4's, 6's and Retirement Planning
Today’s article is about retirement planning. If you have kept reading past the first sentence I want to say congratulations because this is a topic that can put most people to sleep!!
Although I find retirement planning to be incredibly interesting, I also understand that for most people reading about retirement planning is a great cure for insomnia.
Rather than bore you with facts, figures, tax tables and estimates, this article is going to explain how retirement planning works while talking a lot of cricket. So if are someone finds cricket as exciting as watching paint dry, I recommend to read the rest of this article when you can't sleep.
One Day cricket, or 50 overs cricket as it as known, is probably the best example I can think of as to explain how retirement planning really works. You are probably thinking, what on earth are you talking about but stick with me.
In order to live the lifestyle you want in retirement you are going to need X amount of money to provide you with an income of Z each year. Pretty standard right. Much like batting second in One Day cricket you have a target (your desired income), limited time to get there (rather than 50 overs, you have a working life of 50 years approximately) and if you run out of wickets (or money) it’s game over.
Say you are chasing 300 to beat the Indians at the Gabba. Do you tell your openers to give the crowd a show and try to blast the opposition quicks onto Vulture Street? Or do you say lets just survive the first 10 overs and reassess the chase from there?
Financially speaking this is the same as putting additional money into your Super early and invest in growth assets (the one’s that are going to hit you the 4’s and 6s the crowd has come to see!!) or just do the minimum and try to play catch up later in the innings (i.e. maximising contributions in your 50’s and 60’s).
For most people it makes sense to try to blast 100 runs in the first ten overs (the early years of your working life) and allow you to breeze home for the rest of the run chase. However, just like when Glenn Maxwell is trying to scoop the oppositions fastest bowler of the keepers head for 6, sometimes this doesn’t work out and you are 3-10 before you know it. As anyone who as every played cricket with me knows, the first ball my innings is just as likely to go for 4 as to clean bowl me!!
To be upfront and honest, over the next 50 years there will probably be 7 or so market crashes (maybe even more, we generally see a crash every 7 years or so). This is the same as losing a wicket. It sucks for the crowd, the batsmen and ultimately every supporter (or investor) watching the game. However, what most people forget is that when it comes to retirement planning you have a batting line up that has Ricky Ponting, Steve Smith, Don Bradman, Michael Bevan and Adam Gilchrist in your middle order!!
Any bowler would rather eaten 10 raw onions a day for the next 10 years than be forced to bowl at that line up. Your financial version of this middle order, is your ability to make ongoing contributions and the 8th wonder of the world: compounding.
Following a wicket typically the field comes up and it becomes a great opportunity to try to hit a few easy fours. In financial markets following a crash quality assets, companies, cashflows and earnings, are often very cheap and provide investors a great chance to profit over the long term (i.e. hit a few 4’s and 6’s).
In a big run chase it helps to get off to a good start but just remember provided you have wickets in hand (the ability to make additional contributions) you can make up for a slow start!