Uncategorized

You’ve waited a long time to reach retirement, so how do you make sure your hard earned savings go the distance with you? There are a range of steps you can take before and after retiring to make the most of your retirement income. Getting in training For many people, switching to retirement can mean adjusting to a lower annual income. This is often estimated as two thirds of your salary at retirement (source: MoneySmart) but can be more or less depending on your circumstances and lifestyle. If you are nearing retirement, it can be helpful to start training. That is, set your living budget according to the annual income you expect to have in retirement. There are a few benefits to doing this: 1) Understanding whether your retirement income covers your needs and wants. If it doesn’t, you may be able to consider your options, like continuing to work, even in a part- time capacity to supplement your retirement savings. 2) The potential for extra savings. Adjusting your budget early means you might have a surplus from your current income and a range of options for using this surplus. Some options for this increase to your savings might be to pay off debts, contribute extra to your superannuation or even purchase specific items that might be important for your retirement plans. 3) Time to adjust to different spending habits. Studies have shown it can take 66 days to form a new habit1. Your spending habits and accompanying lifestyle are also a habit. Learning how to live to a new budget before you reach retirement gives you time to retrain your behaviour while you still have the financial flexibility to manage budget blow outs. If you need help planning your budget, speaking to a financial counsellor may be a valuable option. Alternatively, if you are comfortable with your budget but would like to understand your retirement investment options, speaking to a financial adviser may help you with a strategy, including transition to retirement options like living on a part pension and moving more of your working salary into superannuation (if eligible and suitable). Pension vs super Your superannuation doesn’t automatically convert to a pension when you reach retirement age. You generally need to instruct your superannuation provider on what you would like to happen and you have a range of options for this. Some Australians may choose to take their superannuation savings as a lump cash sum for their bank account, while others transfer their money to retirement products like an account-based pension (also known as an allocated pension) to provide a regular income stream from the money saved in their superannuation. Retirement phase products are tax-free compared to the superannuation environment. There are pros and cons to each phase and the style of products in each so you may consider discussing it further with a financial adviser. A recent Organisation for Economic Co-operation and Development (OECD) report Preventing Ageing Unequally suggested that taking a lump sum at retirement increases the risk of falling into poverty as it crystallises your gains or losses at a particular date, leaving you with a set sum to live on. By contrast, options like account-based pensions mean your superannuation money continues to be invested in the market so you may have more flexibility with your finances. By the same token though, you may still be exposed to market movements, including downturns. In either scenario, it helps to look at the complete picture of your assets and likely lifespan to assess how best to manage your superannuation savings in retirement. Note that there are restrictions on how much you can transfer to retirement style products from superannuation. The maximum amount you can hold in a retirement phase product like an account-based pension is $1.9 million. For some, this may mean that you retain much of your savings within the superannuation environment instead and transfer amounts over time to your pension product. Many Australians may also be eligible for the Age Pension – in full or in part. This is determined by a means test which looks at your income, real estate and other assets, investment and superannuation. If you have a partner, their details will also form part of assessing your eligibility. You can find out more and how to apply at Services Australia. Living for the year For those who continue to have their savings invested in some form, such as through an account-based pension, flexible spending on luxuries can make a difference to their finances. In fact, your own grandparents probably took this approach too. For example, you might choose to have an overseas holiday in a good financial year where your retirement investments may generate additional returns to buffer you from needing to dip too much into your savings. Or you might adjust how much you spend on luxuries in a tough financial year. You might still take a holiday for example, but it might be a camping trip in a holiday park or a short driving holiday instead. Alternatively, some retirees also continue some form of paid work to supplement their income and allow for the occasional luxury and to give them flexibility in tougher financial years. There can be social, mental and physical benefits to continued work too. Getting older has some benefits It’s not just about wisdom and a lifetime of memories. Australian retirees have access to a range of benefits to help them spread their money further. A great starting point is obtaining a Seniors Card. The benefits can vary across states and can include discounts on state transport, tourist attractions and even dining at some restaurants. Some retirees may also be eligible for the Commonwealth Seniors Health Card which can assist with your healthcare costs. Look out for seniors’ events and specials too. A range of places from restaurants to galleries offer special events or discount days for senior citizens – typically on dates that the average weekday worker wouldn’t go. There is an additional bonus … Read more

