The Ticking Time-Bomb in Your Super Fund

I’ve never told you this before.

If you think you’re close to ‘kicking the bucket’ (well, 55 and over), you need to read this. And if you have someone in your life who’s in the bucket-kicking zone, you should share this column with them -- because it will save them a lot of heartache, stress and money.

I’m going to explain how the average retiree in this country gets screwed over by their super fund when they retire. And I’ll show you the simplest way to safeguard your savings when you retire.

Let’s begin.

One of the bravest things I’ve done in my adult life was to take my bride to the pub in the weeks leading up to our wedding day. Once seated, I scribbled our lifetime financial plan on the back of a serviette.It consisted of me drawing three buckets:

Blow Bucket: all our living expenses, including house repayments (this bucket has a hole in it).

Mojo Bucket: three months of living expenses (this bucket gives you a feeling of safety and security).

Grow Bucket: superannuation, investment properties and shares (this bucket makes you wealthy).

And then I drew a tap above the buckets, which represented our income that we could pour into the three buckets.

The reason my three-bucket strategy is so powerful is that it’s so simple. It keeps you on the same page financially throughout your marriage. However, after talking to hundreds of Barefooters (and my parents), I’ve discovered that it can fall apart when you retire -- when you turn off the tap.

Kicking the Bucket

The big mistake most people make is putting all their money into the one bucket when they retire -- super. In most cases, your super fund will automatically invest your life savings into what they call their ‘balanced option’.

Question: What does ‘balanced’ mean?A good guess might be that riskier assets like shares would be balanced out by safer assets like cash and fixed interest.

Wrong.

The average Aussie super fund has more money invested in shares than in almost any other country in the world, according to a study by financial outfit Mercer. It varies from fund to fund, but right now your balanced fund could have as much as 70 percent of your money invested in shares.

Of course, over the long term, shares outperform every other asset class, so having a default fund chock-full of stocks is a very good thing if you’re a young Playboy Bunny … but not so good if you’re old Hugh Hefner.

As the big Texan, Dr Phil, would say, “how’s that work’n for ya?”Great … at the moment.

“The average super fund has delivered 9.5 per cent over the last seven years”, a press release from SuperRatings says.

Hang on, why are they only talking about seven years of returns?

BECAUSE THEY DON’T WANT TO TALK ABOUT WHAT HAPPENED IN THE GFC.

So let’s talk about the GFC, and the heart palpitations and wealth destruction it caused retirees who had all their savings tied up in the one very unbalanced bucket.Here’s another question for you:

Guess which country suffered the biggest losses on retirement savings during the GFC?Iceland.

Guess who was the second biggest loser?

Australia.

Yes, the Organisation for Economic Co-operation and Development (OECD) found that our superannuation funds lost a larger share of their members’ funds than any other pension system in the world -- with the exception of Iceland.

But let’s not be too cocky. There’s no glory in beating Iceland for the wooden spoon. Seriously, even being put in the same sentence as Iceland is embarrassing: relative to its population, this fishing village masquerading as a country suffered the single largest banking collapse in history, which left it in a severe economic depression.

So the $64 billion question is, how can Aussie retirees like you avoid this happening when (not ‘if’) the next GFC happens?

Answer: Go back to the buckets.

The Three-Bucket Retirement Solution

Take your partner to your local (and take advantage of $5 pensioner parma night).

Grab a serviette and draw the three buckets, and explain that this is how you’re going to safeguard your savings as a couple throughout our retirement. Like Goldilocks, it’ll ensure you don’t take on too much or too little risk, but get it just right.

The ‘Blow’ bucket is still where you draw your day-to-day expenses, and that should be in cash.

Your ‘Mojo’ bucket is where you get your safety and security. Throughout your working life, it should sit at three months of living expenses. When you retire, you should boost your Mojo bucket to three to five years of living expenses (factoring in any age pension you receive).

If you’re a Collingwood supporter, you’re probably quite comfortable with losing, so you may only need three years of living expenses. If you’re a nervous type, shoot for five years of living expenses.

Here’s the thing: knowing that you have three to five years of money socked away is going to save you from a lot of sleepless nights when the markets get rocky. The last thing you want to do is watch your investments crash, panic, and sell them all at the bottom of the market -- just because you’ve got no cash to live on. It’ll buy you time to ride out the storm, when your shares will rebound.And remember, be conservative with your Mojo -- a nice balance of cash and fixed interest (even though interest rates are low). With Mojo, we’re chasing a different type of return: peace of mind.

Your ‘Grow’ bucket is where the remainder of your money should be invested. Specifically, it should be invested it in good-quality, dividend-paying shares (or share funds) within your super. And, most importantly, you want to direct the dividends from your Grow bucket to automatically flow into your Mojo bucket -- so you’re always automatically replenishing your Mojo.

In retirement, with your income tap turned off, your biggest risk is that you’ll outlive your savings. You need to stay ahead of the rising cost of living, and historically the safest way to do that is by investing long term in the share market (Grow) while still protecting yourself (Mojo).

Right now, the GFC is a distant memory.

Right now, the US market is on the second longest upswing in stock market history.

That’s why the time to set up your retirement buckets is right now.

Tread Your Own Path!