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The dreams of retirees are changing due to the COVID-19 pandemic

11 key findings on retirees dreams during the pandemic

Much like how the Global Financial Crisis hit the economic wellbeing of many retirees so has COVID-19, with confidence in the quality of life in retirement and how long money will last being shaken.  Returns on cash and term deposits are negligible and that doesn’t look like changing anytime soon, which augurs well for growth assets given interest rates appear to be ‘lower for longer’.

Allianz Retire+ conducted some research during the pandemic some months ago and they received over 1,000 respondents from current and prospective retirees.  Here are some key findings.

1. Money is a recurring worry for retirees

24% of the respondents said they worried about making ends meet whilst 20% indicated money was a constant worry.

2. Spending even less on necessities, luxuries

75% of retirees said they were spending less on luxuries due to COVID-19. 68% of respondents said they were only buying necessities.

3. Many retirees did not feel financially secure

51% of those surveyed did not feel secure in their financial position.

4. Wealth destruction

36% of respondents said they had lost money during the COVID-19 market downturn. 13% believed they had experienced financial losses that would not be recovered during their retirement.

5. Vulnerable to another financial shock

61% did not believe their financial situation was safe in the event of another economic downturn.

6. Lack of control

45% did not feel in control of their financial future. Heightened market volatility was making many retirees feel they were at the mercy of global financial markets and unable to control their financial future.

7. Quality of life worries

34% of retirees worried about whether their finances would allow them to have a good quality of life.

8. Illness, market uncertainty top concerns

Top five concerns were:

  • becoming ill (55%)
  • unexpected costs (45%)
  • losing a loved one (44%)
  • not having enough money to live the life they wanted to live in retirement (34%)
  • the risk of one-off market downturns (32%)

9. More conservative approach

62% of surveyed retirees said they were taking a more conservative approach to their retirement because of COVID-19. Given that many retirees already live conservatively, the finding added to the broader survey theme of retirees cutting back further and taking fewer financial risks during the pandemic.

10. Retirement expectations being downgraded

23% of retirees now had more negative expectations of their retirement due to COVID-19.

11. Wary of financial advice

23% of respondents sought financial advice, even though they were feeling less financially secure. Allianz Retire+ research consistently finds that retirees who used professional investment advice felt more confident in their financial position.

Some confidence has returned to markets over the last 5-6 weeks as vaccine rollouts appear to be close to happening.  The U.S election result has also calmed investors some. It would be interesting to view the results of the survey if it were conducted today.

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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Think like an investor

Think like an investor – not a gambler

This may well be an understatement, but it has been an interesting year for financial markets, and it doesn’t look like it is finished yet.  Tensions between the United States (US) and China remain, which you would think will be tested further after the outcome of the US presidential election. But what does this have to do with investing?  Well, that depends on whether you want to think like an investor or like a gambler.

If your mindset is to achieve sustainable and growing returns over the long term then you’re thinking like an investor.

During COVID-19 lockdowns, the activity of speculating on the ups and downs of share prices has been prevalent.  This is essentially gambling and that’s ok, go your hardest if that’s a game you want to play, however, the only problem with gambling is, as most people know already, gamblers tend to lose.

An investor’s mindset is one of owning a piece of that business.  This requires owning a stock not for 10 minutes but for 10 years.  Only when you treat shares as an ownership stake in a business does one’s approach to allocating capital change.  Instead of betting on a price that shows up on a screen between 10:00 a.m. – 4:00 p.m. each day, you become interested in how the underlying business makes money, how it forms part of the business community and the economy and how it can grow over time.

Owning a business also affects the way you think about selling it.

If you owned a successful business here in Australia outright, would you sell it because of the concerns over who might win the US presidential election or because of a change in Europe’s inflation rate?  Probably not, however, because we don’t own a publicly listed company outright, the share price is subjected to those sellers who react irrationally on whether or not ‘The Donald’ will keep his job or get punted.

The consequences of buying and selling being based on emotion, impatience and fear is that share prices become yo-yos.  This can however, favour the investor who makes decisions based on the fundamentals of the ‘business’.  If the share price falls yet the fundamentals of the business have not changed, an investor thinks about owning more of that great business, not rushing to the exit.

If the idea of investing in a quality business appeals more to you than punting on where the share price will be today, tomorrow, next week or in six months’ time, you’re an investor.

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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Return expectations in times of low-growth

The June quarter inflation numbers were printed this week and as expected, it was not good!

The chart below depicts the current situation we find ourselves in thanks to COVID-19.