Protecting your income during your working years makes sense. But once you – or your parents – grow older, is life insurance still important? We take a look. Life insurance for later in life As you age and your health starts to deteriorate, having a financial safety net and protecting your nearest and dearest may become even more important. But how old is too old for insurance and do you or your parents still need cover if they are nearing retirement or no longer have an income? The answer is, there could still be benefits from keeping personal insurance cover. Why you (or your parents) might still need insurance As you get older, a lot of the reasons for having Life, Total and Permanent Disability (TPD) insurance or income protection insurance might no longer apply. Perhaps you’ve stopped working, paid off your mortgage and no longer have family members to look after financially. You might now have enough income from super savings to save you from worrying about covering your living expenses in the future. But before cancelling an existing Life or TPD policy to save on the premiums, it’s worth taking a closer look at your (or your parents’) situation. Maybe you still have life goals and responsibilities that could benefit from having insurance cover in place. Plus there could be health problems looming that will make demands on income and savings. While health insurance is key in covering the cost of a hip replacement or cataract removal, life insurance can still have its benefits later in life, especially if you or ageing parents: Have a tight monthly budget to stick to. Don’t have a lot in the way of savings to fall back on. Are helping out family members with living expenses. Will have to sell the family home to fund aged care. Would like to leave the family an inheritance. Meeting the cost of care Some of us may find ourselves with ageing parents that will depend on us almost as much as our children. Sometimes the help they need is practical – like driving them to appointments and helping them around the house. But there may come a time when the time and support you can offer isn’t enough. And while there is some funding available from the government to help with aged care, there are some costs that won’t be covered. If one of your parents needed to pay for their move into an aged care facility, for example, the only practical solution they may have to meet this cost is selling the family home. Having a TPD policy that offers them a payout when they lose capacity to care for themselves due to injury or illness could give them the choice not to sell and keep more of their wealth to pass on to loved ones through their estate plan. Consider a health check before cancelling Even when you or your parents are in a pretty good position financially, state of health is something to keep in mind when choosing whether to keep life or TPD cover. Before cancelling, consider organising a comprehensive medical check up to make sure there aren’t any health problems that could spell trouble in the near future. For anyone that’s had a policy and been paying premiums for several decades, it makes sense to be sure they’re still fit as a fiddle before giving up the benefits of cover. When do insurance policies expire? Most policies will continue to accept new applications and provide ongoing cover for people up to around the age of 64 years old, provided there are no serious pre-existing conditions. Applying for cover later in life might mean a medical exam or blood test is required. But when it comes to taking out new cover later in life, it’s important to keep in mind that premiums on a policy will be far higher for cover in your 50s and 60s. When looking at an existing insurance policy, or thinking about getting a new one, there are two important terms to be aware of: Maximum entry age – most life insurance companies will set a cut off age for getting a new life insurance policy or for switching to a new one. This is usually between 60 and 75 years of age but it will depend on the insurance provider and type of policy. Policy expiry age – this is the age when the life insurance policy will automatically end. This is usually 65 years for TPD cover, 70 years for Trauma and Income Protection and 99 years of age for Life (Death) cover – but again it will depend on the insurance provider and type of policy. This could mean that continuing to pay for a life insurance policy during retirement could provide 30+ years of cover. That’s a lot of peace of mind and potential for a lump sum payout. However, it’s important to remember that you have to keep paying the premiums to get the benefits of cover and depending on your policy, the costs of those premiums will continue to increase or the amount you’re covered for, will reduce as you get older. Just because you’ve paid for cover for a long time doesn’t mean you can’t stop now – don’t let the sunk cost fallacy steer you towards a decision that isn’t in your best interests. As always, make sure you read the Product Disclosure Statement (PDS) before you purchase any insurance policy. Source: MLC  

Planning for retirement is a daunting task and many Australian women lack confidence in financial decision making. Fortunately, there are some small steps women can take today to make a positive difference to their future. It’s probably no surprise to hear that Australian women often retire with less money than their male peers. New research* by Colonial First State (CFS) confirms that even in 2024, this is still the case. There are several reasons for this, including well documented wage gaps and the uneven burden of raising a family which often results in women taking breaks in their careers. Not only do women end up investing less money through super over their careers but this means they’re also missing out on the compounding effects that future returns will have on their balances. And CFS found that while 78% of men have made plans for their financial future, only 67% of women had done similar. Women were also less likely to set financial goals*. All is not lost, though. Read on for some simple steps that will help women start to take control of their super and their future. Knowledge is power It’s important to note that women care about their finances just as much as men do. In fact, women are more likely to feel worried about their finances or guilty that they’re not doing enough to manage finances compared to their male peers*. So, what’s holding them back? Our research shows one major hurdle is confidence – or more specifically, that women aren’t as confident with money and investing as men*. It’s hard to make good financial decisions when you don’t trust that you know what a ‘good’ decision looks like. Luckily, financial confidence is strongly linked to knowledge. The more we know about super and investing, the more confident we can be in our decisions. What’s more, there are several easy ways for women to brush up on their financial knowledge and be able to back themselves. Is there good news? Australian borrowers breathed a sigh of relief with the double rate pause, while the