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Posts by The Investment Collective

Support Measures – COVID-19

Given the escalating numbers of COVID-19 cases in Australia, we have had to change our lifestyle very quickly to incorporate social distancing and more recently put up with state-wide lockdowns. The government has made a series of announcements on the 22nd of March 2020 which are designed to provide support to people impacted by the virus.

The new measures announced are predominantly in the area of Superannuation legislation and social security.

Summary of these measures;

  • Reduction in minimum pension
  • Early access to super benefits
  • Reduction in social security deeming rates for the incomes test

Reduction in minimum pension

Across the board, minimum pension drawdown rates for market linked income streams are reduced by 50% for the 2019/20 and 2020/21 financial years. The aim of this measure is to support retirees who are not required to draw the current pension minimums and can reduce pension drawdowns to avoid selling investments in a depressed market.

This will not affect you if you need the current minimums to survive, already drawing above the minimum pension or currently drawing an income from a complying lifestyle pension.

Early Access to super benefits

Access to superannuation benefits will be opened up from mid-April. The temporary access allows affected individuals to access up to $10,000 in each of the 2019/20 and 2020/21 financial years for a maximum of $20,000 of tax-free superannuation withdrawals.

You must meet the following criteria’s to qualify;

  • You are unemployed
  • You are eligible to receive a JobSeeker Payment, Youth Allowance for job seekers, Parenting Payment, Special Benefit or Farm Household Allowance
  • On or after 1st of January 2020, you were made redundant or your working hours were reduced by 20% or more or if your businesses was suspended as a sole trader.

This is designed to be a last resort for those with no other means of attaining funds to meet their current living expenses.

However, this could be a huge trap for those who utilise the withdrawals by meeting the above conditions but do not actually require the funds. Younger Australians in the early stages of building their super could be most at risk, as they could take funds out of super just for the sake of security. Given the power of compound interest, removing $20,000 from a super fund 20 or 30 years prior to retirement access could have a devastating impact on their final retirement balance.

Reduced social security deeming rates

A direct loosening to Centrelink’s income test, whereby the upper and lower social security deeming rates will be reduced from 1st of July 2020 to 0.25% up to the threshold and 2.25% above the threshold. This is an overall reduction of 0.75% from the default 1% up to the threshold and 3% above the threshold.

An individual with $550,000 in financial assets on the default deeming rates of 1% and 3% will have their age pension reduced by $65 each per fortnight. Under the new transitional deeming rates, their pensions will only be reduced by $32 per fortnight. The key to consider is that deeming is only a part of the incomes derived by the client, which is dependent on the level of financial/investable assets and the loosening of the deeming rates will not help if your prevailing test is the Assets test.

Further measures are set to be announced in the coming weeks, however, it seems as though these initial changes will provide relief to those who are impacted.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Changes to Superannuation due to COVID-19

Well…who saw that coming!!

Just when you think you’ve seen it all, how quickly things can turn from chocolates to boiled lollies…

For the golfers out there, spring in the northern hemisphere gets us fired up for the 1st major of the year, the Masters Tournament played at the mighty Augusta National Golf Club in Georgia. Sadly, the Masters won’t be played in April…it may get a run later in the year, however, it won’t be the same.

The speed at which equity markets dropped from peak to trough in about 4 weeks brings to mind how quickly damage has been inflicted over the years to some of the finest golfers in the world on the 140 metre, par 3, 12th hole at Augusta National, known as “Golden Bell”…the middle of “Amen Corner”.

Many have arrived at “Golden Bell” on the final round on Sunday appearing to be in total command of their game and on path to secure that highly sought after ‘green jacket’ when from nowhere, Raes Creek comes to life and mysteriously drowns those green jacket aspirations before the poor sod can catch his breath and ask his caddie; “what happened there?”

This year, COVID-19 has done to the world what Raes Creek would surely have been doing to some unsuspecting golfer or two had the Masters been on track.  Just as those golfers must dust themselves off and ‘get back on the horse’, we must play the hand of cards COVID-19 has dealt us whether we like it or not.

In relation to superannuation, COVID-19 has necessitated the following changes to assist with the financial consequences it has brought.

Early release of superannuation

Individuals in ‘financial stress’ can access their superannuation savings (i.e.; accumulation mode accounts) up to a cap of $10K in 2019-20 and again in 2020-21, from 1 July 2020 to 24 September 2020.