As you can see, the cost of living dropped an unprecedented (have we had enough of hearing that word lately?) 1.9% over the past three months to June resulting in the annual rate of inflation coming in at -0.3%.

Since 1949, this is only the third time inflation in Australia has been negative!

In a nutshell, this means people are not spending money.  Since people aren’t, or more correctly, haven’t been able to spend money due to the restrictions brought on by COVID-19, company profits will be lower and if profits are lower so will dividends.  As to what extent, we’ll find out in August.

A low inflation rate impacts interest rates and this is not good for term deposit holders. If inflation is low, so are interest rates to encourage spending. However, it’s just not happening. In these times return expectations from our investments need to be adjusted to align with the environment we are in, which is low-growth. This looks like remaining for some time and it is a global phenomenon.

To counter this in the United States, this is how they’re addressing the issue there:

For now, adjust your return expectations from your investments and strap yourselves in, there’s a long way to go!

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 Super – Aligning with Age Pension Age

In what seems to be the ever-changing world of superannuation, the Commonwealth Government has amended the regulations that result in closer alignment to the age pension age, which is a good thing.

The eligibility for the government age pension was increased from 65 in line with the following table:

Soon enough, the eligibility for the age pension will be upon turning 67, however, this is out of whack with the superannuation rules, which principally revolve around turning 65.

Under the current superannuation rules, once you turn 65 the only way you can make a voluntary contribution into super is if you satisfy the work test. This involves working at least 40 hours in a consecutive 30-day period in the financial year the contribution is made.

The current system disadvantages those retirees who have turned 65 as they are not yet eligible to apply for the age pension, however, unless they work, they are restricted from being able to make a voluntary contribution into super.  If an asset was realised or they acquire the winning lottery ticket a voluntary contribution into super is not an option.

It’s highly undesirable to expect a retiree to have to go back to work in order to be able to make a contribution into super hence, quite rightly, this mismatch in the system has been removed.

From the 2020/21 financial year people aged 65 and 66 will be permitted to make a voluntary contribution into super without having to satisfy the work test.  This will permit a ‘non-concessional’ contribution to be made up to the $100K maximum limit.

Similarly, the age at which the ‘bring-forward’ rule for non-concessional contributions is before parliament to be increased from 65 to 67.  The bring-forward rule permits two future years of non-concessional contributions to be brought-forward resulting in a maximum of $300K that can be voluntarily contributed into super instead of $100K.

These are positive steps to alleviate gaps in the retirement system that make it fairer for everyone.

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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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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Strategies to equalise super

In most relationships it’s common for couples to have different super balances, especially where one partner has taken time out of work to rear children or for whatever reason, has not been engaged in full-time employment.  For employees, the amount of employer sponsored contributions made for us is also influenced by salary level, which generally increases the longer we’re in the workforce.

Changes to super since 1 July 2017 have put this issue under the spotlight and provided a real incentive to plan appropriately.  It only seems like yesterday the $1.6M cap on the amount of super that could be held in the tax-free pension phase came to life but it’s been in force for almost two and a half years.  Time flies when having a ‘super’ amount of fun…terrible attempt at humour…

‘Equalising’ the super balances between couples can help to avoid the need to hold amounts in excess of the $1.6 million transfer balance cap in an accumulation account, where profits are taxed at 15%, or worse, be held outside the tax-friendly super environment which could expose profits to the larger marginal individual rates of tax.

Another change to the super rules that are now available to individuals with a super balance less than $500,000, is the ability to carry forward unused concessional contributions i.e. before tax contributions, and make a ‘catch-up’ contribution in the future. This rule provides a real opportunity to maximise retirement savings and gain a personal tax deduction, especially once the nest becomes empty, the mortgage paid and surplus cash accrues.

Couples can also consider contribution splitting, which allows one member to rollover up to 85% of their concessional contributions made in the prior year to their spouse.

Another strategy available is where a member’s income from personal exertion is below $37,000.  Their spouse may receive a tax offset of up to $540 if they make a spouse contribution of up to $3,000.

A strategy we employ at The Investment Collective that is specifically appropriate for couples who have reached 60, is the recontribution strategy.  This involves withdrawing super from one member’s account and then recontributing some or all of the withdrawal into the other member’s account.  This is really beneficial where one member’s balance is above the $1.6M transfer balance cap.  The strategy can also mitigate the impact of death benefits tax when the remaining balance of super passes through to a deceased estate on the death of the surviving partner.

