Thrift is back in vogue
3 Jun 2009 SYDNEY MORNING HERALD - LUCINDA SCHMIDT
The global financial crisis has taken its toll on retirement savings and job security. Lucinda Schmidt looks at some of the survival strategies people are using to cope. Patrick Gallagher's eyes are shining with excitement. He's just been made redundant and can't wait to start up his own business in online sports and entertainment marketing."It's time to have a fair-dinkum crack at what I really want to do," says Gallagher, 28, who worked as a business development manager for an online major-events marketer until May.He received a payout of about $6500, which he used to pay two months' rent on his house in Melbourne and to get ahead on his car payments. Other than that, nothing much has changed for him.Gallagher hasn't scaled back his spending or stashed away any money for a rainy day. "I've never been a worrier," he says. "I've always lived for today."But he's the first to admit that being young, with no mortgage, no children and less than $1000 on his credit card, puts him in an enviable position to weather the global financial crisis.Others have had to drastically alter their financial habits. And financial planners say they are spending a lot of time counselling clients through the crisis.Penelope Joye, a Sydney senior adviser with Shadforth Financial Group, says most of her clients are calm but some are emotional about the plunge in their superannuation balances.She tells them super is long-term and the cash rate will outperform equities only for a short period. She is also ensuring clients' asset allocation matches their risk tolerance."The vast majority of my clients have been through a recession before," Joye says. "And those who haven't are younger and have more time to rebuild their super balances."She is seeing more questioning by clients about whether they are in the right super fund and whether any active share-fund managers are earning their fees by outperforming the market.Another trend is for increased income protection and life insurance."What I think they're doing is taking things seriously prudent is the word I'd use," Joye says. Several clients who are close to retirement age have decided to work another year to boost their super.The other trend she is seeing is clients, especially retirees, scrutinising their budgets. Many are eating out less or going to cheaper restaurants and some have delayed overseas holidays.One of Joye's clients, Warwick Jones*, 66, says he and his wife have had to cut their spending after their super fell from $1.2 million when Jones retired in January 2008 to $700,000.When Jones first retired, the interest and dividend income generated by his super fund with 48 per cent invested in equities more than covered what the couple drew down."I'm not prepared to cut into the capital, when I've lost 45 per cent," he says. That means he and his wife have to adjust their lifestyle to reduce their $48,000 annual drawings."It's little things that you've got to cut back on," he says, estimating that they've reduced spending by about 15 per cent. "We've just got to watch it."For the past couple of months, they have been shopping at Aldi, which saves about $30 a week. They have stopped going to the movies or eating out and buy $12 wine instead of $18 bottles.They are also delaying expenditure on recarpeting their home in Sydney and replacing their pergola and have put off a trip to Europe."I think it will take a couple of years before we see improvement," Jones says. "If I'd had any inkling this would happen, I would have stayed at work."At 50 and still working, Tony Carmusciano is reasonably calm about the global financial crisis, although he is cautious about future interest rate movements and property prices.Last year, he stopped salary sacrificing and bought three investment properties, one in Melbourne and two in Queensland."I wanted to take advantage of the drop in house prices and rates," says Carmusciano, who works as a general insurance broker in Melbourne. "Bricks and mortar is a lot safer."Now, I just hope that interest rates don't go through the roof or residential property prices go through the floor."Servicing the three mortgages requires him to stay employed and he realises that no one's job is safe."My clients are looking at all their costs, including insurance, and some are trying to reduce their level of cover or not insure at all," he says. "So there is always the possibility [his employer] will retrench people if earnings drop."He and his partner, Stefanie, have reduced their spending on consumer items such as clothes, shoes and bags and hold off buying most things until there is a sale. They also spend less on eating out. "It does make you tighten the purse strings at home and think about what you really need to spend."Scott Haywood, a financial adviser with Haywood Financial Management in Melbourne (licensed through AXA Financial Planning), says he's spent a lot of time over the past eight months persuading clients not to switch everything into cash."Some people are very frustrated and disillusioned by super," he says. "There's certainly been some people who are quite agitated. But history tells us markets will recover and if you switch to cash there's no upside."Instead, Haywood has been putting some clients into a capital-protected balanced fund and advising clients to continue salary sacrificing into super.Other clients have talked to him about strategies to retain their jobs, or what to do when made redundant. More than a dozen of his clients have lost their jobs. Haywood helps them prepare a detailed budget and, in some cases, convinces them to accept a job that pays far less."Some of my clients were middle managers on $150,000 salaries but when the going got tough it was hard to justify what they did," he says. "I tell them: 'The market's changed the world's changed."'He says most of his clients are cutting their spending.Louise Biti, a director of Sydney consultancy Strategy Steps, says people are starting to worry more.She provides advice to financial planners and the feedback is their clients are finding things more difficult."For the first year they were pretty