announcement of Michele Bullock taking over as RBA governor was well received. She will become Australia’s first female central bank leader in the RBA’s 63-year history and will serve a 7-year term. Some economists are suggesting that interest rates have now reached their peak. Others remain uncertain, however it certainly signals a slowdown in pace and lessening rate hike pressures. Regularly check up on your super Many people approach their super with a ‘set and forget’ mindset but this attitude can leave you in the dark when it really matters. Aim to regularly check in on your super, making sure your contact details are right (so you’re receiving all the important information and notices) and that you’re happy with the performance of your investment option. Bring it all together Most Australians have more than one super account and are paying multiple sets of fees as a result. Consolidating all your super into one account can help you save on fees and make your super easier to manage. What’s more, you may even have super money that you’ve forgotten about. According to the ATO, there was more than $16 billion in ‘lost’ super as at 30 June 2023 – accounts which have stopped receiving regular deposits, typically after someone has changed their job, name or address. Top up We know most women have lower super balances than men^ but the power of compounding (where you earn interest on your money and on the interest it has earned), means you can start making a difference today. Summing up Taking hold of your financial future is easier than you think. Here’s a summary of our tips to get you started: Check your super balance. See if you have any lost super or multiple accounts you might like to consolidate. Look at topping up your super. Even a small amount could make a difference. Learn more about super. * Source: CFS commissioned survey of 2,966 Australians and research was completed in March 2023. Findings and statistics in this article are based on this research. ^ Source: Australian Families Then & Now: Income and wealth (aifs.gov.au) Source: Colonial First State  

The beginning of the financial year is a great opportunity to review your financial situation, to make sure you’re on track and on top of changes happening across tax and superannuation. Here are five areas that you may wish to review early this financial year. 1: Make your tax savings work for you The personal tax cuts commenced on 1 July 2024 which may mean you pay less tax and have extra cashflow, and it’s important to think about the best way to make the extra dollars work for you. If you are an employee, you may have already noticed an increase in your take home pay as less tax is withheld each pay period by your employer. You may need the savings to meet regular household expenses and manage cost of living increases but if you have capacity, there are ways you may be able to use the tax savings to improve your financial position, such as reducing debt, increasing your cash reserve, investing for the future or boosting your super balance. Even small amounts can make a difference over time. If you’re able to reduce your debt, you’ll have indirect savings by reducing the amount of interest you are paying. If instead you choose to build up your savings, the right option to do this depends on a number of things including: whether your investment goal is short term or long term based on how long you have to invest, what you would like to invest in (e.g. term deposits, shares and/or property) whether you need access to these funds at a particular time (e.g. super savings can generally only be accessed once you retire after age 60). The key is to make a conscious decision to put your tax savings to work in a way that suits you best. To estimate your tax savings for this financial year, check out the Government’s calculator at taxcuts.gov.au. 2: Review your concessional super contributions strategy Concessional contributions include: contributions that your employer must make for you (Super Guarantee or ‘SG’ contributions) salary sacrifice contributions (which are contributions from you pre-tax salary), and personal contributions that you claim as a tax deduction. A limit applies to the concessional contributions that you can make without having to pay extra tax. This is known as the concessional contributions (CC) cap. From 1 July 2024, the annual CC cap increased from $27,500 to $30,000. In addition, the rate of SG contributions that employers must make increased from 11% to 11.5%. Therefore, the beginning of the financial year is a good time to review your super contributions strategy to ensure it continues to be right for you. This includes taking into account the increased CC cap and SG rate to ensure you do not exceed your CC cap. It could also mean starting or reviewing a salary sacrifice arrangement with your employer if you’re able to direct some of the additional income from the 1 July tax cuts towards saving for retirement. Your CC cap may be limited to the annual cap or may be higher if you have unused concessional contributions from the last five financial years and meet other eligibility rules. These are called unused carried forward contributions. See ato.gov.au and search ‘concessional contributions cap’ for more information. 3: Could you benefit from the increase in the non-concessional contribution cap? Non-concessional contributions are contributions you make from after tax income or existing savings. The non-concessional contribution (NCC) cap increased from $110,000 to $120,000 on 1 July 2024. If you’re eligible, you may be able to ‘bring forward’ some of your NCCs from the next one or two financial years, meaning you could make even larger contributions today. The increase to the annual cap also means that the maximum amount under the bring forward rule increased from up to $330,000 to $360,000. Like CCs, eligibility rules apply to NCCs. This includes limits on your total super balance, NCCs you may have made in previous financial years and your age. Remember that investing in super has the benefit of earnings being taxed at 15% compared to your marginal tax rate which could be up to 47% (including Medicare levy). However, access to these savings is restricted generally until you are retired after age 60. 