People nearing retirement are confused, with many planning to keep working beyond the “normal” retirement age of 65, according to reports in The West Australian.
Where's your retirement income?
This widespread confusion is hardly surprising, given the unique financial times we are in, along with the mixed, often contradictory signals that emanate from various sources (who are often pushing their own barrow).
Read more from John Cameron: Are low interest rates hurting your retirement?
Speaking of mixed signals, let’s start with the stock market.
Every night, commentators fill our television screens with graphic accounts of how much the market has gone up or down during the day. Even if nothing has happened, they still go to great lengths to make it graphic.
I guess this is the nature of television. A factual statement such as “nothing much happened on the market today” would hardly have viewers glued to their sets. After all, there are ratings to think about.
Also, and this is very important, there is virtually no mention about dividends (well, occasionally and begrudgingly, a little mention).
Dividends don’t have the same graphic appeal as the daily gyrations of prices – even if those gyrations happen to be microscopic when viewed through a longer-term lens.
This brings me to an important point. The stock market should be looked upon as a longer-term investment – not a short-term, get-rich (or poor) trading casino.
This gets lost in day-to-day commentary by those in the media who are trying to whip up excitement and turn the stock market into the latest, ratings enhancing, excitement machine.
Those daily price fluctuations (except in rare extreme events) fade into insignificance when compared to long-term trends.
Finally, let’s return to dividends.
Over the long term, dividends make up roughly half the stock market’s total return. On top of that, you can add in valuable tax credits due to the imputation system. These can easily add 1-2 percent to the yield
Two more things are important in the current climate.
Dividends, when taken across the whole market, are fairly stable, with a gradual upward trend.
Also, they provide a much higher yield than is available from areas such as bank term deposits.