I’m Freaking Out Here!

Hi Scott,

As I write this, the Dow Jones has suffered its “biggest fall in history”. They are saying on Sunrise that our market will plummet today. I feel physically ill. I am 62 years old, earn $110,000 a year (I work in logistics for a government department), and am due to retire in three years — or at least that was the plan until today! I feel so stupid. This was the year I was finally going to sort my super, work through the steps in your book, and get on top of it all. But have I left my run too late? What should I do? Help! I’m panicking.

John

Hi John,

Thanks for your email, which brilliantly captured the madness of Monday’s market.

It’s like you wrote it on a plane just as the oxygen masks fell from the ceiling: “Captain Kochie says the market’s plummeting!”

But then after a few scary bumps the pilot’s voice comes over the PA saying “sorry about that, folks, we just hit some unexpected turbulence; everything is back to normal now”.

So adjust your tray table, resume your in-flight viewing, and notice that Kochie has gone back to dancing with the Cash Cow.

Okay, enough with the analogies.Monday saw some brief market turbulence, but there will most certainly be a crash at some stage.

That’s because, historically, the Australian stock market crashes every 10 years or so.The good news is that it’s not too late.

What I’m saying, John, is that you need to harness the fear you were feeling when you wrote me this email on Monday, and make sure you strap on your financial life jacket right now.

Here’s what to do:

First, get rid of any debt you have. Interest rates have never been lower — but that won’t always be the case. The time to get out of debt is right now.

Second, get rid of any dodgy investments you have. They fall into three camps: the ones your brother-in-law talked you into, the ones you’ve borrowed money for that aren’t paying their way, and anything you don’t understand. Ditch ’em.

Third, my advice to anyone over the age of 60 who is preparing to strap on the sandals and socks is to start aggressively building up three to five years of ‘Retirement Mojo’ — a cash buffer of living expenses. (If you think you’ll get a pension or part-pension, that’ll reduce the amount you’ll need to save to reach your buffer.)

Better yet, put it on autopilot — contact your super fund and request that all future super contributions go to a cash and fixed interest investment option.

Why would you do this?Well, my old finance professor called it ‘sequencing risk’ — which is a fancy way of saying that a market crash in the final years leading up to your retirement has a significant impact on the future income you can generate from your nest-egg.

I learned this first hand in 2008 when I saw many retirees watch in horror as their super got smashed. What did they do? They sold out at the market bottom … and locked in their losses.

Think of last Monday as a test-run, John. When the real crash comes, you want to be able to say yourself: “That’s Day 1 — it’s a good thing I have 1,825 days (five years) of living expenses set aside to ride this sucker out.”

That way you won’t end up having to rely on the Sunrise Cash Cow!

Scott