4: Submit your notice of intent to claim tax deduction for personal super contributions If you made personal contributions in 2023/24 and intend to claim a tax deduction, don’t forget to give your super fund your notice of intent and receive an acknowledgement before you lodge your tax return for 2023/24. You must lodge your notice of intent no later than 30 June 2024 if you haven’t lodged your tax return by that point. You also need to lodge your notice of intent before you commence a retirement phase income stream, rollover or make a withdrawal from your super account. This includes personal contributions you have made since 1 July 2024 that you wish to claim as a tax deduction. The timeframes are very specific and there is no discretion if these are missed, which means it could impact the tax deduction you are able to claim from these contributions. 5: Review your estate planning goals Just like many aspects in your life, your estate planning needs to be reviewed on an ongoing basis. Your Will and Enduring Power of Attorney should be updated to reflect any changes to your finances, investments, family and goals. Reviewing your estate plan ensures that it: aligns to your goals, and directs your assets to the right beneficiaries at the right time. Some key life changes that may impact your estate planning include: getting married having children a change in relationship, such as separation or divorce acquiring or selling assets building your savings (including superannuation). Superannuation doesn’t automatically form part of your estate, which means unless you take certain action, you can’t rely on your Will to determine who’ll receive your superannuation balance when you pass away. Your super fund may allow you to … Read more

Thanks to the evolving rules and additional tests, the world of superannuation contributions continues to be a source of confusion, resulting in misunderstandings and genuine errors. Whether it’s the work test, work test exemption, downsizer rule, bring forward rule, or carry forward rule, the area is a never ending array of snappy titles that are hard to differentiate. Irrespective of the evolving rules, there continues to be one fundamental superannuation contribution concept that often causes a panic at the end of each financial year, and that is contribution timing. So when is a contribution made? If a contribution is not made in the intended financial year, it may result in the denial of a deduction, which often results in substantial tax consequences or excess contributions. So, with the various contribution methods, how do you ensure a contribution is received and counts in the intended year? Contribution timing When planning contributions, particularly during the later stages of June, it is vital to understand that a contribution is counted when the payment is received by your fund, not when the payment is sent. This applies regardless of the type of contribution, how the funds are transferred and the type of fund, for example: A cash payment is deemed to have been made when the cash is received by the superannuation fund. An electronic funds transfer is deemed to have been made when the funds reach the superannuation fund account. A contribution by personal cheque is deemed to be made when the cheque is received by the superannuation fund, and promptly presented and honoured. The last example is particularly useful for SMSF trustees attempting to make a last minute contribution. The contribution can be accepted as long as the cheque is dated on or before 30 June and is presented promptly. If the funds arrive later than a few business days it would be questionable and would not be accepted without extenuating circumstances. What about “in-specie” contributions? In addition to making contributions as cash, it is possible to transfer alternative assets into superannuation, primarily an SMSF. These are called “in-specie” contributions. The only assets that can be transferred into superannuation by a member are as follows: ASX Listed Securities Widely held Managed Funds Business or Commercial Property Cash based investments such as Bonds and Debentures. The timing of the contribution will occur when the change of beneficial ownership occurs. Broadly, this is when everything needed to facilitate the change in legal ownership has been completed. For example, a superannuation fund will have acquired beneficial ownership of shares when the fund obtains a properly executed off market share transfer that is in registrable form. It is important for all superannuation members to understand contributions and when they are deemed to be received by a fund. Source: Bell Potter

Back in November we saw five reasons to expect a higher $A. These largely remain valid and the $A seems to be perking up again. Source: AMP Firstly, from a long-term perspective the $A remains somewhat cheap. The best guide to this is what is called Purchasing Power Parity (PPP) according to which exchange rates should equalise the price of a basket of goods and services across countries – see the red line in the first chart. If over time Australian prices and costs rise relative to the US, then the value of the $A should fall to maintain its real purchasing power. And vice versa if Australian inflation falls relative to the US. Consistent with this, the $A tends to move in line with relative price differentials or its PPP implied level over the long-term. This concept has been popularised over many years by the Big Mac Index in The Economist magazine. Over the last 25 years the $A has swung from being very cheap (with Australia being seen as an old economy in the tech boom) to being very expensive into the early 2010s with the commodity boom. Right now, it’s modestly cheap again at just above $US0.67 compared to fair value around $US0.72 on a PPP basis. Source: AMP Second, after much angst not helped by another US inflation scare, relative interest rates might be starting to swing in Australia’s favour with increasing signs that the Fed is set to start cutting rates from September whereas there is still a high risk that the RBA will hike rates further. Central banks in Switzerland, Sweden, Canada and the European Central Bank have already started to cut rates. Money market expectations show a narrowing of the negative gap between the RBAs cash rate and the Fed Funds rate as the Fed is expected to cut by more than the RBA. As can be seen in the next chart, periods when the gap between the RBA cash rate and the Fed Funds rate falls have seen a fall in the value of the $A (see arrows – and this being the case more recently) whereas periods where the gap is widening have tended to be associated with a rising $A. More broadly the $US is expected to fall further against major currencies as US interest rates top out. The dashed part of the rate gap line reflects money mkt