InvestSMART Radio May 17th Transcript
Chairman of InvestSMART, Paul Clitheroe, joins Steve Price talking planning for retirement.
Steve Price: We’re very lucky tonight, because we’re joined in the studio by one of the best known and most trusted names in Australian finance, Paul Clitheroe. How good it to see you again, Paul.
Paul Clitheroe: And you Mr. Price, and you.
SP: When you looked through that budget that Scott Morrison handed down, at least they didn’t fiddle with super.
PC: Thank heavens.
SP: They want to fiddle with tax. What’s your view? Before we get into our topic tonight, we’re going to take some calls folks. 131 873, if you’d like to chat to Paul about financial matters. But we’re going to talk to Paul tonight about retirement planning, and how much you actually need to retire on. So if anyone is about to go through that part of their lives, give us a call and we might be able to give you some advice. Paul’s got some great ideas here on financial goals for this year as well. What do you make of this idea that if you give a big tax-cut to all business, Bill Shorten loves to put an $80-billion-dollar figure on it which is dishonest, does the trickle-down effect actually happen? Do companies employ more people?
PC: The truth is, Steve, that I can get you one of the world’s leading economists who will sit here, and no doubt you’ll speak to these people and they’ll say, “no it doesn’t,” and I can get you another one who will say “yes it does.”
SP: I’ve heard them both.
PC: Look, ok. I’m a common-sense sort of soul. And my view is, that as a business, you’re paying less tax be you big or small. So, what’s for sure is that you’ve got a bit more money laying around. And therefore by definition, if I’m running a business, you know a bakery or a butcher or a big business, the reality is that if I’ve got a bit more money around, I’ve got a chance to expand. The issue is though, Steve, is will I buy technology or will I buy people?
SP: That’s a very good way to put it.
PC: The blunt truth is; it wouldn’t create no employment. That makes no sense to me at all. I mean are we all going to take that extra money and expand through robots and machinery? Because gees Steve, there are a lot of businesses like the butcher, the baker, the candlestick maker, who…
SP: …Who need people.
PC: Correct! Let’s say one thing for sure. It is not going to create less employment, okay. So therefore, I’m going to say that it’s going to create more employment. How much, Steve? The truth is we don’t really have the modelling that is going to tell us that.
SP: Treasury thinks they do. How often are those treasury figures way out?
PC: Well they are. Because, you know, the problem with the economy and economics. It works beautifully, economics works beautifully, until you involve people. Because the study of economics is one of rationality. You’re in an office in Canberra and you’re a very bright person, very highly trained, and there’s all this stuff – you know we did supply and demand curves at school and stuff – and it all makes sense. I get that. But at the end of the day, it’s a bit like financial literacy, the body I chair for the federal government, where for some thirteen years now we’ve been beavering away trying to give people better money skills, teaching kids money in schools, and so on. But the trouble is that, you know, you see skilled people who still are making strange decisions about credit cards. We’ve still go, what, I think it’s close to 60% of Australian’s who have the wrong mortgage – it’s too expensive. So, Steve, if we’re overly rational we’re not going to come to the right conclusion – because we’re dealing with people!
SP: I’ve been dealing with my mother, who’s in her early eighties. My dad passed away last year, and he did all the bills. She’s struggling to understand the difference between a credit card and a debit card. And I’m trying to explain this stuff to her, and she gets frustrated by it. So, she’s been using a credit card to buy everything, and then paying it off through her normal bank account. She could just have a debit card and pay for it all as you go. You don’t need the credit card process!
PC: Talking to her isn’t working?
SP: Nope. She can’t get it.
PC: Okay, let’s do this really quickly. For me, it’s a great number that sums it up. It sums this issue up.
SP: Sorry mum!
PC: So here we’ve got these very rational economists coming up with very rational decision making, and then doing very rational models based around that intelligence and so on. But then we introduce humans, and the in the world of financial literacy, we know one thing for sure, and that is nearly exactly 50% of people cannot give you 50% of any number you give them.
PC: Seriously, yes.
