Wants are not needs
by Phil Smart
LAST week we explored the difference between needs and wants and, as a result of poor planning or the lack thereof, discovered 80 per cent of people will end up on an income stream of less than $30,000 in retirement.*
This week we will focus on our behaviour when it comes to investing, defining our five core needs and tailoring them to suit our own circumstances. The intention is that each article will follow on from the week before as we endeavour to create a level of awareness about what to do and not to do to protect ourselves against our own behaviours when it comes to investing.
It all starts with who we are. We are tribal by nature, both primal and mammalian. Primal in the way we act. Mammalian in the way we associate. We think emotionally while remaining within the confines of the tribe. We adopt the collective wisdom of the crowd theory, that if everyone thinks it is so, then it must be and we don’t want to be seen as wrong nor do we want to be seen as different.
As primates, we associated communally in trees, which provided shelter and protection. When we left the safety of trees, we took to caves, then basic shelters, to eventually society as we know it today, where we have homes that protect us and show all others how we stand in regards to the rest of the troop or community.
Our family home is our safe haven, rented or mortgaged, it doesn’t matter. We want to fit in, to assimilate into the same community of living standards as everyone else at whatever the cost. Most of us seek immediate gratification in life.
As humans, we have this sense of deservedness and selfentitlement from the get-go. In Australia, we believe we work hard, so it’s our right, we can afford it, we want it. Sadly it all comes at a price.
If planned properly, we can have it all. Much of what we do is driven by what others are doing, so we do the same because we think it will make us happy and we deserve it.
We call it the Pursuit of Happiness Spiral. Humans have many needs and wants yet most do not distinguish the difference between a need and a want.
Let’s explore the five core needs and establish some parameters that are quantifiable.
Core need 1: knowing when we want to retire.
Set a goal, let’s make it age 60.
Core need 2: Retire on a preferred income that we have taken 40 years to get used to.
As a rule of thumb, lets aim for 60 per cent of our final average salary. In today’s terms and adjusted for inflation, this FAS is $150,000^ combined for a couple on average weekly ordinary times earnings (awote). This would amount to $90,000 per couple or $45,000 per individual. With concessional tax benefits to be had within the super environment, combined with no mortgage payments and no children (hopefully they have all left home), these combined factors indicate that a couple could retire comfortably, especially with 40 years of old habits and an average term of 27 years in retirement*.
Core need 3: No bad debt.
We seek to have our home paid off at retirement, no personal loans and credit card debts (bad debt is where the interest is not deductible and generally the assets depreciates i.e. cars, white goods and boats).
If you have debt on an investment property that is being covered by rental income (geared), then that is regarded as ‘good debt’.
Core need 4: Great health going into retirement.
A regular exercise program, healthy diet and a positive mindset are all prerequisites to maintaining overall wellness and longevity. With 27 years in retirement on average, starting the first day of retirement with a pre-existing health condition is not an ideal way to begin your golden years.
Core need 5: Ensuring we have the right insurance to protect our families if something was to happen to us along the way.
Most of us will earn in excess of $5 million over our working life^. Other than our health, our ability to earn an income is deemed our number one asset. So protect it. Our mortgage on average at 40 years of age is $500,000. Ensure you have enough cover to clear it.
Most of us are underinsured personally, yet 84 per cent have our car insured. When we reflect on these five core needs, it is easy to see why we are all similar. The real difference is our preferred retirement age and how much we want to retire on.
As we alluded earlier, we as a nation seek immediate gratification. Our behaviour has it that we are in a constant state of deservedness — we believe it is our right.
We don’t plan ahead. Five core needs? It’s OK, plenty of time! Right now I want my boat or those new pair of shoes.
The cost of this must have now attitude is that 80 per cent of us will not achieve our personal goals and financial objectives at retirement.
Tips: Define your five core needs and ask yourself if what you are doing can guarantee achieving it?
Traps: Don’t think you will be OK and not act on it. Next week we will focus on managing our behaviour when it comes to our wants and creating wealth through our family home. We only get one chance at getting it right and whichever way we look at it, life is more than money.
* Source: Abs average incomes 2008 The information on this page is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.
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