In 2008, many people approaching retirement watched in horror as their savings were swept away by a wave of financial disruption that washed onto Australian shores from the US.
A recent survey conducted by HSBC showed that Australian retirees were the hardest hit by the Global Financial Crisis, and that one in six people who were still working felt they would be never be able to retire.
Based on responses from 16,000 people in 15 countries, including 1000 Australia, the HSBC report showed that 79 per cent of Australian retirees saw their income fall, with 41 per cent seeing it fall by half – nearly double the global average of 21 per cent. Retiree incomes in the US fell by 16 per cent while in UK they fell by 24 per cent.
Graham Heunis, HSBC Australia’s Head of Retail Banking and Wealth Management, said the continued impact of the GFC for many Australian retirees highlights the importance of preparing for unexpected events.
“[It was] a painful reminder of how we can all be blindsided by circumstances outside of our control and why it is important to provide a savings buffer for unforeseen events,” he said.
But it isn’t only people thinking about retirement who can be hit by something unforeseen.
The New Daily asked Anne Graham, managing director of financial planning firm McPhail HLG about the eight biggest money traps – and what you can do to prevent them.
The word ‘wedding’ can add a premium to the cost of everything from rose petals to cupcakes, so it’s no surprise that budget blow outs on a couple’s big day can haunt bank statements long after the vows are exchanged.
This can apply to the bride or groom or, more often, for their parents. “Budget, shop around and be realistic,” Ms Graham says.
“Don’t get carried away with the dream wedding or cave into family pressure.
“It’s easier said than done, though.”
Another tip is to avoid the word “wedding” when getting quotes.
Borrowing too much
People often overestimate their ability to repay debt – and your heart might get in the way of a budget when buying a house or taking that extra overseas trip.
Even if your bank is willing to lend you a certain amount, that doesn’t mean you have to take full advantage of their offer.
“You need to make sure the amount you borrow is affordable and you can manage the repayments without too much stress and also build in a buffer for increases in interest rates,” Graham says.
If you have a partner, consider what would happen if you went from a double to single income and have contingency plans in place for an emergency.
Unfortunately, many people fail to save enough money for a comfortable retirement.
Graham says that people often borrow too heavily – and, as a result, they only manage to pay down their loans just before heading into retirement.
Her advice is to think about retirement early on in your career, start saving as soon as you can and use one of the many online retirement income calculators.
The black hole of credit cards
Getting into credit card debt offers short-term financial relief that all too often goes wrong.
Graham says that people often fall into the trap of only making the minimum monthly repayments, even though that doesn’t reduce the debt and accrues a high interest rate.
“People need to pay it down each month because it can become a dangerous cycle,” she says.
“People don’t understand or appreciate how much interest they are paying on their debt.”
Other traps include switching to an interest-free credit card but failing to cancel the old one, or using your homeloan to pay down your debt and then refusing to get rid of the card and/or reduce your borrowing limit so you end up getting into strife all over again.
Spending more than you earn
It can be denial, or ignorance, but people can get caught out spending more than they earn and find themselves on the fast track to financial stress.
“I think people kid themselves, I think deep down they know that they are getting themselves into a bit of a problem but don’t know how to handle it or how to change,” Graham says.
“You could do something like a food diary, writing where you spend your money in a four-week period and you can find a pattern. For example, they might then realise they spent $20 a day on coffee and muffins.”
Divorce can be financially devastating. Graham says that it’s to best prepare both people in a relationship so that they have a full understanding of their finances.
During a break-up, couples should be prepared to compromise so that they can avoid court and a costly legal battle.
If you’re planning to be a stay-at-home parent, keep up your professional skills to ensure you can return to the workforce if you need.
Death or illness no insurance
Most people are under-insured.
While the level of cover might vary depending on the family or individual’s situation, consider home loans, school fees, income cover for a couple of years and funeral expenses when working how what you need. This is still relevant to singles, who’ll need to protect themselves in case of serious injury or illness.
“The thing to consider is, ‘If I wasn’t here tomorrow how would I want my family to be looked after?'” Graham says.
Resist the temptation to cancel your insurance – the cost of your policy can be far less than the devastation of a huge claim if you’re not covered.
Ms Graham’s advice: get life and income protection while you are young, fit and healthy. The longer you wait the more expensive it will be.
Supporting the kids/grandkids
Don’t let love blind you.
Graham says that older people tend to spend money on their kids or grandchildren that they can’t necessarily afford.
This can involve supporting kids when they’re in their 20s or 30s. Or, in the case of grandparents, wanting to help out children or grandchildren if they’re struggling with finances.
“You’ve got to draw the line,” Graham says.