Whether you’re retired, and living on your savings, or still working and saving for retirement, read on.
The key to your financial security and well-being is investment INCOME. Investment INCOME, not capital gains.
So, it follows that you need to ensure your funds are invested to generate the optimal level of reliable, continuing investment INCOME.
In regard to capital gains, unless these are MASSIVE - say 10 to 15% per year, and can be relied upon to remain so, year in year out - you can’t realise on them without jeopardising (selling off) the very source of your income.
In other words, to benefit from capital gains, you have to part with your capital!
Superannuation funds report their investment returns in terms of ‘growth’; that is, how much the amount of your funds has increased (or decreased) over the reporting period - normally the financial year, July to June.
This means the “returns” may include capital growth (or contraction) and investment Income.
Bear in mind they don’t tell you how much capital growth, nor how much investment income, but give you a consolidated figure.
This used to seem OK - even irrelevant - when we had high inflation, and share-prices and property were rising in value year after year. But today inflation is only 2%pa, share-prices are still 35% below their 2007 levels, and property prices remain equally subdued.
Also, lets bear in mind that even the ‘massive’ gains were illusory - they were eroded by inflation! What mattered then (though we didn’t appreciate it), and what matters now, is Investment Income! Not capital gains. Investment Income.
So, if we are to rely on investment Income for our present and future security, where do we find the highest levels, the most consistent source, the greatest likelihood of increasing income?
Here’s what the banks are paying – December 2012
|Bank Savings account||0.5 - 3% pa (variable)|
|Term Deposits (eg. NAB, 12 months)||4.45% pa|
|ING Direct||3.5% pa (variable)|
|Ubank||4.21% pa (variable)|
|BankWest CMT||3.25% pa (variable)|
Residential rental property is yielding between 3 and 5%pa (gross)
Australian Industrial shares (previous 12 months’ gross dividend –: 26/11/12 prices), typically present in Superannuation share-funds
So choose wisely; the consequences of an unwise choice can be disastrous. To illustrate:
- $300,000 in a 4.45%pa term deposit will give you $256.73 per week pension (but never increasing, unless interest rates change).
- $300,000 earning 6% dividend income will give you $346 per week (with every prospect of increasing year by year).
- $100 per week, invested at 3.5%per year for 40 years will give $507 per week pension.
- $100 per week invested at 6% per year for 40 years will give $928 per week pension.
The Reality Dividends of typical Australian ‘blue chip’ companies have increased 2.8 fold over the past 15 years.
Has your income?