MONEY MATTERS

MONEY MATTERS MONDAY 29TH MARCH 2010
By Robert Frogley

Life Isn’t Like A Monopoly Game

Have you ever noticed that older people usually have more money than young people? Not sure why that is, but it’s true. For some reason life doesn’t seem to be like a game of monopoly where everyone gets given the same amount of money at the start.

In real life we all start with zero and have to earn an income as a first priority. Then we have to save some of that income and invest it to build up our savings.

It takes some people years before they even realize that they need to save, that the world doesn’t owe them a living. Older people certainly do have more money. They have had more time and opportunity to save and accumulate assets.

Paying off a home, compulsory super contributions, and voluntary saving and investment plans all help us build our savings. Most people learn something about building assets over the years.

However even those about to retire or already retired often need to learn more about investing and managing money. While working we have a regular income to meet our needs but once we retire we need to understand more about money. Our careers don’t usually teach us financial expertise.

It’s a pity the basics of money management and saving aren’t taught in schools.

The natural tendency of retirees who know little about money matters is simply to keep all their money in bank accounts. Yet if they took the time and effort to learn a little about investing they may feel happy to spread some of their money into other investments where they could earn better returns.

They worry that if they move money outside the bank they could lose it. As always, knowledge can eliminate the fear.

Over the years many bank depositors have been tempted by higher interest rates offered by non-bank borrowers, and ended up losing their money. Often they find they have lent money to property developers who went broke.

This increases the fear of moving outside banks. Yet other investments without returns fixed in advance can provide much better results even though they vary over time. Investments such as property and shares also provide benefits such as inflation protection and tax reduction.

Of course it is important not to put all your money in one area, it’s best to spread money across a range of investments.

For most retirees the main issue is generating enough income to live on. Bank deposits may do that but there are other good options. Allocated pensions are widely used by those with superannuation balances. They pay a fixed monthly income at a level you choose and can vary to suit your needs.

It is best to choose an income that is a balance between spending now and ensuring the capital lasts many years. There are several other issues older people should consider when choosing investments. Maximizing age pension entitlement is important and some investments can help improve eligibility.

Keeping up with inflation is also important. The cost of groceries in the supermarket, and other living costs, will be much more in ten years time than now. Retirees need to grow their capital so it can generate extra income in ten years time to meet those extra living costs.

Therefore investments with growth potential are very valuable. Minimising tax is another key objective for retirees. A dollar saved from the taxman is yours to keep forever, and the interest and growth it can earn.

Allocated pensions pay income that is entirely tax free for those over 60, and greatly tax sheltered for those from ages 55 to 59.

Money in allocated pensions can be invested in any area desired - conservative, fixed interest only, or with a more growth focus. Everyone’s circumstances are different and that means an individual plan must be worked out. Financial planners can help with this process.