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Everyone should have a financial plan

Why you need a financial plan

Everyone needs a financial plan and everyone should make a plan that suits their particular circumstances.

You can make your own financial plan that will set you on the path to good financial health. The first, and possibly the most important part is goal setting.

We’ve talked about goals here before, so it’s important to remember to set SMART (specific, measurable, achievable, realistic and time-based) goals. You will need to think about what you want in the short-term, which might be anywhere from now through to 3-4 years, the medium-term which could be from 5-8 years and then long-term goals that look well into the future.

An example of a short-term goal is to finance a new car in 2 years’ time, a medium-term goal might be to save enough for a deposit on a house within 5 years and a long-term goal could be that you don’t want to rely on social security payments when you retire.

It does not matter whether the goal is a short-term or a long-term one, the means to achieving every one of those goals is the same!

You must first look at your income and expenses. Make a budget, this is a pretty simple thing to do these days with a proliferation of budgeting and cashflow apps available, the MoneySmart website is always a good place to begin.

Now you have made your budget and identified that you have some surplus income that you can direct towards saving for your goals, but the critical thing then is to stick to it! You must be very disciplined in ensuring that the identified savings part of your salary goes into your savings and stays there. It’s worth checking with your pay office to see if they will pay your salary into 2 different accounts, but if not, then you must make the transfer as soon as your pay comes in or set up a regular direct debit to occur at that time.  You must also avoid drawing from that account until you are ready to buy the object for which you have been saving.

Unfortunately, in the current economic climate you aren’t going to get much help in growing your savings account via interest payments. This means that you will need to shop around to find an account that pays at least some interest, and as your savings grow, you may be able to use term deposits or other high interest savings accounts for a larger balance.

This will matter to you less when you’re saving for a short-term goal than it will if you are looking at long-term savings. If your goals are long-term, the best course of action is to contact a financial adviser to assist, as you will need their expertise to advise you in relation to how to invest your funds and where to invest them.

Don’t hesitate to call one of our friendly advisers to assist you with your financial progress.

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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Retirement presents a number of new challenges as well as uncertainty for many Australians.

Planning for your retirement

Retirement presents a number of new challenges as well as uncertainty for many Australians. The current economic volatility and low return on cash savings are increasing drivers for Australians seeking advice. It is important to obtain appropriate and tailored advice as it will help retirees navigate the change from saving for retirement to relying on your savings during retirement.

The danger of running out of money is the second biggest worry for retirees, with 53% of Australians concerned about outliving their savings. (National Seniors Australia 2020[i])

There are many ways we can provide value when planning for retirement:

  • Reviewing your historical spending to determine likely spending habits during retirement to know how much you need to support your lifestyle.
  • How to structure your savings to minimise or even eliminate tax.
  • Review your risk tolerance and understanding of the risk-return relationship.
  • Assist eligible retirees to access Centrelink benefits to supplement income and extend retirement asset longevity.
  • Ongoing review service to ensure you remain on track and are coping outside of employment.

The COVID-19 global pandemic is the current driver of volatility and low interest rates. The need to maintain a long-term investment strategy and avoid instinctively making emotional decisions is imperative to ensure that your retirement savings continue working for you.

Understanding your needs and objectives allows us to provide tailored and relevant strategies to support effective decision-making and a long-term plan that guides you through a stress-free retirement.

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.

[i] https://nationalseniors.com.au/uploads/0120203573PAR-RetirementIncomeWorry-ChallengerRpt-FNREV.pdf

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Before seeking financial advice it is important to think about your goals.

The importance of having goals

It’s a common occurrence as a financial adviser when someone asks me what I do for a living, and when I tell them, the reply is “oh, I need to see one of those”. I like to ask what they are wanting to see an adviser about. Inevitably it is to build wealth, but often they haven’t explored what they want the wealth for.

A key step when engaging with a financial adviser is having an understanding of your present circumstances, and having ideas, maybe not definitive, of goals you want to achieve. Sounds easy?

Not everyone knows what they want to do, achieve or what might even be possible.  Depending on the stage of your life, your goals could range from buying a house, travel, retirement, debt reduction, or even estate planning and the priorities for each goal will continue to change over time. This is where your financial adviser can assist to work through your goals and objectives with you, establish a financial plan suited to your needs and help you on the way to success.

Sometimes we have a goal, but can’t define it. When setting goals, we need to think S.M.A.R.T.

Is the goal;

  • specific,
  • measurable,
  • achievable,
  • relevant to you; and,
  • has a timeframe been set?

Having a S.M.A.R.T goal is shown to improve a client’s focus, whether it be saving money to travel around Australia next year, to paying debt off by retirement, knowing the ‘end game’ and what is important to you is essential.

A couple more ideas when setting your goals;

  • “Don’t be afraid to dream” – not everything will always be possible, but if you don’t aspire to a goal, then chances are you won’t make it.
  • In setting personal goals there is no right answer except the one that works for you.
  • “Share your goals” – discuss with your partner and family what you want to achieve. Working together on a family goal like saving for a pool at home is a great activity and can show the kids the value of budgeting.