SP: I’m no good at maths, but at least I can do that.
PC: Funnily enough though, if we ask people 50% of a number, and maybe it’s a bit of an age thing, but if you ask people for half of a number, you actually do better. But yes, 50% of people won’t give you 50% of a given number. So in a sense, if you like, you can do all of the rational economics that you like, but people get in the way.
SP: It makes sense. When you look at the Royal Commission we’re currently having, and previous commissions and collapses of financial advisory firms and shonks like Storm Financial and all that sort of stuff, you can see why people get sucked in. Because they don’t understand the basics. You get a slick salesman that comes along, and bingo.
PC: Look, we do focus groups and we can see, you get two identical prospectuses and one is offering 6% and one is offering 12%, and people, very few people say, when we say they’re exactly the same but one is 12% and one is 6% - obviously, we’d all like the 12% - Australians are trusting people and the thing we don’t seem to naturally say is “it looks too good to be true.”
SP: I think I would immediately say, “how come I can get 12% out of that, if it’s the same as the one that gets me 6%?”
PC: People, and particularly if there is a face attached to it, we are a very trusting race of people. For better or worse. We’re Australians for heaven’s sake!
SP: She’ll be right mate!
PC: She’ll be right mate. And I tell you, when it comes to money Steve, I’ll tell you who the best person to trust is. You.
SP: InvestSMART. They’re our sponsors, and we should explain that it is an online business, where you can go on and there’s a whole range of products you can look at. From very cost-effective and cheap, and more expensive depending on how much advice you want.
PC: No, no. Well it’s even simpler than that. Basically, the business is really based on, like most online businesses, and the reason I got involved was saying, gee you know, as much as my own money as anything else Steve, investing money is expensive. Buying and selling a house is expensive. Investing money, you know you can be paying 3% per annum, and it seemed to me as the world is changing and more people are interested in money, and I am really interested in this business, which is why I’m a shareholder and chairman and I will disclose that very clearly – I’m biased. But what interested me, and I actually searched the business out looking for a solution for me. Because I’m a little bit of a DIY sort of person, I like a bit of help but I kind of like to be in control of my money. Because I’m sure about one thing: the person who cares most about my money is me. I’m convinced of that.
SP: Or your wife.
PC: Vicky’s pretty good as well by the way.
SP: Or the kids!
PC: They’re pretty good too. But the idea of saying, here’s some factual, logical information. Not selling you anything. And then from that information, you can make a choice, if you want to. You can pay a small fee per month. You can buy some research and make your own decisions. Or, if you want to, here’s a range of low-cost products, where if you wish, InvestSMART can help you with that. So, it’s kind of like, for me, it’s kind of like that Bunnings feel. If you want it all done for you, InvestSMART is not the place to go to.
SP: Anyone interested, look it up online. Shane in Tullamarine. G’day.
Shane: G’day guys. How’re we going?
SP: Oh well I’m very happy because I’ve got the great Paul Clitheroe with me.
PC: Listen to him Shane, just listen to him.
Shane: I’ve been trying to get on for a couple of weeks to ask a very specific question. My wife and I are 55, so we’ve probably got 15 years left in the workforce. And, a bit over $100,000 each in super. Recently people have come to us, and said you know, we should be investing and using our tax, and the government will let us use our tax to buy houses in new subdivisions.
PC: Oh lord.
Shane: To make, you know, you keep buying houses and turning over your tax.
SP: What people are giving you that advice? Who is it?
PC: It’s the property seminar people, believe me.
Shane: The ring up, and then they come and see you and they tell you how great it is. And that the houses are going to double in five to seven years.
SP: I’ve got a question for you, Shane. Can you run fast?
Shane: Fast enough to stay away from them? Yeah.
SP: Correct. Is that good advice?
