by Ben Kemp.
Unfortunately, boring is beneficial and especially in times of uncertainty and uncontrollability.
While often clients attend an initial consultation wanting to make their early retirement or financial freedom a reality, it often needs to be peeled back and an assessment of protection and safety completed first. Before taking on any additional risks, we need to be ensured we are able to make ends meet through a range of unlikely, but dangerous scenarios.
COVID19 gives a face and a name to these “crisis” that we often float with clients. The reality that your employment could cease over night or at the least be cut back significantly in earnings is now facing many of our fellow Australian’s.
So what do we do to manage these scenarios? Well, we have a range of options available and while some might not be very ground-breaking, they are often undervalued and underutilised.
Might sound simplistic, but a concerning amount of individuals, couples, households, do not have much (if any!) cash (money in the bank) available to access to times of need. This ideal figure is different for everyone and can also change over time. The balance between making your money work for you and having sufficient safety buffers is a tough balance to strike, and can take some time to work out. But, what I do know is that access to liquid funds in times of need can buy you significant comfort and time to decide on larger scale or on-going changes.
Personal insurance, such as Income Protection. In those events where due to illness you are unable to work for an extended period. This is not the panacea, it is simply another important function to have in place.
Access to equity
For many of us, we are fortunate to own a home (or a portion of one with the bank owning the rest!). In recent years, property prices have been strong and naturally people have benefited by equity being created in their home. This is often an option to access for investment, but it can also provide a simple safety net. In an ideal world, we don’t want to be drawing down from debt to fund costs of living, but if we are going to do this, doing it home loan rates rather than credit card rates is important. The establishment of a facility will likely cost you little or nothing, but can provide an effective fall back method in times of need.
Investing is crucial to boost the ability to meet personal goals such as early retirement. With investing, we preach the importance to have liquidity. Cutting through the jargon, we want some investments we can access quickly if required! The trap of putting all of your eggs into the investment basket has caught many out in the past, and instead of having a small portion of investments they can redeem to see them through they have been required to sell an entire asset instead. Think of this like being forced into selling an investment property because of a short term impact on your cashflow, rather than redeeming a portion of an investment portfolio or calling on safety reserves to see you through and retaining the asset at risk.
Super/Pension Investment Mix
For those clients in the phase of life where they are drawing down an income from super to partially or fully meet their income needs, they need to ensure they run this portfolio like a household budget. Generate income, draw this down for living, but also ensure there is a safety net or a rainy day fund built in, to allow for adhoc unforeseen lump sum draw downs.
Everyone’s situation is different and that is why it is important to apply the above, plus other options to meet your protective needs.
A lot of prospective clients come in expecting risk and return, when it all starts with protection. Once we have protective mechanisms in place, then we can explore our risk and return capacity!
This blog contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, AMP and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investment. Please contact us if you want more information.
PB Financial Solutions Pty Ltd – trading as Burke Britton Financial Partners & Securelife Financial Solutions ABN 67 097 381 523 is an authorised representative and credit representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee.