The Plain Man's Guide to Financial Security
first published 3 Nov 2011
Or how to travel life's pathway with a fair hope of contentment along the way.
As an engineer I had to learn a bit about money - cost-benefit analysis and how to get funds approved for a project. After many years as I approached retirement I began to attend my employer's occasional retirement planning seminars, and picked up some ideas that struck me as "obviously" true though I had never thought of them. When I was made redundant and accelerated into retirement I needed to get practical about the ideas and information and do something to provide a retirement income. My experiences, mixed well with the Biblical values I have long held as a Christian, I put together for a presentation at a men's breakfast in 2011, and here it is again with some expansions and references. Hopefully it will be of use to someone!
I'm an engineer, so I tend to approximate and simplify. As another engineer put it, I'm hyper-simplifying here. The principles here are true, I believe, but applying them is not always easy. I'm not an economist, nor an investment advisor, and any decisions you make must remain your own responsibility. If in doubt, get some professional advise, or do your own research.
- If what I have to say seems trivially obvious, then you probably don't need to read this at all.
- If they are utterly new ("I never thought of that!" stuff) then very definitely you should read this, and probably pay for some professional advice before you decide anything.
- If you are in between, fine, just be careful, and remember, generalisations such as the ones that follow are just that - your circumstances will almost certainly have some specific issues of their own that may make applying these simple principles not quite so easy. "To every complex problem there is a simple answer, and its (nearly) always wrong!"
Three Things ...
- Three things is always an easy and short list to remember, but I am cheating just a little, because....
- actually, its 3 things
- another 3 things!
- 3 principles that shape our thinking about money, and
- 3 principles that shape our handling of money.
Firstly, 3 principles that shape our thinking about money
- Bags with holes
- Being rich isn't wrong
- Better to give than get
1. Bags with Holes
- You can't count on keeping it here. Any bag you try to keep your wealth in will sooner or later develop a big hole. Share markets crash, property values can fall, banks can fail, governments fail, and gold buried in the back yard isn't safer either.
- You can't take it with you (and it wouldn't be any use if you could)
- It can't make you happy
- Someone else will get it when you're gone.
"Really! It won't make me happy? I'd sure like to try!"
- This young man did not find it so. "He went away sad, because he had great wealth." Mark's Gospel, 10:22 NIV. He came to Jesus asking how he might gain eternal life, a better life. Jesus saw in his heart his great love of his wealth, and said "one thing you lack - sell all you have and give it to the poor, and follow me, and you will have treasure in heaven".
- He needs a better treasure, which won't fail
- "But store up for yourselves treasures in heaven, where moths and vermin do not destroy, and where thieves do not break in and steal.
- For where your treasure is, there your heart will be also." Matthew 6:20-21 NIV
2. Being rich isn't wrong
- "For the love of money is the root of all kinds of evil." 1 Timothy 6:10
- NOT money as such! We are flesh and blood, physical creatures, not disembodied spirits. We need food and shelter, and money is the means of obtaining them. God knows this well - of course He does, for He made us. It is the over-mastering love of money that turns to evil, not the money itself.
- Jesus had many poor followers, AND many rich. Nicodemus was a member of the ruling council, Levi was a tax-agent for the Roman occupation forces, Joseph of Arimethea was wealthy man, as were Barnabas, Philemon and Lydia.
- Only the young man was told to sell everything and give it to the poor. It was not a general command to all.
- Money need not = guilt.
3. Better to give than to get
- "Whoever sows sparingly will reap sparingly,
- And whoever sows generously will reap generously...
- For God loves a cheerful giver" 2 Cor. 9:6-7
- "Command (the rich) to be generous & willing to share" 1 Timothy 6:18
- this is a command to all who are relatively wealthy, as most of us are here in Australia. Since we cannot take it with us, we cannot really own our wealth - we must confess we are only stewards, custodians for a time, and will have to give an account to Him who owns everything.