PC: Shane look, we’ve seen this over and over again. I was saying to Steve just a minute ago, if it looks too good to be true. In my 34 odd years of doing this, I literally had The Money Show and I was doing it with Channel 9 up in Queensland one year. You might remember, Shane, about maybe twenty years ago, the people on radio ads saying, “we’ll fly you free to Queensland, and for twenty bucks you’ll get into an investment.” So, I took The Money Show and the cameras up there, and basically poor people are buying these grossly – I mean how do these punters make money? The punters who’re making the money here won’t be you, my friend. The punters making money are the people flogging you property in strange locations, which is grossly overpriced. And the real trick is, that you don’t know its grossly overpriced because you’re out of your area of comfort. So we had Sydney-siders flying to Queensland – this is fifteen years ago, mind you. And they’re saying, “Oh Paul! We can buy a town house for $74,000. This would be $300,000 in Sydney!” I’d get them by the ears, drag them to the local real-estate agent, and the same place would be in the window, for $34,000!
SP: Oh no.
PC: So seriously, look. The whole thing, if you’re paying tax you’re making money. And I think super is one of the few legal tax deductions, so you should consider topping up your super. And if you’re doing property, please, please – Steve is quite right – if you’re doing property, do your own research in an area that you know, talk to someone like an accountant who charges you a fee and doesn’t flog you stuff for commission, and seriously, honestly. This few minutes could save you. For heaven’s sake, don’t lose your $100,000 each in superannuation on this silliness. Because look, I nearly guarantee that you’ll lose your dough okay.
SP: We weren’t going spend that. It was just that you had to pay, some of it out of your tax to –
PC: Nah, nah, nah. Negative gearing story. Go talk to your accountant, if you’re going to do negative gearing Shane, do it properly do it sensibly. Don’t do it through some punter that’s knocked on your door.
SP: Take Paul’s advice, please. 131 783 is our number.
SP: The chairman of InvestSMART’s in the studio with us, Paul Clitheroe. What’s the one piece of really good retirement planning advice you’d give people? Pay your house off?
PC: Look absolutely – I think if you can get there with a property owned debt-free, the blunt thing is, let’s not forget in our system that the pension safety net is actually really pretty good. So you know, if you’re a couple and you own a property in particular, even if you’ve got a few hundred thousand dollars in the bank, you know, you’re still drawing $30,000 plus in pension –
SP: And you have your health card.
PC: And you have your health card, so Steve. I’d really concentrate on getting that house paid off. But, for me. The big thing that people tend not to do, when people say “gee how much do you think I’d need to retire?” And I go, well, you know – how much do you want to spend? And if people could simply just tell me how much they want to spend in retirement.
SP: And you say to them, do you have a budget? And they say no.
PC: Not really. And if I could just get them to say, Paul we want to spend thirty grand a year in retirement, all I have to do is multiply that number by seventeen. Just multiply your number by seventeen.
PC: Well what it does, is interesting. Let’s say you’re really expensive. You want to play golf a bit. Let’s say your $100,000 a year. Multiply it by seventeen – your target is about $1.7 million. And if we think about that, what we’re saying is that at about sixty-five, if you take that, and I’m not talking about some silly investment.
SP: So you’re saying you’ve got seventeen years left to live.
PC: Yep. A little bit more probably, things are going pretty well there. So basically, what the idea is, is you’re not going to earn ten or twelve percent on your money. It’s the crap sales people tell you, it’s the crap sales people go on about. Look, once in a while you might on one share or another. But if you’re running your money at about 7% across property, shares and fixed interest, you’re doing pretty damn well. And so, basically what that says is take your hundred for you, multiply it by seventeen, pop your $1.7 million away at about 7%, we need to allow for a bit of inflation, and you’ve got your hundred grand a year for a normal life expectancy. Now, if you live to 150, we’ve got a bit of a problem here. But looking at you, Pricey, it’s not going to happen.
SP: No, no.
PC: Me either!
SP: Definitely not going to happen. Cathy in Appin, thank you for holding on.
Cathy: Hey Paul, hey Steve, how’re you going?
SP: Yeah we’re good. How can we help you out?