expectations. Source: Bloomberg, AMP Third, global sentiment towards the $A remains somewhat negative and this is reflected in short or underweight positions. In other words, many of those who want to sell the $A may have already done so and this leaves it susceptible to a further rally if there is any good news. Source: AMP Fourth, commodity prices look to be embarking on a new super cycle. The key drivers are the trend to onshoring, reflecting a desire to avoid a rerun of pandemic supply disruptions and increased nationalism, the demand for clean energy and vehicles and increasing global defence spending, all of which require new metal intensive investment compounded by global underinvestment in new commodity supply. This is positive for Australia’s industrial commodity exports. Source: AMP Finally, Australia’s current account surplus has slipped back into a small deficit as commodity prices have cooled and services imports have risen (particularly, Australians travelling overseas) but it remains much better than it used to be over the decades prior to the pandemic. A current account around balance means roughly balanced natural transactional demand for and supply of the $A. This is a far stronger position than pre-COVID when there was an excess of supply over demand for the $A which periodically pushed the $A down. Source: ABS, AMP Where to from here? We expect the combination of the Fed cutting earlier and more aggressively than the RBA, a falling $US at a time when the $A is undervalued and positioning towards it is still short, to push the $A up to around or slightly above $US0.70 into next year. Recession and a new Trump trade war are the main risks There are two main downside risks for the $A. The first is if the global and/or Australian economies slide into recession – this is not our base case but it’s a very high risk. The second big risk would be if Trump is elected and sets off a new global trade war with his campaign plans for 10% tariffs on all imports and a 60% tariff on imports from China. If either or both of these occur, it could result in a new leg down in the $A, as it is a growth sensitive currency, and a rebound in the relatively defensive $US. What would a rise in the $A mean for investors? For Australian-based investors, a rise in the $A will reduce the value of international assets (and hence their return), and vice versa for a fall in the $A. The decline in the $A over the last three years has enhanced the returns from global shares in Australian dollar terms. When investing in international assets, an Australian investor has the choice of being hedged (which removes this currency impact) or unhedged (which leaves the investor exposed to $A changes). Given our expectation for the $A to rise further into next year there is a case for investors to stay tilted towards a more hedged exposure of their international investments. However, this should not be taken to an extreme. First, currency forecasting is hard to get right. And with recession and geopolitical risk remaining high, the rebound in the $A could turn out to be short lived. Second, having foreign currency in an investor’s portfolio via unhedged foreign investments is a good diversifier if the economic and commodity outlook turns sour, as over the last few decades major falls in global shares have tended to see sharp falls in the $A which offsets the fall in global share values for Australian investors. So having an exposure to foreign exchange provides … Read more

Conventional wisdom used to dictate Australians were better paying off their home loans, and then, once debt free turning their attention to building up their super. But with interest rates ramping up over the past two years and uncertainty as to when they are likely to reduce, what’s the right strategy in the current market? It’s one of the most common questions financial advisers get. Are clients better off putting extra money into superannuation or the mortgage? Which strategy will leave them better off over time? In the super versus mortgage debate, no two people will get the same answer – but there are some rules of thumb you can follow to work out what’s right for you. One thing to consider is the interest rate on your home loan, in comparison to the rate of return on your super fund. As banks ramped up interest rates following the RBA hikes over the past two years, you may find the returns you get in your super fund has potentially shrunk in comparison. Super is also built on compounding interest. A dollar invested in super today may significantly grow over time. Keep in mind that the return you receive from your super fund in the current market may be different to returns you receive in the future. Markets go up and down and without a crystal ball, it’s impossible to accurately predict how much money you’ll make on your investment. Each dollar going into the mortgage is from ‘after-tax’ dollars, whereas contributions into super can be made in ‘pre-tax’ dollars. For the majority of Australians, saving into super will reduce their overall tax bill – remembering that pre-tax contributions are capped at $30,000 annually and taxed at 15% by the government (30% if you earn over $250,000) when they enter the fund. So, with all that in mind, how does it stack up against paying off your home loan? There are a couple of things you need to weigh up. Consider the size of your loan and how long you have left to pay it off A dollar saved into your mortgage right at the beginning of a 30-year loan will have a much greater impact than a dollar saved right at the end. The interest on a home loan is calculated daily The more you pay off early, the less interest you pay over time. In a higher interest rate environment many homeowners, particularly those who bought a home some time ago on a variable rate, will now be paying much more each month for their home loan. Offset or redraw facility If you have an offset or redraw facility attached to your mortgage you can also access extra savings at call if you need them. This is different to super where you can’t touch your earnings until preservation age or certain conditions of release are met. Don’t discount the ‘emotional’ aspect here as well. Many individuals may prefer paying off their home sooner rather than later and welcome the peace of mind that comes with clearing this debt. Only then will they feel comfortable in adding to their super. Before making a decision, it’s also important to weigh up your stage in life, particularly your age and your appetite for risk. Whatever strategy you choose