Investment markets constantly provide many topics of interest to discuss. Here we comment on two themes that have been of recent interest: oil prices and the Greek renegotiation.

Oil prices

From June 2014 to late January 2015 the price of West Texas Intermediate Oil (WTI) declined from $US107.26 to $US44.53, a correction of 58%. The price has since moved off its January lows to rebound by 21% to $US50.52 (as at 3 March 2015).

The correction is due to a number of factors. Weaker than expected global demand has coincided with increased production in the US.

OPEC has not been willing to cut production, however we note that OPEC are not the only producers of oil.

Eventually lower prices will result in some producers becoming uneconomic and they will cease or reduce supply. This ‘appears’ to be the logic of OPEC which seeks to maintain market share. Producers that may be taken out of the market will be those with relatively higher production costs.

In Australia, major companies such as Santos have come under pressure as returns from new projects will decline. As oil corporates cut exploration budgets there is a flow on affect to industries that service the sector, such as Worley Parsons whose market capitalisation had halved to $2.2billion. The company is a major provider of services to the Canadian oil sands producers. Some corporates may need to raise capital as asset write-downs and compulsory capital expenditures place pressure on balance sheets.

As oil prices decline, so too do the taxes and royalties that governments collect from the producers. If a government relies on oil taxes, a fall in tax receipts can affect government budgets and spending plans. Examples include Russia, Alaska, Iran and Venezuela. We note also that the shale sector had been generating significant employment growth in the US.

In Australia, the federal budget, already strained by lower iron ore prices will also be impacted to some extent.

Fiscal pressure can impact politics. As politicians come under pressure from the electorate, geopolitical risks increase.

Consumers benefit from lower oil prices. Airlines and transport companies have lower cost bases as well as oil importing countries.

The Australian share market is relatively concentrated. Major stocks such as BHP and RIO were impacted by lower iron ore prices throughout 2014.

More recently Santos, Origin Energy and Oil Search have detracted from market performance.

Greece renegotiation

In late January 2015, Alex Tsipras’s left wing party was elected to Parliament in Greece having won over the electorate with a ‘roll back austerity campaign.’ The new government has reignited market concerns that Greece will exit the Euro as it is seeking to negotiate new terms from those that were introduced under the European Union and International Monetary Fund (IMF) Greece bailout five years ago.

Since being elected, negotiations between the new government and representatives of the European Commission, European Central Bank and the IMF (often called the Troika) have commenced.

We believe there will be a resolution that will at least defer some of the austerity measures and/or alter them in terms of priorities. The fact that Greece is seeking to negotiate new terms should not be confused with Greece wanting to leave the Euro. The Greek electorate wants to wind back the measures but they also want to stay in the Euro. An agreement was required by the end of February for Greece to be provided with its next round of funding under the original agreement.

It is not difficult to understand the views of a newly elected government wanting new terms given they are inheriting 25% unemployment and an economy that has seen GDP fall by more than 25% since 2008.

Following the post-World War II rebuild, we note England took 60 years to make its final debt repayment. In the case of Greece, it is unlikely they can repay the debt. However debt is only an issue if the creditors demand repayment and it cannot be paid by the borrower. At some point we would expect the value of Greek debt to be written down to more manageable levels.

The situation with Greece and creditors again raises questions about sustainability of the 19 member Euro. Former chairman of the Federal Reserve, Alan Greenspan, recently was quoted as saying “it is just a matter of time before Greece exits the Euro.” Everybody has a view; however Europe appears determined to remain united.

Have you nominated your children as beneficiaries to your super fund account? If so, you may have inadvertently exposed their super inheritance to future legal proceedings.

Consider this scenario. Jane passes away at the age of 68 leaving a remaining super balance of $1,200,000. Her two sons, Alistair and James, are listed as beneficiaries and are both in their mid-30s. In accordance with the Jane’s nomination, the super fund pays a net amount (after deducting taxes) of approximately $500,000 into each son’s respective bank account. Alistair invests his portion in a managed fund.