calm and didn't make a lot of changes to their portfolio," she says. "The attitude was: 'We know we need to sit through this and everything will come good.'"But as this has gone on, and there is still so much uncertainty, some people are starting to question whether they have the courage to continue to just stay put [in their current investments]."She says some planners are starting to lose clients, or face heavy questioning about the value of their advice.Biti, who set up Strategy Steps a year ago, says she had to look at her own cash flow when she moved from being an employee to a business owner. She started by going through her insurance switching car insurers for more cover at half the premium cost and cutting $50 a month from her private health insurance premium by switching to a different product with the same company. Her next step will be to change to a $500 excess, so her premium is further reduced.She also changed her credit card and cancelled a small insurance policy she didn't need. She then reviewed the fees on her bank accounts and was told she could have an almost identical product with the same account number for a fee one-third that of her old account. Biti estimates theses changes have saved her $300-$400 a month."Now is a great time to go through all these expenses and have a good spring clean," she says. "It's amazing how much money you can throw away without thinking about it."Apart from her cash flow spring clean, Biti, aged in her mid-40s, says she has not altered her own investment strategies. "In hindsight, a lot of us wish we'd switched to cash 18 months ago but we didn't. So we have to have faith that markets will pick up."For many small-business owners such as Ash Hunter, 33, the worst part of the crisis has been laying off employees.Hunter, the chief executive of Melbourne publishing and investment group Hunter Five, retrenched five staff in April, the first time he has had to do so in 11 years.He's also had to adjust to his business changing from a rapid-growth phase, with annual double-digit revenue growth for almost 10 years, to what he calls a "maintenance phase".In January, Hunter began a project to save $1 million in costs. Measures include trying to book cheaper airfares, using lastminute.com for hotel bookings and using landlines rather than mobiles.Another change has been a jump in his work hours from about 60 hours a week to at least 80, as he works on strategies to refocus the business. But Hunter refuses to be negative."There's a real challenge with consumer confidence over the next six months," he says. "But the world doesn't stop with a downturn. We'll be in a much stronger position when confidence does return, instead of cutting and slashing."As for his personal finances, Hunter says he sold his shares about 18 months ago, paid off some of his home loan and reinvested the rest in the business. "People at the time told me I was a twit," he says. "But I didn't understand what was going on in the market. And if I don't understand it I don't do it."His self-managed super fund is invested in property and cash only, with no shares. "This downturn provides some amazing opportunities," he says. "Idon't pretend I'm happy with what's happening, but I'm also very positive that things will improve."*Not his real nameMAKE ENDS MEETScott Haywood, of Haywood Financial Management, says:* Do a budget. Review non-essential items such as travel and dining out. Review your credit card statements and look for opportunities to make savings.* Save money around the house. For example, switch appliances off at thewall.* Review your transport budget. For example, look for a cheap petrol station, walk or cycle instead of driving and pump up tyres to reduce fuel consumption.* Be patient. Markets and investments move in cycles.Penelope Joye, of Shadforth Financial Group, says:* Have some money set aside in an emergency fund.* Review expenditure.* Review your insurance policies to make sure you are covered appropriately.* Maximise super contributions.* Re-evaluate investments.* If you qualify, take advantage of new rules halving the minimum pension payment that must be withdrawn from an allocated pension in 2009-10.EMERGENCY MONEYPenelope Joye, a senior financial adviser with Shadforth Financial Group, says everyone should have some cash set aside for emergencies - even in boom times.But the global financial crisis makes it even more important, as more people are being retrenched and it's becoming harder for many people to find new jobs quickly. The old days of riding out cash flow problems with more debt are well and truly over.How much should I set aside? This depends on many factors, including whether you have debts such as a home mortgage, whether you have dependents, whether you have a working spouse or other sources of cash and what spending you see asessential.Joye says that, at a minimum, this amount should cover three months' worth of expenses. But if you are in a specialised field of employment or if you know there is very little recruitment going on in your industry and it will probably take you longer to find a job, then you should provision for longer.How do I calculate it? Go through credit card bills and bank statements to track your spending. Joye warns not to forget those lumpy items like house and contents insurance, car registration or private school fees that may happen once yearly.You should pro rata these amounts, she says, then add up how much you spend in a month on what you believe are essentials. "Use an Excel budget tracker to track expenses, so you have a good grip on weekly and monthly expenditure on essential items as well as 'fixed' expenses," Joye suggests.Where should I put my emergency money? There are much better places to stash your cash than under the mattress. But you need to make sure it is available quickly - so you can't lock it away in a term deposit.Joye says a low-fee, high-interest at-call cash account is best (see table). "You don't want access to the funds to be restricted in any way," she says. "This money is not where you are trying to generate returns - use your other assets to do that. The most important principle here is liquidity."