Equalising super balances between couples can bring tax benefits, assist with estate planning and boost the retirement nest egg.  Come in and have chat with us…you never know where it will lead…

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 Importance of Dividends

Any supporters of the Aussie Test Cricket team who watched the recent Headingly Test would have felt like they were on an emotional rollercoaster akin to the uncertainty, fluctuations and volatility that financial markets can deliver.

When the English captain J. E. Root fell to N. M. Lyon (aka the ‘Greatest of All Time’) on the 3rd ball he bowled that day, The Ashes were all but retained, but alas it was not to be. To be fair, it was an outstanding game of cricket in anyone’s language…probably one the Aussies let slip through their fingers, but hats off to B. A. Stokes who played one of Test cricket’s all-time mighty innings under intense pressure to keep England ‘alive’.

What does Test cricket have to do with dividends?

Well, dividends can provide certainty of returns…unlike that damn Headingly Test.

Dividends have been, are, and always will be an important component of portfolio construction because:

  • They provide a reliable source of returns from Australian companies year-in, year-out.
  • The amounts paid are not impacted by the current level of the share market.
  • The dividend yield can act as a ‘safety net’ in times of volatility.

A source of reliable returns

Over the long term, returns from equities come from capital growth and the dividends paid along the way.  Below is a comparison of the returns from those two sources over the last 20 & 40 years:

As can be seen from the table above, dividends have provided more than half of the returns over the last 20 years, and 40% of returns over 40 years.  When you include the benefits of franking credits to those who can receive a refund thereof, the importance of dividends is paramount.

The level of the share market has no impact

While capital returns are affected by share market movement, dividends are dependent on the underlying earnings of a company, not the fluctuation of the share price.  The amount of dividends paid and ratio of profits paid out as a dividend is decided solely by the company’s Board of Directors.

Since the dividend is a reflection of the company’s profitability and not the current share price, it is important to remember in periods of volatility and negative share price performance, dividends received from quality companies with the right fundamentals should not vary greatly from one period to the next.  The chart below demonstrates the deviation away from the ‘standard’ returns from both sources:

From the above we can clearly see the returns achieved from dividends hardly fluctuated over that 20 year period.  This is further highlighted in the chart below:

The returns from dividends, as evidenced by the orange bar, are not impacted by volatility and fluctuations of the share market.

The safety net effect

Short term share price movements over 6-12 months are generally a reflection of the mood of investors based on predictions of economic growth, interest rates or inflation…or what seems to be more common lately, a tweet from ‘The Donald’!

With the benefit of hindsight however, more often than not these events which have created the mood swings that led to large declines in share markets have turned out to be not as bad for markets as we thought at the time.  Take the war with Iraq as an example.  At the time, there were many predictions of ‘doom-and-gloom’ and an impending global recession which caused panic selling even by companies demonstrating the strongest of fundamentals.

Once panic subsides and some normalcy is restored after such an event, the companies with a reliable and predictable growing earnings and dividend stream experience the quickest rebound in their share price.  This is because rational long-term investors are attracted to quality companies at the right price.

Conclusion

Never underestimate the part dividends play in the performance of your investments.

Here’s hoping the last 2 Tests of the current Ashes series provide the Aussie Test team with a healthy dividend.  After Headingly, one suspects they’re up against it…

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EOFY Checklist: What A Year It’s Been!

And we’re not even halfway through it…

It’s certainly been an interesting few months, with the threat of potential changes to the financial planning landscape that would probably have occurred if the federal election result had gone the other way.

As the great Ronald Dale Barrassi once said, “The only constant in life is change.” It’s fair to say everyone in our industry; from clients to those earning a living in it, are looking forward to some stability for the time being.

With the election now a thing of the past and the end of the financial year upon us, it’s time to review some of the strategies that assist with our wealth accumulation objectives.

1. Give your super a free kick

Now is a good time of the year to make additional contributions into super, especially if you intend to claim those contributions as a tax deduction.

Any surplus cash you have sitting in a bank account earning the current abysmal rate of interest can be contributed into super before June 30 as a ‘personal’ contribution and claimed as a tax deduction.

Providing you haven’t exhausted your $25K concessional contribution cap, that increased tax deduction will most likely result in you obtaining an increased refund from the ATO.

The benefits are twofold; you get an increased tax refund which can be directed however you wish whilst also increasing the wealth you have accumulating in super.

2. Utilising unused concessional contributions

From 1 July 2018, if you have a total superannuation balance of less than $500K as at 30 June the previous financial year, you will be able to contribute more than the general $25K concessional contributions cap for that year by topping up the contribution with the ‘unused’ concessional cap from prior years.