To qualify for this:

  • You must be unemployed.
  • You must be eligible to receive a jobseeker payment, youth allowance for jobseekers, parenting payment, special benefit or the farm household allowance.
  • On or after 1 January you were; made redundant, or your working hours were reduced by at least 20% or if you were a sole trader, your business was suspended or turnover reduced by 20%.

If someone is considering this option, attention needs to be given to how the withdrawal might impact personal risk protection insurance held inside their super such as; income protection, life, and total permanent disability cover.

Reducing the minimum amount required to be withdrawn in pension mode

The government has announced a temporary 50% reduction in the amount a superannuant is required to withdraw from account-based pensions and annuities, allocated pensions and annuities and market-linked pensions and annuities for the 2019-20 and 2020-21 financial years.

This initiative is designed to avoid investments being sold down at the worst possible time to meet annual minimum withdrawal requirements and thus increasing longevity risk i.e.; the risk of running out of money.

To promote the longevity of your retirement savings, revisit or complete a budget for your living costs.  The amount you need to pull out of super to fund your lifestyle will drop out naturally which can then form the base for your pension withdrawal.  Additional or ‘one-off’ withdrawals can always be taken as and if needed.

If there’s a positive out of this we should be spending less because we can’t damn well do anything or go anywhere and the minimum required to be withdrawn in 2020-21 should be reset lower due to depressed asset prices.

Isolation might be a good time to dust of the playing cards for a good old-fashioned game of ‘patience’…or perhaps 500, which would be my preference…but restricted to a group of 4 of course.

Stay COVID-19 free out there and see you on the other side of COVID-19.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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What does ‘retirement’ mean anyway?

Recently, I saw the alter-ego of Barry Humphries, Dame Edna Everage, in performance at the Melbourne Arts Centre. It was, as you might expect, a deliciously irreverent, and ‘politically incorrect’ show played to a capacity audience of some two and a half
thousand people.

While enjoying the show I was wondering about the fact that here’s an 85 year old, who apparently ‘retired’ from the business 5 years
ago, up there on stage for over 2 hours. What was also very evident was the sheer joy that the Dame exuded – you could see that she was enjoying herself immensely, and, I’m assuming, hadn’t returned to the stage because she’d run out of money!

So what does ’retirement’ mean anyway? It’s clearly different to the retirement of earlier generations where it generally meant stopping work altogether and pursuing interests in travel, social activities and more time with family.

As an aside, do you know why the age of 65 was selected as the ‘retirement age’? It dates back to 1880 when the German Chancellor,
Otto von Bismarck, introduced a social security system to his country. He selected that age because he knew that most Germans would
either not reach age 65 or if they did, wouldn’t live much past it. So the social security system wouldn’t really cost much!

Nowadays, retirement will generally include travel, social activities and family but also, for many people, some form of ‘work’. In conversations we have with our clients we increasingly learn of preferences people have to keep working for a few days a week – but at something that gives them pleasure and for which any income earnt is simply a ‘bonus’.

Clearly, retirement means different things to different people and there’s no right or wrong. Our role as your financial adviser is to help build and structure your wealth such as to provide you with ‘options’ in terms of pursuing whatever retirement may mean for you.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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How do I really feel about stopping being a full-time employee?

For the last 13 years I have guided my clients through their retirement preparations and into the non-working phase of their lives.

I’ve seen a lot of fear in their faces – fear of the unknown, fear of running out of money, and probably lots of other fears that I haven’t experienced at this stage of my working life.

But now it’s almost my turn! I’m taking the easy road first by reducing my working hours later in the year, to about half time. The preparation for that isn’t very easy as I have to say goodbye to a lot of people who have become friends, and there is quite a bit of work in the lead-up to handing them to a new adviser.

I have no doubts that the new advisers will continue on with the job that I began for these people and so I don’t have any worries about the farewells, and I will still see the friends outside of the office.

Working only a few days each week is something I am excited about, and I have lots of plans for my future away from work.

The thing that I still don’t know though, is the strength of my own financial plan. Just by looking at it, I don’t know if it is sufficiently robust, but my experience tells me that it will work, in the same way that the retirement plans of my clients have worked. It is really only until it is put to the test that any of us knows if the plan is workable.