Finally, everyone must have goals, dreams and ambitions. Even if you don’t know what you might want, discuss your ideas with your adviser who will be more than happy to assist 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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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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Piggy Bank

RBA cuts rates to record low

Philip Lowe, Governor of the Reserve Bank of Australia (RBA) announced a further cut to the cash rate down to 0.1% on 3 November 2020. This is a 0.15% reduction from 0.25%, which was held since March 2020. This is broadly in line with market expectations and brings Australia’s official interest rate in line with rates in comparable countries (which is around zero). For investors, it means lower rates for longer, with a rate hike unlikely in the coming years.

What is driving the latest easing?

Put simply, the RBA’s economic forecasts show that it does not expect to meet its inflation and employment objectives over the next 2 years and sees the recovery as being bumpy and drawn out. The RBA has been undershooting its 2-3% inflation objective for the last 5 years now.

Will the banks pass on the RBA rate cuts?

Passing all of the 0.15% cut will bring some downward pressure on bank profit margins as a significant chunk of deposits are already at or near zero rates. However, I believe the banks will pass most of it on as they will be under pressure from the RBA and the government who have been providing them with a lot of support (including cheap funding which is now 0.15% cheaper). If they do not, they will face public backlash.

Implications for investors?

There are a number of implications for investors from the latest easing by the RBA.

First, ultra-low interest rates will likely be with us for several more years, keeping bank deposit rates unattractive, so it is important for investors in bank deposits to assess alternative options.

Second, the low interest rate environment means the chase for yield is likely to continue supporting assets offering relatively high sustainable yields. This is likely to include Australian shares where despite sharp cuts to dividends, the grossed-up for franking credit dividend yield on shares remains far superior to the lower yield on bank term deposits. Investors need to consider what is most important; getting a decent income flow from their investment or absolute stability in the capital value of that investment. Of course, the equation will turn less favourable if economic activity deteriorates again.

Third, the ongoing decline in mortgage rates along with easing lending standards will help boost house prices, but bear in mind that high unemployment and a hit to immigration will likely impact throughout the year ahead. The housing outlook also varies dramatically between cities given the rising demand for outer suburban and regional houses over inner city units.

Finally, lower rates and increased quantitative easing will help keep the Australian Dollar lower than otherwise, but it is still likely to rise over the year ahead if global recovery continues and this pushes up commodity prices.

If you are not satisfied with the interest rates on your savings or require assistance in reducing the interest rates on your mortgage, please speak to your financial adviser or a mortgage broker.

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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In financial planning it's important to be aware of a client's risk profile.

The importance of risk profiles and asset allocations

One of the most important facets of financial planning is to understand our client’s risk profiles. Put simply, this is your tolerance to market volatility and downturns particularly, or the ‘sleep at night’ factor.

If your portfolio is invested with an asset allocation that does not match your risk profile, you will always be uncomfortable with market movements. The converse is that it is invested in line with your tolerance, and you aren’t concerned with short term volatility.

Typically, your risk tolerance is higher when you are younger, and decreases as you age. Think about the crazy things you might have done when you were 21, compared with the measured approach to your activities when you are 65. We react in exactly the same way with our investment decisions.

At 21, we have time on our side for market volatility and growth to smooth out, but this is not true as we age. This means that we must adjust the way we invest portfolios for clients in later life so that the exposure to growth assets is reduced, and there is an increase to the defensive assets.

Defensive assets are things like bonds, cash and other fixed interest instruments, that provide an income with a relatively level and stable capital value. Growth assets are domestic and international equities, property and infrastructure investments that have the ability to both grow significantly in value, as well as fall in value in times of stock market volatility.

Portfolios need to be constructed with a mix of these two broad categories, based on the client’s risk profile. Growth investors will typically have at least 80% invested in growth assets, whilst a moderately conservative investor might have only 20% in this category. A typical balanced portfolio, is middle of the road, a mix of growth and defensive assets in balance. This type of portfolio suits many people and doesn’t require much in the way of adjustment as we age. It’s perhaps not as exciting as a growth model, but is always a solid performer over the longer term.

At The Investment Collective, we will reassess your risk profile every 3-4 years, or more frequently if you become uncomfortable with market movements. This ensures that your portfolio matches your degree of comfort with markets.

If you would like to discuss the asset allocation in your portfolio, give one of our friendly advisers a call.

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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Redundancy is on the rise due to COVID-19

Controlling your finances during a redundancy

If you’ve been made redundant, it’s important to take action so you can protect the lifestyle you’ve worked hard to achieve. Depending on the size of your redundancy payout and your current savings, you may want to reduce your spending to help see you through until you secure another position.

Making the most of your money

You could consider depositing your redundancy payout into an online savings account to give you the potential to earn extra interest while you determine what to do with your redundancy payment in the long term. If you have a home loan, you may also consider placing the redundancy payout in your mortgage offset account to reduce the ongoing interest cost on your loan.

Watch your budget

It may take some time to find a new job, therefore, it is a good idea to plan how your finances will see you through to re-employment. Online budgeting tools can be very useful in helping you understand what you spend and can help to identify areas where you can cut back.