you’ll need to regularly review your options if you’re making regular voluntary super contributions or extra mortgage repayments. As bank interest rates move and markets fluctuate, the strategy you choose today may be different from the one that is right for you in the future. Case study where investing in super may be the best strategy Barry is 55, single and earns $90,000 pa. He currently has a mortgage of $200,000, which he wants to pay off before he retires in 10 years’ time at age 65. His current mortgage is as follows: Mortgage $200,000 Interest rate 6.80% pa Term of home loan remaining 20 years Monthly repayment (post tax) $1,526.68 per month Barry has spare net income and is considering whether to: make additional / extra repayments to his home mortgage (in post-tax dollars) to repay his mortgage in 10 years, or invest the pre-tax equivalent into superannuation as salary sacrifice and use the super proceeds at retirement to pay off the mortgage. Assuming the loan interest rate remains the same for the 10-year period, Barry will need to pay an extra $775 per month post tax to clear the mortgage at age 65. Alternatively, Barry can invest the pre-tax equivalent of $775 per month as a salary sacrifice contribution into super. As he earns $90,000 pa, his marginal tax rate is 32% (including the 2% Medicare levy), so the pre-tax equivalent is $1,148 per month. This equals to $13,776 pa and after allowing for the 15% contributions tax, he’ll have 85% of the contribution or $11,710 working for his super in a tax concessional environment. To work out how much he’ll have in super in 10 years, we’re using the following super assumptions: The salary sacrifice contributions, when added to his employer super guarantee contributions, remain within the $30,000 pa concessional cap. His super is invested in 70% growth / 30% defensive assets, returning a gross return of 3.30% pa income (50% franked) and 2.81% pa growth. A representative fee of 0.50% pa of assets has been used. If these assumptions remain the same over the 10-year period, Barry will have an extra $161,216 in super. His outstanding mortgage at that time is $132,662 and after he repays this balance from his super (tax free as he is over 60), he will be $28,554 in front. Of course, the outcome may be different if there are changes in interest rates and super returns in that period. Case study where paying off the mortgage may be the best strategy 40 year old Duy and 37 year old Emma are a young professional couple who have recently purchased their first apartment. They’re both on a marginal tax rate of 39% (including the 2% … Read more

Let’s explore the ins and outs of salary sacrificing into your super and help you determine if it’s worth considering as part of your financial strategy. We’re all familiar with the concept of super. It’s that portion of our salary that employers are required to contribute to a super fund on our behalf, with the goal of providing us with financial security in retirement. But what not everyone is aware of, is that relying solely on your employer’s contributions might not be enough to ensure a comfortable retirement. That’s where salary sacrificing into super comes into play. What is salary sacrificing into super? Salary sacrificing into super involves redirecting a portion of your pre-tax salary into your super fund. Instead of receiving this portion as part of your take-home pay, it goes straight into your super account. Here’s how it works: Agreement – You and your employer agree to salary sacrifice a specific amount or percentage of your pre-tax salary into your super fund. This amount is in addition to the compulsory employer contributions. Pre-tax – The sacrificed amount is deducted from your gross (pre-tax) salary, reducing your taxable income. This means you pay less income tax on your take-home pay. Super contributions – The sacrificed amount is added to your superannuation contributions, helping you build a more substantial retirement nest egg. The benefits of salary sacrificing into super Tax savings – One of the primary advantages of salary sacrificing into super is the potential for significant tax savings. The sacrificed amount is taxed at the concessional super tax rate of 15%, which is typically lower than the tax rate you pay on your income. This means you get to keep more of your money while still saving for retirement. You may pay additional 15% tax on all or part of your salary sacrifice if your income exceeds $250,000. In this case, the effective tax on your contributions may be up to 30%, which is still less than the highest tax rate of 45%. Faster retirement savings growth – By contributing more to your super fund through salary sacrificing, you’re accelerating the growth of your retirement savings. Your money is invested over an extended period, potentially leading to more substantial gains through compound investment returns. Compound investment returns refer to earning money not just on the original investment but also on the accumulated growth gained over the period since the investment was made. Lower taxable income – Since the sacrificed amount is deducted from your pre-tax salary, your taxable income is reduced. This can have several additional benefits, such as qualifying you for certain concessions, reducing the Medicare Levy and helping you stay in a lower tax bracket (salary sacrifice contributions are not subject to the Medicare Levy or the Medicare Levy Surcharge. This can lead to significant tax savings, especially for higher income earners.) Automatic savings – Salary sacrificing is an automated process. The money is taken out of your pay before you even see it, which can help you build disciplined savings habits. Long-term financial security – Salary sacrificing into super is a smart way to attain long-term financial security during your retirement years. It provides peace of mind, knowing that you’re taking proactive steps to build a comfortable retirement nest egg. Things to consider before salary sacrificing into super Contribution caps – The annual limit on the amount you can salary sacrifice into super without incurring additional tax in Australia is $30,000 from 1 July 2024. The cap limits change over time so it’s important to be aware of the current contribution cap limit. Those who have a superannuation balance of less than $500,000 on 30 June 2024 may have a concessional cap of up to $162,500 in 2024/25. This includes the annual $30,000 cap, $25,000 for 2019/20 and 2020/21, and $27,500 for 2021/22, 2022/23 and 2023/24. This is based on the