I can look back to conversations with my clients before they resigned and committed to life without a salary, to a few months afterwards, where the relief and happiness I see is rewarding. They have come to terms with the fact that they still get paid each month, albeit from a different source. They have freedom to do things that they couldn’t while a fulltime employee, and they can take life at a slower pace if they want.

Markets can and will affect everyone’s retirement fund in some way, but again, experience tells me that being invested properly in a diversified portfolio of good quality investments, will ensure that we can weather the storm. The important things are the quality of the investments and the ability to remain calm (and invested) when markets are volatile.

So, I am content with the decision that I have made. For a time, I will still have a salary coming in and won’t be fully reliant on investments to fund the green fees and the rates. I will be free to spend time doing the things that I like, including with my family and probably on the golf course. Perhaps it’s the best of both worlds for me for the future!

Our experienced team of advisers are ready and able to guide you through the lead-up to your own retirement. Don’t be tied down with worry about whether you have enough put aside for retirement.  Give us a call so that we can begin to help you gain the confidence for your own financial future, whether you are considering retirement or you are still fully immersed in your working years, with a mortgage and young family.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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The only value of money

Over the years I’ve lost count of the number of conversations I’ve had with clients about money; how they think and feel about it, how much they might need and so on.

It seems to me that there’s really only one value of money, and that is that money gives you options – more money, more options, less money fewer options.

Interestingly, having more money, and therefore more options, doesn’t seem to mean much more than that. In my experience, it doesn’t mean you’re smarter, funnier, or even better looking than anyone else. It simply means you have more options.

Having more money also doesn’t seem to mean that you’ll choose the right option. A large part of what we do as financial advisers is to help our clients confirm and clarify their objectives, and help them to work out what their realistic options are. I underscore ‘realistic’ because sometimes we need to confirm to clients that some options simply are not realistic, or if achievable, may have ‘unintended consequences’.

As an adviser, I’m never, ever, going to tell a client how to spend their money – that’s just rude! The end result I’m seeking to achieve is to ensure my client has a clear understanding of what their realistic options are, and how to achieve them, such that they can make informed decisions.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Preventing financial stress on expecting parents

I can see how having children can be the most rewarding and life-fulfilling experience for parents. Spending time with my niece and nephew and seeing them grow gives me great joy and insight into parenthood.

Starting a family or a growing family brings a roller coaster of emotions and financial stress as parents assess the upcoming changes in their life and finances. I’ve recently met with a couple expecting their first child and they are confused about how to do this and what financial support is available to them. Additionally, while focus is on immediate income and expense needs, other financial considerations such as superannuation and insurance can get left behind.

Should planning for a baby start after conception?

From my experience expecting parents tend to focus on the cost of having children in the sense of preparing for the babies arrival, prams, cots etc. – and longer-term education costs. In reality though, the most significant cost of having children is the loss or reduction in employment income, during both the initial maternity/paternity leave and also via reduced working hours over the longer term.

From a planning point of view, it’s important for a couple thinking about starting a family to know what that future cash flow shortfall will look like. This will show how much a couple will require to save in cash before the baby is born in order to get through the child-raising year without having to drastically change their standard of living.

The government provides a range of financial support initially which can supplement or replace reduced cash flow. Note that this is only very short term and it is important to discuss with your partner what happens after these payments stop.

Parental Leave Pay

The government offers 18 weeks of minimum wage payments (currently $740.60 per week) to the main caregiver of a new baby.

To be eligible, the primary carer of the newborn must have worked 10 out of the 13 months before birth (or adoption) of the child and at a rate of least 330 hours over the 10 months (equivalent to approximately one day per week on average). Have individually earned less than $150,000 in the last financial year.

Don’t worry, dads or partners are not forgotten!

Dad and Partner pay

The government offers two weeks of minimum wage payments (currently $740.60 per week) to the dad or partner of the primary carer.

Any initial financial stress is generally forgotten by parents as the majority of conversations I’ve had with clients is about their child’s achievements. I’ve often heard how sleep-deprived new parents are once their baby is born and planning for the new one’s arrival by removing some of the financial stress will help a couple to focus on caring for the newborn.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Credit Card 101

Credit cards have long been helping people pay for things they need or want. You may be very familiar with them or you may be a newbie in the world of credit who is contemplating applying for your first card. Effective utilisation or misuse of credit cards can make or break your financial well-being.