Bad debt

Some people use part of their redundancy payment to pay off debts like their personal loans, car loans or credit cards. If you do put some money towards your debts, you may want to pay off those with higher interest rates first such as credit cards. Paying off these high interest accruing debts will assist with your ongoing cash flows.

Managing mortgage repayments

Keeping up your mortgage repayments when you’ve lost your income is often a priority. Contact your lender to talk through your options if you’re concerned that you may be out of work for some time and are worried about paying your mortgage. Delaying or restructuring your repayments, extending your loan term or switching to an interest only loan may be options to help you manage your financial situation through this period.

Review your employee benefits

You may need to make decisions about your life insurance and super contributions. Your super may be affected in ways you may not have anticipated after you leave your employer:

  • You may lose some or all of your insurance cover when you are made redundant. So, check to see if insurance continuation options are available if it looks like you’ll lose your cover when you leave your current role.
  • You may not be able to claim against your salary continuance, income protection or Total and Permanent Disability (TPD) policy if you are injured or ill while you’re out of work. If you’re made redundant, check with your insurer to find out how your policy is affected.
  • You may lose your employee benefits or any fee discounts.
  • Your super contributions from your employer will cease.

Seek professional financial advice

You may also want to consider seeking financial advice to help you make informed financial decisions in times of redundancy so you can continue to reach for your long-term financial goals.

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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Conversation is an important step in creating a financial plan

The benefits of seeking financial advice

I have been a financial adviser for about 20 years, and met with quite literally hundreds of clients in all stages of life and with differing financial needs. It has always been fascinating to learn how people think and act in respect of their wealth. The financial planning process itself is pretty straightforward – confirm and clarify objectives and develop strategies, structures and investments that will help meet the objectives of our clients. As such, for me, it is the interaction with clients that I find interesting and sometimes still surprising. Listening to a client, and confirming back to them your understanding of their objectives and preferences is of course paramount in this process.

However, when I think of what I’ve actually spent most of my time discussing with them, it pretty much comes down to the same things, time and time again:

  • Spend less than you earn.
  • Invest surplus income in quality assets which generate income.
  • Review those assets on a regular basis.
  • Structure your financial affairs as simply as possible, but no simpler.

When it comes to investments:

  • As a financial adviser my ‘value proposition’ does not include ‘shooting out the lights’ on investment returns (quite frankly, if I could do that on a consistent longer term basis, I wouldn’t need a day job!)
  • Risk always equals return.
  • We don’t want to avoid risk. However, we need to properly assess the risks and ensure we are appropriately compensated for them.

My aim is always the same. To place my client in a position to make an informed decision. It’s always their decision, I’m simply looking to provide constructive input.

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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Retirees looking over sunset

Aged Care – What’s the cost?

2020 has been an unconventional year, in which we have been faced with a once in a lifetime global health pandemic and our first recession in 20 years. A hot topic of late is the quality and safety of our aged care system, with the federal governments Aged Care Royal Commission well underway.

However, regardless of any flaws in our aged care system, it is still a key consideration for every Australian retiree and something that needs to be addressed as we get on with age and the need for ongoing care escalates. Below is a breakdown of the costs that you should expect if you are considering a move into an aged care facility.

Basic daily fee:

  • Payable by all residents as a contribution for day to day living costs such as meals, cleaning, laundry, heating and cooling.
  • Equivalent to 85% of the basic single person Age Pension.
  • Currently $52.25per day (residents in designated remote areas may pay $1.06 per day more).

Accommodation payment or contribution:

  • Cost of accommodation which may be payable depending on assets and income as well as choice of room. Also known as the applicable room fees, this can be negotiated with the aged care provider.
  • Payable by residents not eligible for government subsidy in respect of cost of accommodation, however, partial subsidy may be required depending on asset/income assessment.
  • Can be payable in either a fully refundable lump sum (RAD) or a daily accommodation payment (DAP) or a combination of both.

Means-tested care fee:

  • Contribution towards cost of care which may be payable depending on assets and income.
  • Income Component Thresholds – $27,840.80 per annum for singles and $27,320.80 (each) for a couple who are separated by illness. In a nutshell this means the tested fee will only apply to you if you earn above these income thresholds.
  • Asset Component Thresholds – There are three levels of asset thresholds which determine if you are low means, moderate means or high means. The asset free threshold for low means is $50,500, moderate means is $171,535.20 and anything above $413,605.60 is high means.
  • Subject to annual and lifetime caps with a current annual capping on fees of $28,087.41 and a lifetime capping of $67,409.85
  • Currently the maximum means-tested care fee payable is $256.44 per day.

Additional charges / Extra services fee:

  • Any other amounts agreed between the resident and the residential care facility.
  • Includes additional care or lifestyle options.

Furthermore, you will need to consider whether to keep or sell the family home and for couples a key consideration is to decide if you move into care together or become separated by illness. It is a very complicated process and every scenario needs to be assessed based on its unique circumstances.

Please contact one of our financial advisers if you need advice in this area.

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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2020