five-year carry forward rules. Your financial goals – Consider your overall financial goals when deciding how much to salary sacrifice into super. You should strike a balance between your short-term and long-term financial needs. If you have pressing financial commitments, it might not be wise to sacrifice too much of your current income. What kind of lifestyle do you envision for your retirement? The more comfortable you want it to be, the more you may need to save. Reduced take-home pay – Salary sacrificing means you’ll have less money in your take-home pay. This can be challenging if you’re on a tight budget or have immediate financial needs, such as your mortgage. Investment risk – Your salary sacrifice contributions are invested, and like any investment, they come with inherent risks. Depending on market performance, your super balance can fluctuate. Access to funds – Remember that once your money is in your super fund, you generally can’t access it until retirement or you meet certain conditions. Ensure you have enough liquid assets outside of super, such as cash or shares, to cover emergencies or short-term financial needs. Super is designed for retirement savings, so accessing your money before you reach preservation age can be challenging. Preservation age varies from 55 to 60, depending on when you were born. If you were born on or after 1 July 1964 your preservation age will be 60. From 1 July 2024, the preservation age will be 60. Seeking advice – It’s a good idea to consult with a financial adviser or accountant before implementing a salary sacrifice strategy. They can help you assess your unique financial situation and provide personalised recommendations. Is it worth salary sacrificing into super? The answer depends on your individual financial circumstances and goals. Do you have outstanding debts or immediate financial needs that should take priority over extra super contributions? It’s crucial to have a solid financial foundation before diverting funds into super. For many Australians, especially those who can afford to do so, salary sacrificing into super can be a highly effective way to boost retirement savings, enjoy tax benefits, and secure … Read more

Asset allocation is the process of dividing funds between different asset classes including cash, bonds, property and shares. This takes place as spreading resources across different asset classes can help diversify the portfolio’s holdings, which is an important way to manage risk. In theory, asset classes rise and fall at different times. So, when one asset class rises another will fall, and vice versa. It’s not a perfect relationship but over time this relationship can help smooth out your portfolio’s returns. Different approaches to asset allocation There are many different ways to allocate your investments. The right choice will often depend on your life stage, your appetite for risk and your investment goals. Capital preservation funds Investors often choose this strategy if they need to access their money in the next 12 months, for example if they wish to use the funds as a deposit to buy a home. This can be a sensible option if you don’t want to risk losing your money. Many people who already have substantial wealth use this strategy as they don’t need to risk their capital to produce a return given they already have sufficient funds to support their lifestyle. Taking a capital preservation approach, investors tend to put most of their funds in cash or very low risk investments like government bonds. While this may be a good way to protect your capital, your returns are likely to be modest. It’s also important to assess whether there’s a risk of inflation reducing the principal amount, should the strategy’s returns be below inflation. In this case, the strategy should be reviewed to ensure the funds in the portfolio are actually preserved and not falling. Income generation People nearing retirement or in retirement, who are no longer working and producing a regular salary, may choose an asset allocation strategy to produce income to support their lifestyle. The type of investments used in this strategy produce a regular, often fixed income. They could include government and corporate bonds, real estate investment trusts and some shares that may generate stronger dividends. This approach to asset allocation may generate a higher return compared to a capital preservation strategy. Keep in mind however, the strategy’s performance will be lower than other strategies through which income produced from the investments is reinvested to generate additional returns.     Balanced strategy In a balanced asset allocation strategy, a mix of different asset classes produces growth and income for the fund. Resources are largely split between fixed interest investments and shares, with a smaller allocation to other asset classes such as cash and alternatives, providing both protection and diversification. There are many different types of balanced funds. Some split their resources evenly between shares and fixed income investments. Others tilt their asset allocation one way or another. It’s important to read your fund’s asset allocation strategy so you understand and are comfortable with the way your money is invested if you choose a balanced asset allocation approach. Growth strategy In an asset allocation strategy that is tilted to growth, portfolios are likely to have higher risk assets, such as shares and property, which also offer the potential to generate higher returns over time. This strategy is often used by younger people who wish to generate wealth over time, and who have the ability to ride our market cycles. Strategic versus tactical asset allocation The approaches outlined above are usually known as strategic asset allocation and involve changing the fund’s weighting to different asset classes, depending on the investor’s ability to tolerate risk, their time to retirement and investment goals. Tactical asset allocation is another way to split resources into different pools in an investment fund or portfolio. In this approach, fund managers will opportunistically decide to change the way the assets in a fund are invested, depending on investment market cycles. For instance, let’s say the share market experiences a substantial fall. Some fund managers will choose to allocate more money to shares after this correction, assuming the market will rise and the fund will benefit as share prices lift. The same approach can be used across any asset class. Fund managers can use both a strategic and tactical approach to asset allocation in the same fund. For example, if a fund has a balanced approach the fund manager may have a mandate to allocate the fund’s resources in the following bands: Cash 0% – 10% Fixed interest 40% – 50% Shares 40% – 60%. Fund managers can choose to weigh the fund to take advantage of market conditions, hopefully cushioning returns from market fluctuations, but they must ensure the fund’s assets remain broadly in line with the bands above.   Source: BT

