There's more than numbers to crunch with investing
AN UNDERSTANDING of numbers is important when making financial decisions. But sometimes other factors can become more important.
"Mary” wrote to tell me she was single, aged 70, and on the full pension. Her major asset was $80,000 in her superannuation fund which was paying her a monthly income.
She wanted to know whether she should just cash it in.
My natural response was that she could cash her super in. As I saw it, the only purpose of having money in super if you are a retiree is to save tax.
By cashing in her super tax-free, she could save ongoing fees and be free of the death tax that might be incurred by her beneficiaries when she died.
Her response was, "That sounds fine, but what am I going to do with the money? The banks are paying less than 2 per cent”.
Her superannuation statement showed the fund, after fees, had been paying her 6-8 per cent a year.
And then it dawned on me that this was not as simple an issue as I had first thought.
The only way for Mary to get better returns would be to invest in a range of managed funds that were heavily invested in the share market. But she was totally inexperienced in do-it-yourself investing, which meant she would need to get advice that would cost her at least $3000.
So I closed our email exchange by telling Mary she was probably better off to leave her finances be.
She could relax and enjoy the monthly income, the fact that her money was being professionally managed, and still be able to make withdrawals at call whenever she needed money.
If Mary had withdrawn the money and placed it in the bank, she faced the danger of making unwise investments, or just of frittering the money away because it felt more easily accessible.
Despite efforts over the years to improve Australians' financial literacy, in reality most people are still better off having their money managed for them. Investing becomes more challenging and diversified year by year.
The Catch 22 is that even though most people derive real and tangible benefits from receiving and following great financial advice, in some cases it is simply not a practical way forward.