Wealth effect: Future's so bright, I gotta wear shades
Do you have enough to Retire?Free Retirement Plan Health Check
We have some good news. The International Monetary Fund (IMF) has upgraded its global growth forecasts for 2021 to record levels. This news, combined with rising share markets and booming local house prices, should have a positive impact on the confidence of retirees.
When we see our super balances and house prices rise it can be tempting to spend more. And spending more might be the right thing to do. But retirees have other options to improve their long-term financial positions when things are going well.
Record global growth
Economic confidence has returned around the world. With vaccination rollouts well-advanced in the US and Europe and summer approaching in the northern hemisphere, it feels like there’s an end in sight. People can finally see a way out of the pandemic.
This optimism, along with the enormous government stimulus packages, is fueling the economic recovery with unexpected energy. The IMF’s global growth outlook for 2021 is a record 6 per cent. That will more than cover the economic contraction of 2020, which the IMF now estimates was -3.3 per cent.
Here in Australia, the IMF now expects the economy to grow 4.5 per cent in 2021.
The economic recovery is having a positive impact on share markets and our super balances, which are sitting at record highs. Our homes are worth more too, with record low interest rates and relaxed lending standards creating unprecedented buyer demand.
When we feel wealthier, we have a tendency to spend more. It’s a behavioural shift known as the ‘wealth effect’. It’s not a bad thing. In retirement it’s important to be flexible, and we should adjust our spending from time-to-time when circumstances change. And that includes spending more when things are going well for you.
Building long-term certainty
But this may be an opportunity to be smarter than that. Markets rise and markets fall, and retirement is long. Perhaps you should be taking the opportunity to rebalance your investments at inflated prices to replenish your short-term cash reserves.
Maybe the strong economic conditions present the opportunity to reduce the structural risk within your investments. We tend to get more conservative as we get older, and you may be taking risks that aren’t required anymore.
At When Financial Solutions we can help you make the most of the strong economic outlook, so it’s not a matter of ‘if’ you will have a comfortable retirement, but ‘when’.
Michael Bowman and James McMaster are co-founders of When Financial Solutions. This article is general and does not consider your personal circumstances. If you would like advice specific to you please give us a call.