Australian shares fared well in July, buoyed by suggestions that no further interest rate hikes will be necessary. With inflation coming off the boil, there was optimism that borrowing costs have peaked and could be lowered later this year. In turn, this could be beneficial for corporate earnings. Returns from overseas shares were positive too, albeit partly owing to weakness in the Australian dollar which boosted returns from offshore investments. Fixed income also fared well, both in Australia and offshore. Yields trended lower, which translated into favourable returns from bond markets. US The world’s largest economy grew at an annualised rate of 2.8% in the June quarter, which was an acceleration from the first three months of the year and above consensus forecasts. Pleasingly, inflation continues to moderate. The headline and core measures of CPI in the US both ticked lower in June, which will have been welcomed by Federal Reserve policymakers. The latest labour market indicators were less encouraging. Fewer new jobs were created in June than in the previous month and the number for May was revised downwards. The official unemployment rate also ticked up by a tenth of a percentage point, to 4.1%. The Federal Reserve left official interest rates unchanged at its meeting in late July but markets are pricing in the prospect of around 1.75% of rate cuts in the next 18 months or so. Forecasts suggest the first cut could occur as soon as September. Such aggressive policy action has only historically occurred during recessions, suggesting current forecasts could overestimate the extent of easing if the economy remains on its current growth trajectory. Australia The ‘trimmed mean’ measure, favoured by Reserve Bank of Australia officials, showed consumer prices rising at an annual rate of 3.9%. This was a slight slowdown from the first quarter of the year and was also below consensus forecasts. Inflation remains comfortably above the Bank’s 2% to 3% target but it appears to be moving in the right direction and forward looking interest rate expectations moved as a result. Investors no longer expect policymakers to increase interest rates any further and there are renewed hopes for a possible 0.25% rate cut before the end of 2024. The trimmed mean measure of consumer price inflation has now fallen for six straight quarters, from a peak of nearly 7% year on year in late 2022. In turn, there is optimism that Reserve Bank of Australia officials will succeed in bringing inflation back within 2% to 3% during 2025. At the meeting on 6 August, the cash rate remained at 4.35% and officials provided updated economic growth forecasts. Employment growth was much stronger than expected in June but retail sales growth has been less strong. This suggests Australians remain concerned about living costs and that higher mortgage interest payments are eroding purchasing power. New Zealand The Reserve Bank of New Zealand left interest rates unchanged at 5.5% at its July meeting but a bigger than expected drop in inflation in the June quarter suggests policymakers have scope to ease policy settings in the period ahead. Current forecasts suggest borrowing costs could be lowered by 0.25% in August, with two further cuts possible before the end of the year. Europe GDP data for the second quarter of 2024 were released in the Eurozone. The German economy, the largest in the region, shrank by 0.1% over the period, although growth was reported in the three next biggest economies (France, Spain and Italy). With inflation in the Eurozone continuing to moderate, another rate cut in September has been fully priced into the market following June’s initial cut. With the election out of the way, the Bank of England lowered interest rates by 0.25% at its meeting on 1 August. This was the first UK rate cut for four years and could help soften the impact of higher taxes, which are expected to be announced as the new government looks to improve the country’s budget position. Asia Chinese GDP grew at the slowest pace for five quarters in the three months ending 30 June. Residential property prices continued to fall and retail sales growth slowed, suggesting domestic demand is weakening. This will likely be concerning for officials, particularly since subdued export orders are clouding the outlook for the manufacturing sector. Factory output in China slowed for a third consecutive month in July, which does not augur well for the achievement of Beijing’s 5% annual GDP growth target. Interest rates on one and five year prime loans in China were lowered, as authorities tried to underpin activity levels and support the beleaguered property sector. Elsewhere in Asia, the Bank of Japan raised interest rates from 0.10% to 0.25%; a move that had been widely anticipated and well telegraphed by central bank officials. Australian dollar The AUD performed quite well in early July but lost ground in the second half of the month – particularly following the release of the latest quarterly inflation data. The AUD closed July at 65.4 US cents; its weakest level in three months. Notably, the AUD lost significant ground against the Japanese yen following six months of gains. The exchange rate moved by more than 7% after the Bank of Japan raised official cash rates.     Australian equities Australian shares rallied strongly in July, supported by growing expectations for a September rate cut in the US and better than expected inflation data locally that eased concerns about a possible rate hike in Australia. The S&P/ASX 200 Accumulation Index returned 4.2%, its strongest monthly performance so far in 2024, on the back of solid contributions from some of the largest stocks in the index including Commonwealth Bank, Wesfarmers and CSL. The Consumer Discretionary sector (+9.1%) led the charge. Stocks in this area of the market were buoyed by encouraging June/July retail sales numbers and optimism that Australian interest rates will not be raised any further. At the other end of the scale, Utilities (-2.9%) lagged despite a lack of material company updates ahead … Read more