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  1. ActiveTrade

    ActiveTrade Well-Known Member

    5th Apr, 2008
    Hi all, my old man is a public servant and has just seen his super decrease in value. Just like most of us have.

    He is about 5 years out from retiring and is invested in First State Super. He is wandering if he should be switching to cash or not to protect his capital until the market returns to normal.

    Any thoughts ?
  2. bennymarsh

    bennymarsh Well-Known Member

    10th Nov, 2007
    Sydney, NSW
    a) you've probably missed the bottom, you took all the risk down, and switching now you will miss out on all the recovery.
    b) dollar cost averaging means that your buying cheaper units which means you take advantage of recovery by having purchased more units.
    c) This chart is really good, it shows that these stock market corrections happen every 5-7 years, and recovery is usually over a shorter time than the downturn (if you adjust for the 1987 recovery).
    d) if you aren't going to use all your capital at retirement in 1 go, most of your capital will be invest for 20-30 year, you go through a lot of these market corrections.

    As Douglas Adams says, DON'T PANIC!
  3. carlosreynolds

    carlosreynolds Active Member

    11th Jun, 2008
    As you are asking what he should do in regards to cash account, he must be in something other than cash ie somewhere from balanced up to high growth. I would consider the following.

    1. How much income will he need per year from this superannuation account (assuming that it is an accumulation style account ie unit price based, not defined benefit)?

    2. Going forward in retirement, how much income will he ideally carry in cash and how much in growth. As an example I would carry 3-5 years of income in cash, with the remaining amount in "growth" investment options. Towards the end of the 3-5 year period, sell some growth assets to "top up" cash investment option.

    3. What contributions will be paid into the superannuation account over the next 5 years (any lump sums, transition to retirement strategy) etc

    Therefore, assuming he has no other sources of income in retirement, he should consider the following.

    1. Not sell any assets today. If anything, transfer all funds to higher growth investment options (bet that will be controversial).

    2. Direct all future contributions (employer, personal or lump sums) to a cash investment option (to target approx. $180k to $300k in 5 years - a little more for inflation). I would only choose cash, and nothing like cash plus or any other variant.

    3. Setup transition to retirement strategy (more info on this site) - sacrifice all income down to 15% tax bracket to the cash investment option and draw back what is needed to live on from new pension account. I am assuming he lives on less than he earns.

    4. Consider a washthrough strategy (I think there's more info on this website somewhere) prior to full conversion to pension to ensure he can obtain the maximum tax free component - only really for estate planning purposes though.

    This will allow your old man to exit the workforce with a cash and growth strategy without having to sell assets at depressed (and depressing) prices. This (having cash "guaranteed") should provide him with some peace of mind during downturns, whilst keeping a portion of his funds exposed to growth assets.

    Also, I would see an FPA affiliated financial planner to take all responsibility for the advice and implementation.

    PS. This is not advice and there were lots of assumptions.
    PPS. It's late and I've been studying for ages if this doesn't make any sense.
    Last edited by a moderator: 5th Nov, 2008
  4. Billv

    Billv Getting there

    15th Jul, 2007
    Sydney, NSW
    You've already got some good pointers there.

    Has he got financial advise?
    He should visit his super fund's website and should read on "transition to retirement" because there are some good tax incentives for over 60year olds in there.

    I'm actually defencive on super and will say that because of his age, considering the times we are in and despite the short turnaround which is now visible on the horizon your dad should consider lowering his risk.

    I am assuming that he has a lot of super so if it was me I'd look at the more conservative or capital guaranteed plans for his existing money.
    Future contributions can still go into the balanced or high growth plan.

    Having said that, everyone's situation is different so I'd consider getting financial advise.