- Give wisely
- Start now - "...their extreme poverty welled up in rich generosity." 2 Cor. 8:2 - Don't wait until you can "afford" it. The widow Jesus saw gave but 5 cents worth, but it was more in His eyes than bags of gold that the rich hardly noticed giving.
- 2 coats gives 1 coat to no coat (Luke 3:11) John the Baptist told people to do this. A young Scottish missionary named Jock Purves lived in Baltistan (in "Lesser Tibet") in the mid 1920s. The people of that high country (3000m up between the Karakoram and Himalayan mount ranges) were very poor, storing even the husks of their apricot seeds for winter fuel. No one could go in or out in winter because the only passes were blocked with snow. Jock and his companion did all they could to help the poor, and to tell them of Jesus who came to share their poverty to make all men rich with God. One day a man came to Jock and demanded a coat - "I've heard you say in your Book that he who has two coats should give one away. You've got two coats, I've seen them. Give one to me!" But Jock knew his Bible well; "Ah", he said, "it says let him who has two coats give one to him who has none!", and the man beat a retreat. I have no doubt that Jock's second coat went to clothe someone in rags. Certainly his pajamas had before the winter was out! ("The Unlisted Legion", by Jock Purves)
- No guarantee of treasure here, but hereafter. In WW2, in Nazi occupied Holland, old Mr Ten Boom and his two adult daughters gave of their home and money to hide Jewish people and get them out of the country to safety. Finally they were betrayed and sent to prison camps, where Ten Boom and one of his daughters died under the cruel treatment. Only Corrie survived. The Ten Booms looked more for treasure in heaven than on earth.
- John Wesley - "Earn all you can, Save all you can, Give all you can."
3 principles that shape our handling of money
- Big $$$ = Big Risk
- Eggs can teach us
- Early birds
1. Big $$$ = Big Risk
- "The potential reward is proportional to the risk involved"
- If the possible return is high, SO IS THE RISK!
- If low, so is the risk
- if someone tells you "This is guaranteed to give you a 20% return each year" grab your wallet and run!
- CASH assets (eg, bonds and bank accounts) are low risk and low return (eg, about 2-3% above inflation)
- EQUITIES (shares and property) are high risk and high return (if the moon is in the right place and the wind blows from the east and you keep your fingers crossed!)
- If you don't have time (eg, close to retirement) you can't afford RISK - go for mostly CASH investments
- If you have time (many years till retirement, or enough invested to give you a fair income for many years of retirement), mixing in some EQUITIES makes senses. You have the time to wait for a fallen equities market to recover; you only lose if you sell them at rock bottom prices.
2. Eggs can teach us
- Don't put ALL your eggs in one basket
- Especially not a RISKY basket!
- Property, FACT or FANTASY?
- "Isn't it a foundational law of the Universe that house prices always go up?" - see [Do house prices always go up?]
Property, FACT or FANTASY?
- Do house prices always go up?
- "Isn't it a foundational law of the Universe?"
- Herengracht says "NO!"
- Herengracht is Amsterdam's premium canal-side business district
- Property price records go back to 1628AD, and it has always been a popular district
- How has it fared over nearly 400 years?
- In real terms (ie, corrected for inflation) house prices only doubled over 380 years
- based on a starting price at about the time the canal was built and the district came into being
- That's a 0.1% average annual return!
- if you take the 1660 price as a base, the property values haven't change at all! That's 0% return. Not so wonderful after all!
- of course, if you bought in 1720 and sold just before the peak in 1736 you did double your money. However, the chances are that if you believed the "house prices always go up" myth, you would not have sold in 1736; after all, another 16 years and the price will have trebled or quadrupled, wouldn't it? (if you still think so, have another look at the graph.
- Notice the Cliffs!
A Turkey Parable
- "Those nice humans have looked after me very well all my life!" The best of food and care all 1000 days so far.
- "So they will look after me the rest of my life too."
- The future is NOT necessarily the same as the past! Day 1001 brings a surprise!
