An understanding of numbers is important when making financial decisions. But sometimes other factors can become more important. These thoughts came to me after an exchange of emails with a woman I will call Mary.
She wrote to tell me she was single, aged 70, a retired aged care worker, and was on the full age 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 persevere with the superannuation or simply cash it in.
Having spent a lifetime in the investment world, my mind automatically goes straight to tax before any other issue. So of course 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". So I asked her to send me a copy of a superannuation statement to see what she was getting now.
When this arrived, I noticed that the fund, after fees, had been paying her 6-8 per cent per annum.
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 sharemarket. Based on our email exchange to date she was totally inexperienced in do-it-yourself investing, which meant she would need to get advice.
The challenge is that because the regulators have forced so much red tape on the financial advisory industry, the only way Mary was ever going to get advice was to undergo a full financial analysis, which involves a long consultation and 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If Mary had withdrawn the money and placed it in the bank, she faced the danger of making unwise investments, or just of frittering the money away because it felt more easily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. It took me back to my childhood, when my father became redundant from his job as a farm manager and received a lump sum of ??500. It was a large sum in those days, and caused some friction in what was normally a very happy family. My mother would say to me, "Your dad keeps using some of our nest egg," and Dad would respond, "How can I pay the bills without touching it?" To which Mum would reply, "When we didn't have it, we didn't need it".
Despite efforts over the years to improve Australians' financial literacy, in reality most people are still better off having their money managed for them. The world of investment is becoming 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.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: email@example.com