Cathy: I have five properties. One I own, and the others have mortgages on. My other half is 66, I’m 56. My thoughts are, if we take his super out to sell two properties to own one. And then take his super out, and I think I can take mine out at 57 under $200,000. To pay another one out. He’s not going to get a pension because his name is on too many things. He wants to retire, I want to retire. So I figure, if we own two houses and get $450 a week, should we do that? Or should we hang on?
CP: Yeah, look. I’m going to be really careful here, because basically we get into this area of really personal advice. Bluntly, I’d really like you to find an advisor who charges you an hourly fee, rather than sells you things. And I think you need to get this sorted. But I’ve got to tell you one thing – I am incredibly reluctant to ever have money come out of superannuation on a voluntary basis. If you need it as a pension, that’s fine. Let’s think about it. Inside superannuation, at retirement, you’ve got your money inside, right. And that money is growing for you. It’s paying. It’s completely tax free once you’ve retired if you’ve got under $1.6 million, which it sounds like you certainly do. So basically, for me to say, I’ve got my money in super and I’m 62, and I’m keeping it there. Because basically, for me to bring money out of super, even to pay off a property, I am taking money out of the most fantastic retirement tax shelter I’ve ever seen. I am going to be really – well that money can come out any time you like. But I would hate you to do that without ensuring that you have some really decent advice around this. If we had an hour and a half on Pricey’s program, I could sort this out for you.
SP: Get a really good advisor. But almost, in that case, and I’m not giving financial advice either, but you’d almost be selling a property and dumping more into super, wouldn’t you?
CP: Well funny you should mention that. Absolutely. Look, I still love the idea of owning the property you live in. And maybe you’ve got a few properties paid off paying you rental income. I get that. But for me, the best if you like, the best and safest legal tax game in town, is superannuation. Particularly with the new rules.
SP: And at Cathy’s age, and with her husband working status, they could put $300,000 each into super. And bring it forward.
PC: And also don’t forget, they can also put up to $25,000 of their taxable income in through salary sacrifice.
SP: So Cathy, we’re not advising you either way.
PC: Yeah, no we’re not. But if you’re telling me you want to pull out money from super to pay off debt, I’m saying you can do that. Is it the smartest thing to do? I cannot tell you that without an hour or so of analysis.
SP: Go and see a good advisor.
PC: You need to do that Cathy. Or you could really get this badly wrong.
SP: Good on you. By the way, you’re in a good spot Cathy. Susan in Sutherland, g’day.
Susan: Hi, how’re you going?
Susan: I’m 48 and my husband is 53. We both have super. I have about $160,000 and he’s got about $250,000 and we both contribute about 5% to the super.
CP: So, you’re putting in 5% on top of the boss’s super?
CP: Okay good.
SP: So, your employer is putting in 9.5% and you’re topping it up with 5%?
CP: Good on you, I’m happy with that. Keep going, I’m happy so far.
Susan: I’m in a defined benefit program with Defined Benefit Superannuation which I’ve had explained to me many times. I still don’t understand it.
SP: I’ll give you one explanation about it – they’re great.
CP: They’re great. Can I just ask you, very quickly, who do you work for? Do you work for state government, or federal, or teacher?
Susan: An insurance company.
CP: Alright, so you’ve got defined benefit super. I’ve got you. And the question is?
Susan: And I’ve got like $50,000 in term deposits and I own 50% of the house, so my question is, you kind of answered my question before, where do I go from here to grow some wealth? We’ve always been too scared to buy an investment property. We’ve heard many sad stories, rather than people making money. So, what could we do to increase our wealth?
CP: Great question. The absolute fundamental is, thank you for ringing it, which fits in with Steve and my topic for the night beautifully. The absolute number one thing, which we all forget, is where we make most of our money is our working life, it isn’t our investments. We make most of our money during our working life by spending less than we earn. I know it sounds awfully simple, but most of us forget that. And we don’t do it.
SP: It’s boring.