A year later Alistair marries and his wife gives birth to their first child soon after. Several years later however the marriage breaks down. During legal proceedings, the Family Court specifically orders 40% of Alistair’s super inheritance be split with his former wife.

Alistair understandably questions, “that was an inheritance from my mother. How can my wife receive 40% of it?”

This example highlights the importance of thinking ahead when making super fund beneficiary nominations. Here, the super fund paid Jane’s death benefit directly to Alistair, who in turn invested the proceeds into a managed fund in his own name. However, when his marriage broke down, the managed fund was placed into a pool of assets that the Family Court was able to divide and allocate between him and his former wife.

This was despite the managed fund being invested solely in his name using the proceeds of his late mother’s inheritance.

What Jane could have done was to nominate her super be paid directly into her estate rather than nominating her children as beneficiaries.

The $1,000,000 could have been held in a trust and invested for the benefit of her children.

Establishing a trust of this type typically affords beneficiaries a degree of protection from future legal proceedings, particularly if there is a marriage breakdown or bankruptcy later in life. These trusts can also be tax friendly as income generated by the inheritance, for example share dividends, investment property rental income, can in theory be spread out and distributed to a range of beneficiaries and diverted to family members who are in a lower tax bracket. This may be appealing from the child’s perspective, particularly if their employment income already has them in a high marginal tax bracket. The trust can also be designed to restrict the ability to withdraw and sell the assets, thereby protecting the inheritance against spendthrift or vulnerable beneficiaries.

It is important to remember however that a trust of this type comes at a cost. For starters, expert legal advice needs to be obtained upfront to design and embed the terms of the trust into the person’s will.

Then, once the trust comes to life (following death), annual tax returns will need to be prepared and beneficiaries may require legal advice from time to time about the trust’s ongoing operations. However many would say that these costs are a small price to pay for protecting and managing the tax position of a child’s inheritance.

Trusts designed to manage inheritances are not necessarily limited to super fund proceeds and may comprise of other assets that the deceased owned at the time of passing. Term deposits, real estate, shares and cash from insurance policies may in theory find their way into the trust and be set aside for the benefit of the children.

Trusts, however, are not for everyone. With the right expert legal advice you need to evaluate how it might fit with your own estate plan.

Australians are living longer than ever before. So it’s important to be financially ready for retirement – and the changes to your lifestyle along the way.

While it’s great that we’re living longer, it means we need to be better prepared financially for our later years. It’s also important to realise that our lifestyle is likely to change during retirement, with each stage having particular financial needs. Of course, every person is different, but here’s a broad overview of what each of the three retirement stages could look like for you.

Early retirement

Early retirement usually begins in your early 60s and can last right up to your mid-70s, depending on your health and energy levels. The main focus should be on enjoying the free time that comes from no longer having to work – or perhaps only working a few hours a week on the things you really enjoy. This may allow you to spend more time with family and friends, start a new hobby or take those trips you’ve always dreamed about.

This is likely to be the most expensive time of your retirement, with much of your spending going on travel and leisure activities, or perhaps to help your children or grandchildren get ahead financially.

You may also decide to renovate your home, now that the kids have gone and you’re spending more time there.

If you’re working part time, you may have extra income on top of your super or age pension. But even then, you’re likely to choose more conservative investments that focus on preserving your wealth for the years ahead.

Mid-retirement

Your mid-retirement period might start anytime from your late 60s, and may continue into your early 80s.

During this stage, you may find your energy levels slowing and your desire to travel or participate in more active hobbies diminishing.

You may also decide to downsize to a smaller home, which involves managing the costs associated with buying and moving to a new property. What’s more, the money you put away from the sale of your house could also reduce your age pension entitlement, so make sure you talk to your Western Pacific financial advisor before making any major decisions.

