Future Focus: What you need to stop worrying about money
Your investment portfolio is only one part of the equation.
Financial security isn’t just about having the biggest portfolio. It is about addressing financial risk holistically in your life so you don’t have to worry about money.
One of the peculiar features of money is that it is very difficult to know when you have enough. You solve for one potential financial scenario and another one pops into your head. You save enough for a basic retirement and you start dreaming of something more. To each financial questions the answer becomes the same – you need a bigger portfolio.
Building wealth is only one subset of financial security. Accumulating a larger portfolio is not going to stop all your worries about money.
There are other levers to think about that can reduce the worries about money while you are achieving longer term goals.
Step one: You need a housing plan
Housing security is the foundation on which a lot of our financial lives are built. For some people, that means owning a home. For others, it may mean a long-term rental.
There is no universal requirement to own property but everyone needs a plan to address future housing needs. The plan will vary by person and life stage.
It may be saving for a deposit for a rental unit or a down payment when you are young. As you age it could take the form of having enough in super to afford to rent during retirement or paying off your mortgage prior to leaving the workforce.
Super Consumers Australia’s research found that a single retiree renting in retirement would need around $659,000 in super to maintain the same standard of living as a homeowner with $322,000. For couples, the figures were $786,000 and $432,000 respectively.
That isn’t an argument that everyone should buy a house. It is an argument that housing is part of your retirement plan whether you treat it that way or not. If you know where you are likely to live, what it will cost and have addressed the potential expenses in your financial plan you have removed one of the largest sources of uncertainty from the equation.
Everyone needs a roof above their head. Financial security starts with having a housing plan to address those needs into the future so you are confident this basic human need continues to be met.
I’ve provided some guidance on one potential housing plan – how much you need in superannuation if you don’t own a home.
Step two: Build some resilience
A large investment portfolio is not much consolation if losing your income would immediately put your household under financial stress. I’ve written about having a plan if your income stops tomorrow.
As you age and your human capital or lifetime earnings capacity reduces you need to convert it into financial capital. But you also need to protect that financial capital from periods where you may be out of work.
Building financial resilience is about protecting your long-term goals and providing options and peace of mind to deal with the inevitable hick-ups in life.
Building financial resilience means maintaining a fully stocked emergency fund, keeping debt manageable, having appropriate insurance and keeping lifestyle creep at bay.
Financial independence is gained incrementally. The first step is creating a level of financial resilience to reduce your day-to-day worries about money. Once that foundation is established you can move on to reducing the need for a paycheck.
Step three: Insuring against risks your emergency fund can’t cover
Investors can spend enormous amounts of time thinking about investment risk while overlooking more damaging risks to well-being. What happens if you can no longer work? Or if a serious illness saddles you with a large financial burden? Who will take care of your loved ones if you die? Insurance exists because some risks infrequently occur but are too large to easily address in ohter ways. We don’t need to insure for everything, but it is important to consider mitigating the risks that could fundamentally derail your financial plan and your quality of life.
Your personal situation dictates how much and which insurance is required. Factors include how much a household relies on individual incomes and the number of dependents.
Once those risks have been appropriately covered, there is less need to compensate for uncertainty by accumulating an ever-larger investment portfolio or to keep a large pile of cash sitting on the sidelines. Insurance is another foundational steps that frees you to address what you want out of life.
Step four: Supporting your loved ones
One of the more uncomfortable parts of financial planning is acknowledging that your financial plan needs to cover the possibility that you won’t be around. If you have children, a partner or other people financially dependent on you, wealth isn’t just about your future lifestyle but also about the people that you leave behind.
That means asking uncomfortable questions – if I wasn’t around could my family pay the mortgage and continue to pursue their dreams? If you are primarily responsible for managing your family’s finances it is worth asking if someone else has the knowledge and capability to take your place. Answering these questions can provide something that a good year of investment returns cannot: certainty about what happens in a worst-case scenario.
Set up structures so your loved ones are provided for and it will help you sleep at night.
Step five: Your estate plan
A Will is one of those financial tasks that is easy to ignore because it deals with a situation you don’t want to contemplate. But accumulating wealth without deciding what happens to it is an incomplete financial plan.
A Will is only one part of estate planning. Depending on your circumstances, the broader plan can include:
I’ve covered each in depth and how to consider what is right for you.
The more complicated your financial life becomes, the more important this becomes.
A portfolio with multiple investment accounts, a family home, superannuation, insurance, trusts or business interests can create a very different set of estate-planning problems from someone with a bank account and a single super fund.
The goal isn’t to create the most sophisticated estate plan possible, but to ensure your financial wishes are known and clearly communicated to people that will be impacted by your death.
Once that work is done, you don’t need to keep worrying about what happens to your assets every time you make an investment decision. You can simply update your plan when needed to ensure your current wishes are reflected.
Step six: You need a credible retirement plan, not an arbitrary number
This may be the hardest one. People like the concept of a ‘retirement number.’ The problem is once you get to one target a new one pops up. $1 million sounds better than $750,000 and $2 million sounds safer than $1 million.
How much you need depends on when you retire, whether you own your home, how much you spend, how long you live, whether you receive the Age Pension, how your assets are invested and what sort of retirement you want.
I’ve laid out my retirement goal here, and how to find your own.
But once you have a credible answer, you can stop treating every market movement as a referendum on whether you will be okay.
Final thoughts
Part of being an investor is understanding how uncertain the future is.
Markets will fall. Inflation will surprise you. You may live longer than expected. Governments can change the goal posts. Your spending may change. Your health may change.
There is no portfolio that eliminates this uncertainty. The goal is to build enough resilience that uncertainty doesn’t dominate your life.
This means:
- Having a home you can afford to stay in
- Building enough financial assets where sudden unemployment does not jeopardise the chances of reaching your financial goals
- Using insurance to provide protection against catastrophic outcomes
- Knowing your loved ones will be financially supported if something happens to you
These are milestones that won’t show up in your investment portfolio, but they will reduce your worries about money. These are all goalposts on the way to financial independence that buy security, flexibility and choice.
Invest Your Way
For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.
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