CP: Well you’ve been listening to me for thirty years Steve. I’m always boring, but at least I’m consistently boring. I tell the truth. And so basically the first thing for me, is I’d sit you down and say right, let’s take a look at your spending. I’ve got no doubt that you’ve got budgets and stuff. Let’s take a look at what you spend, let’s take a look at what you earn, the reason you’ve got $50,000 in savings and so on is because I’m sure you’re saving more than you’re spending, you’re creating savings. Now, you’re already topping up your superannuation which is great. You talked about the fact you own half a house, is there any house mortgage at all?
Susan: No, we’ve paid that off.
CP: Brilliant. Brilliant. Alright, so now we really are in a world we’re you’re topping up your super which is wonderful. Big tick to you. You’ve paid off your house. Second big tick to you. You’re obviously saving money, third big tick to you. You’re already creating wealth in super and in the property you’ve got paid off. So really, now you do need to make a decision if you keep building your money, probably where you are now with a relatively low interest bank account, it might only be 2.4%. But by spending less than you earn, you’re putting money in there the whole time. Then you’ve got to do, what I call the ‘Sleep at Night Test.’ Obviously, at your age, I would rather you do a bit more with your money. Whether you go out and you buy a couple of blue chip shares, or you know, you might buy into a relatively safe investment managed fund – that sort of stuff InvestSMART does by the way, these sensible ideas around money. You’re not going to get huge returns, in my view, but sensible ideas around money. Or, do you do the investment property thing? Now, what you’ve already told me is that you’re terrified about investment property. Let’s put that to one side for a moment. Are you equally as terrified of shares? Because, if you are, this is going to be challenging for me.
Susan: If they’re blue chip and they’re good, reliable shares. We’ve been people that don’t like to take a high risk. We’ve been people who are happy to take a low gain – because if it’s too good to be true it normally is.
CP: You’re great. Fourth big tick to you. You’re ready!
SP: You must be reading his book!
CP: She’s terrific. So basically, I am, I think the issue here is let’s not get excited. If you’re got your money in a bank account earning 2.4%, in a very safe account, you’re very, very safe. If you switch to what I’d call less volatile shares, the bigger names you know, and you can buy those in a fund by the way if you wish. Basically, I still think there you might be able to see, over time a 7% return or something like that. Property is similar over time. The issue, for me though, is the ‘Sleep at Night Test.’ Obviously for me with a ten-year view, I would prefer you were in shares or property than money at the bank. But, in that sense we’re arguing about the different between 2.4% and 7%. The big things you’re doing, you’re doing already. You’re topping up super, you’re in a defined benefit scheme – don’t let anyone talk you out of that. Defined benefit schemes are fantastic.
SP: Stay there.
PC: So, gosh. I hear about people trying to pull people out of there. You’d have to be mad wouldn’t you!
SP: Stay there!
PC: You’re doing the right thing there. Your property is paid off, it will grow in value. You’ve got your money, you’ve got your savings growing. Really, if I was you, I’d be probably saying you don’t like the sound of investment property. Would I steer you towards a lower-risk, low cost fund that buys shares and so on? Look, to be perfectly honest, that’s probably the way I’d steer you. But at the end of the night, I want you to be able to go to bed at night and sleep without worrying about your money. You’re doing all the right things, you’re doing a great job.
SP: How do you feel about that, Susan?
Susan: Good, good. So would you start off with some small shares, a small amount?
PC: I would. Look, one of the joys, sorry for being so quick here I am just looking at the clock, one of the great joys about shares is, you can buy a couple of thousand dollar’s worth or you could put a couple of thousands of dollars into a managed fund. With property, you’re up for a large amount of money. So absolutely if you’re fairly new to shares, you might want to buy a few shares, or you might want to buy a low-cost managed share fund. Either way, the great joy of shares is you can start in smaller quantities.
SP: Dip your toe in.
PC: Yeah, dip your toe in. You’re on the right track!
SP: InvestSMART forums are on around the country. If you’d like to find out more, investsmart.com.au. You’ll be able to find out there. Paul Clitheroe it’s always a pleasure to see you in the studio. We could have taken calls all night. But you’re a very busy man and we’ve got to move on. I’ll see you in a couple of weeks.
SP: Paul Clitheroe.