- (adapted from "The Black Swan", by Nassim Nicholas Taleb, published by Penguin)
3. Early Birds (not the same as turkeys!)
- Start early, even if it is a little
- Compound interest is your great friend - in the same way it works against the person with a large, long-term mortgage, it works wonderfully for the investor.
- Few get rich quickly! Many get poor quickly.
- Remember rules 1 and 2! (Risk and Eggs, and if somethings sounds too good to be true, IT IS)
Final Bits and Pieces
- Superannuation is your friend
- It is a tax-sheltered long-term investment (at least it is in Australia)
- Don't count on a government retirement pension in years to come (it will have gone to support all those baby boomers!)
- Choose your level of risk - most Superannuation funds allow this
- "Do I need a Financial Planner?"
- vexed question this!
- some people don't have the time or knowledge to make successful investment decisions alone. One advisor told me she has customers who say "we don't know anything about investing and don't want to - just tell us what to do!". for them a few thousand dollars a year is probably money well spent.
- on the other hand, at least in Australia, nearly all financial planners/advisors are not very independent. Most are linked to banks, life assurance companies or other financial institutions, and are likely to offer products from that institution, and from which they get some income. This is not totally negative, as good information cost money, and the big institutions have the staff and expertise to gather good info for their advisors to use. Still, the prospect of conflict of interest is still there. Be aware and be warned. This article is useful http://www.superguide.com.au/the-soapbox/exclusive-only-7-truly-independent-financial-advisers-in-australia
- if my 3+3 principles above are absolutely new to you, you probably need some help.
- if they seem trivial, kindergarten stuff, to you, you may not need professional advice.
- if your assets are complicated (eg, investment properties, lots of shares) you might need some good professional help.
- Have a good look at Retirement Income Streams offered by Super funds, when the time comes. In Australia they provide an excellent low or no tax income stream in retirement, provided the money is sourced from a superannuation nest-egg.
What I did
- got all the cheap and independent advice I could, to build on my general knowledge of finances gained during my working life (see links in the References below)
- got some cheap and independent advice on super funds and retirement income streams (see links in the References below)
- selected an "industry" super fund instead of one of the retail funds. Industry funds came about when compulsory employer funded superannuation came in some years ago, and were for specific industries, eg, health workers or construction workers. Most have since opened up to the general public. They typically have very low fees, and are for benefit of the members only.
- The "White Toyota Camry" of the industry funds - FirstState Super
- not expensive
- but not very exciting!!! (some us don't want financial excitement)
- Retirement Income Stream account
- Fees < 0.5% p.a.
- 50% Cash, 50% Equities (but may move to 75/25 soon)
- Regular income, & I pay no tax, being over 60
- Partial aged pension and Health Card when I turn 65
- I can withdraw a lump sum any time.
Here's the original slideshow in web page format
Here's the MP3 audio file of the original presentation
- [Superguide (http://www.superguide.com.au] an independent site specialising in superannuation information in Australia. Very useful.
- the book, "Superannuation: Planning Your Retirement for Dummies" by Trish Power is very helpful; well worth the modest price. She is the owner of superguide.com.au and has a wealth of experience in the superannuation sector in Australia. Note: this book is tailored for the Australian superannuation market.
- [Superratings (http://www.superratings.com.au/] does comparative reviews and ratings of all the significant superannuation funds in Australia, and provides general financial news articles and advice.
- [SuperSavvy (http://www.supersavvy.com.au/] this is a paid service ($80 per year) provided by Superratings.com.au. This gave me access to concise comparative reports on all the funds, and allowed me to filter out the few that looked most useful, then compare them in detail. The also provide a basic financial advice service for about $250, assessing your assets and level of risk-aversion, and making a recommendation. It was a small sum well spent.
- [Chant West (http://www.chantwest.com.au/] also provide a good fund comparison service
- [Australian Government Moneysmart website (http://www.moneysmart.gov.au/]
This page http://tardus.net/plainGuideFinancialSecurity.html
published: 24 November 2011
Contact me, "Tardus"
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