Here’s how it will work:

In the table above, this individual in the 2019-20 year could potentially make a concessional contribution of up to $47K because they had used $3K in the prior year thereby having an ‘unused’ balance of $22K that can be carried forward into the next year.

In the 2020-21 year, because the balance of their super was above $500K on 30 June 2020, the concessional contributions cap is limited to the yearly amount of $25K.  In the subsequent year, 2021-22, the ball game has really opened up due to the super balance dropping below $500K at 30 June 2021 which has provided an opportunity to contribute up to $94K in that year.

This potentially allows for realised capital gains to be ‘transferred’ into super and be taxed at the 15% contribution rate, as opposed to a higher marginal tax rate because the concessional contribution can be claimed as a tax deduction.

This is a strategy to keep in mind over the coming years especially if you’re approaching retirement and have a sizeable amount invested outside the super environment that has significant unrealised capital gains.

3. Check in on your goals

It’s a good time of the year to check in on your life and financial goals to see if you’re on target to making your dreams become a reality.  Similarly, expectations may need to be revised to take account of changes to your circumstances over the last 12 months that have impacted on your wealth accumulation strategies.

At the end of the day, your super is your money and you are ultimately responsible for how it performs and grows.  You need to ensure it is being invested wisely and in line with the timeframe you intend to access it.

Here’s hoping for more stability and certainty on the financial planning front over the next 12 months, at least!

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or superannuation advice, please contact us today. One of our advisers would be delighted to speak with you.

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A Strategy to Counter Labor’s Franking Credit Policy?

No doubt you are aware of the Labor Party policy that if elected at the next federal election they will no longer permit unused franking credits to be refunded to taxpayers and self-managed super funds (SMSF’s) in pension phase.  You may also be aware an exemption has been provided to Age Pension recipients.

The planning for retirement for many SMSF’s was done so on the premise that excess franking credits would be received to supplement investment earnings the fund’s assets generated.  This effectively would result in the return on equities paying fully franked dividends to be increased by 30% or the amount of company tax that was paid on that profit the company has decided to distribute to you.

Many of our client’s portfolios hold shares in CBA (Commonwealth Bank) which has a current yield of 5.95%.  The dividends CBA pays are 100% franked which means the true yield to a taxpayer entitled to receive a refund of those franking credit becomes 8.5% (5.95% / 70% * 100%).  A rather compelling reason to hold CBA in this low-interest rate environment some might argue…but that’s for another time…

Let’s assume you have a 2 member SMSF that is in full pension phase and you are not eligible for the Age Pension.  Let’s also assume the SMSF’s portfolio receives $30,000 of fully franked dividend income which once grossed up for franking results in a total dollar return of $42,857.  An additional amount of $12,857 or 30% of the total return has been received due to the refunding of the franking credits.  Under Labor’s policy, the $12,857 will be lost!!

One interesting change in the SMSF landscape happens on 1 July 2019.  From that date, the membership rules of an SMSF change in that the number of members permitted will increase from 4 to 6.  What does this have to do with my SMSF losing my franking credits I hear you say? Well, a lot!!

A strategy worth considering is increasing the number of members in your fund to include those in accumulation phase because the earnings attributable to their member accounts will be taxed at the rate of 15%.  The advantage of this strategy is; rather than lose an entitlement to receive those franking credits altogether, they can be offset against the tax raised against the income attributable to the members in accumulation phase.

For example:
Fully franked dividend income $30,000
Franking credits $12,857
Other income $15,000
Taxable income $57,857
Proportion of members in pension phase 60%
Proportion of members in accumulation phase 40%
Tax rate applicable to a super fund 15%
Gross tax $3,471.42
Less: franking credits that can be used -$3,471.42
Net tax $0.00

A further advantage of adding members in accumulation mode into the SMSF is their taxable contributions are not pro-rated.  This means the contributions tax of 15% levied on those concessional/taxable contributions can be also be soaked up by franking credits to mitigate the net tax position.As you can see for the hypothetical example above, by including members into the SMSF who are in accumulation mode, part of the franking credits can be used to reduce any potential tax liability to nil.  Whilst this is not as advantageous as receiving a full refund of those excess franking credits there is a minor advantage gained in reducing the amount of tax the SMSF pays overall.

As the great Kerry Packer said at the House of Representatives Select Committee on Print Media way back in November 1991:

“I pay whatever tax I am required to pay under the law, not a penny more, not a penny less…if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”

Please note this article only provides general advice, it has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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2020