At this stage, you’re less likely to be earning any extra income from work. You may also spend less on travel and leisure, shifting your financial focus towards taking care of your health.

Late retirement

During the final stage of retirement, you may need to pay for extra support to maintain your home and take care of yourself. Your health is also likely to need more attention.

As your accommodation and healthcare needs change, you may decide to move to a retirement village or nursing home – a transition which needs particular financial attention. It’s also essential that you’ve put your affairs in order through proper estate planning.

PERMA is an acronym that describes five conditions that positive psychologists say will lead to ‘authentic happiness’ at any age. Think of PERMA as the values that you should have that result in a happy retirement.

1. Positive emotion

We know that optimists do better in retirement than pessimists, and that ‘other directed’ people do not fare as well in retirement as ‘self-directed’ people. As you look at your retirement, are you excited or are you apprehensive?

As someone once said, happiness is the way you live your life and not a desired state of being!

2. Engagement

In retirement, it is easy to become disengaged from day-to-day life if your concept of ‘being involved’ comes from your day-to-day work. Those people who are more likely to go out with friends, undertake activities and to remain mentally active feel more like they are ‘alive’ and enjoy more successful retirements.

3. Relationships

Human beings are not meant to be on their own; we need other people who we can care for, have fun with and expand our horizons. However, relationships need to be positive to have the most impact on our overall retirement happiness.

4. Meaning

There is a big difference between ‘fulfilling’ activities in retirement over ‘time-filling’. Retirement is the time to look at the meaning of life and to focus on living a life of value.

5. Achievement

Self-image has a significant impact on our mental outlook, our relationships with others and our desire to continually feel good about ourselves. It is easy to reflect on our success at work that has disappeared now that we are retired.

We need to win small and large victories no matter how old we are.

Bruce and Marianne had planned for their retirement about five years before Bruce was ready to leave his job as a school principal. Many of their friends were either retired or facing retirement and provided the couple with good examples of both what to do and not do when it came to making the transition from a regular work life.

“I was amazed at the number of my friends who reached their retirement and basically had no idea what they were going to do once they got there”, Bruce commented. “Marianne and I told ourselves that we are going to take this opportunity to get everything out of this new life – we were going to make it an adventure.”

For the past five years, they had taken a month in the summer and ‘practiced’ retirement. “We were initially concerned that we might find it difficult to change our mindset once we actually retired”, said Marianne.

“I knew from my work as a psychologist that making a major life change such as retiring is a lot more stressful than most people realise.”

What is your mindset when you think of retirement? Our experience in working with retirees has shown us that being happy in retirement does not have much to do with whether or not you are working, or whether or not you have money. It is more about a positive state of mind and attitude towards life. Since many things shape our perceptions – media, our beliefs, and observations of the ever-changing world around us – it is critical to sort through our perceptions of retirement in order to identify and create an accurate and realistic picture that can serve as a positive guide for a thriving next phase of your life!

Successful retirees are generally optimistic people who believe that they can control parts of their lives. They seek out new opportunities to learn or experience new things – they refuse to give in to an attitude that focuses on ageing as negative or that retirement means that you are ‘near the end.’ The key is their attitude towards whatever life has dealt them, including their ability to control their attitude!

False assumptions

Financial planning clients and their advisers often assume that there is a template for the ‘ideal’ retirement. It is usually that you want to walk away from work with enough money to do all of those things that you always dreamt of doing when there was never enough time! This is one of the reasons why retirement planning often becomes a financial planning exercise. The false belief is that as long as you have enough money, you can happily retire.

The problem with that is that people focus on having enough money and ignore figuring out how they want to feel or think.

With this model in mind, many pre-retirees that we talk to tend to see their retirement future as a series of weekends strung together over a period of thirty years. We advise them that the keys to retirement success are actually no different than the keys to life success – that is the way you view yourself and your place in the world will determine whether you are able to maintain a happy retirement life.

** This article by Barry LaValley, President, The Retirement Lifestyle Center.