Before we go through the complexities of credit cards, you must first understand what credit is. Credit is the means to borrow money/access goods or services with the mutual understanding that you’ll pay later. Have you ever borrowed money from a friend for lunch or a colleague paid for your coffee because you left your wallet at home? That effectively is them giving you credit! Of course, with the intention and trust that you’ll pay them back later. We use credit all the time and credit cards are just one of many financial tools used to attain a set amount of credit, commonly via a licensed financial institution such as a bank.

One of the defining benefits of credit cards is the fees, charges and interest associated with using the card. Commonly there would be a fee to set-up the card which is generally charged annually, there are late payment and overdraw fees and also varying levels of interest depending on how you’ve spent the credit. There are often substantial fees associated with taking cash out using a credit card and in general, if you don’t pay off your card in full at the end of each month interest will be charged and backdated too!

Pros of credit cards

  • Easy to carry and use – Easily fit in your wallet, pocket or phone case!
  • Safer than cash – With the exception of contactless payments, it’s generally quite limited before you have to enter a pin for the purchase.
  • Buy now, pay later – Which is the one crucial benefit of a credit card. As of late, there have been a series of different options in the BNPL space but we’ll touch on that in a different session.
  • You’re protected – Fraud protection and monitoring are generally facilitated by the card provider and you’re generally not held liable if your card is stolen or misused.
  • Freebies! – Which to some is the one major benefit of using a credit card. Rewards and frequent flyer points are commonly associated with mid-top tier credit cards and the benefits can easily outweigh the associated fees if used correctly.

Cons of credit cards

  • High-interest payments – Credit card interest rates are applicable if you don’t clear the outstanding balance at the end of each month. These rates are generally much higher than a standard home loan or personal loan and it would be wise for any financial minded individual/family to avoid these payments at all costs.
  • The associated debt spiral – A common trap of the credit card is that you only have to miss one payment and interest will start to add up. Unless you pay off the FULL amount each month, interest will be charged on the FULL amount owing regardless if you’ve paid off half of the balance, 80% of the balance of 99% of the balance. If you get into the habit of not paying it off in full, your debt situation will quickly spiral out of control.
  • Additional fees – As well as interest there is generally annual fees, overdrawn fees or late payment fees. These can sting quite a bit and more importantly, you may have to pay interest on it!
  • Expensive to use abroad – Some cards are a bit friendlier and designed for travellers but most cards will charge excess fees when used in a different country than its origin. Often an additional 1-3% of fees on each purchase which can add up whenever you decide to go on a nice holiday!

To conclude, there are a ton of benefits in owning a credit card, such as flexibility with managing your cash flows and access to additional free benefits. But this can come at substantial a cost if not managed correctly and you can easily fall into financial stress if you get silly and spend on things that you cannot afford!

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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How interest rates affect asset prices

How the level of interest rates impacts the prices and value of assets has probably not been high on the topic list for discussion at most barbeques over this summer, however, there is an argument that they should be, due to the potentially greater effect on absolute return over the investment horizon.

Around the developed world, central banks have decreased interest rates in the hope this will provide a stimulus for economic growth and prosperity, since when money is cheap, folks will borrow and in Australia, folks have taken up the offering. This has led to people placing bets into the capital city residential property markets. The consequence of this has been the price appreciation of residential property in those markets which, unsurprisingly, always seems to be front and centre of discussion around the good ol’ BBQ.

Property prices have gone up, but how many people have mentioned that the value obtained by picking up a property at an elevated price has increased in the same proportion as the price paid for it? That perhaps depends on one’s perception of value, however, this demonstrates one-way low interest rates have affected asset prices.

In times like these, we need to remind ourselves that “if price is what you pay, then value is what you get.” Price is self-explanatory, the amount is advertised broadly and it forms the base on which your future return is calculated.  Value, however, is what something is truly worth or what you get out of owning the thing you bought. It follows that in order to maximise the prospects of a return on an investment, you always want to pay a lower price than the value you will receive from owning that asset.

So, how do interest rates exert influence on assets?

