figure.
If you add $500 a month now via salary sacrifice you can push your final figure to $857,000 and enjoy a more comfortable retirement.
What good financial planners advise
Good financial planners would have warned you about the likes of Fincorp and I reckon a safe superannuation fund or even 10 solid shares in 10 great Aussie companies is less risky than punting on unknown companies bearing high interest rate gifts.
Warning: danger lurks

Careful retirement planning by trustworthy financial planners is the safest way to a comfortable retirement. Doing something more than bank deposits doesn't have to be risky, but investing without knowledge is living dangerously and often ends in tears. 

Published on: Sunday, April 01, 2007

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