Primarily this happens through the use of the present value calculation which is a valuation method applied to an asset to determine the intrinsic value of it. Essentially this calculation is used to come up with how much in today’s dollars is $10 worth in ten years. We don’t need to go into the mathematics of the calculation here however, we need to be aware that if interest rates are high, we can invest a lower amount of money today in order to obtain $10 in ten years. Conversely, if interest rates are low, we have to invest a higher amount today in order to obtain $10 in ten years’ time.

To put this another way, when interest rates are low, the present value of a future $10 is high.  When interest rates are high, the present value of a future $10 is low. When coupling this mathematical concept with the fact many risk-averse investors have been pushed up the ‘risk curve’ in order to generate an income to support their lifestyle, you end up having asset prices elevated above their intrinsic value.  This is great for an existing owner looking to sell…not so great for a buyer.

Always remember, the higher the price you pay, the potential for a lower overall return…which should mean interest rates becoming something worth talking about around the barbie.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Here’s to a long life!

As more Australians are spending longer in retirement than previous generations, how are we managing our clients’ longevity risk?

As financial planners, we know the risk of clients’ outliving their retirement savings is very real, however, it’s also a risk that clients often prefer not to face up to. For me, the starting point for managing longevity risk is persuading clients to accept the possibility of outliving their money and then providing them with the strategies, portfolios and behavioural skills to set them up for success.

Behaviour changes: We spend much of our time encouraging clients to understand and appreciate that there is a real risk they’ll outlive their money. When there is an understanding of various trade-offs, most clients need to consider that it’s easier for them to make informed decisions and take ownership of their actions.

Portfolio risk: The portfolio needs to be aligned to the client’s risk tolerance. However, in the case of retirees, we need to be cognisant of the impact a loss may have. The desire to generate healthy long-term returns is also important, so the risk/return trade-off takes on a different meaning for a retiree.

Legislative risk: Social security benefits (i.e. Centrelink) can make up a significant portion of a client’s income and can’t be dismissed. Consideration of tax implications on a client’s finances is also fundamental as we know, tax and social security rules change often, so it’s important to be aware of the impact changes have on a strategy and adapt accordingly.

Strategy and products: Using a range of products can make a strategy more robust and flexible for the future. Providing an element of guaranteed income, whilst maintaining access to capital, is nirvana to some clients, particularly if it also provides an uplift in social security benefits.

We approach client’s longevity risk in a number of ways, however, the most effective strategy is regularly talking to our clients about this issue during regular review meetings, revisiting potential outcomes and empowering the client to make smart decisions for the long-term.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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New Year’s and the resolutions we make

New Year’s has come and gone, and we have moved into the 20’s. I’m of the school of thought that the decade doesn’t begin until next year, but it doesn’t seem to make sense does it, since the teens are finished.

Every year on January 1, people all over the world make lists of New Year’s resolutions. Being human, our lists are often lengthy and one of the most common resolutions is to get fit or lose weight, probably exacerbated by the Christmas pudding that we have all indulged in. So, we rush off to join the gym and we sweat it out regularly for a while. Gyms love January 1.

As the weeks roll on, into February and March, our attendance at the gym begins to taper off. Perhaps we are feeling a bit fitter and we have lost some of the weight. We then allow the other things in our life (and the little man on our shoulder who says it’s all too hard) to take over again which spells the end of our exercise regime.

It doesn’t matter what our resolution for the new year is – what matters is how we apply that resolution to our lives. I’ve changed the way I make a resolution by just picking one thing. This year it is that I will tidy up. It’s pretty broad isn’t it – but it covers lots of things including my:

  • House
  • Kitchen cupboards
  • Financial life
  • Mind
  • Golf
  • And so on

I just have to remind myself constantly that this is the goal that I have set myself for 2020, and I have made a good start. But I have to work at it. The kitchen cupboards won’t stay tidy unless I make them that way and be consistent about putting things away in their proper place.

It is the same with anyone’s financial life.  You won’t save money or keep proper control on your spending unless you have a plan to keep it tidy. The work that you put in now on planning and budgeting will pay off for you in your later life, that is retirement. If you want to be able to do things in retirement, you need to have the plan in place now so that you can achieve those dreams. The consequence of doing nothing is being restricted in retirement, and perhaps being restricted to living off the age pension.

Give one of our friendly financial advisers a call to assist you to put your plans in place to tidy up your financial life. We are good at it and we can make a difference for you.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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