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New Year’s resolutions are such a drag, right? Whether it’s fitness, family or finances, the best laid plans rarely last beyond the first week of January. Life has a habit of getting in the way, especially these days with so many demands on your time. Instead of making ambitious resolutions you don’t have the time or energy to keep, try our personal finance challenge. Here are five things you can get done in around five minutes…start on Monday and by Friday you’ll have a better handle on your daily budgeting, banking and super savings. And then you can start thinking about the rest of the year. Monday | Sort out your super Retirement might be a fair way off but there’s no excuse for ignoring your super. After all, it’s your money. And it’s not that hard—you don’t need to be an expert on investment markets to log into your super account online and get the basics sorted. Check your employer is paying you the correct amount of super. Check you’ve nominated a beneficiary so your super goes to the right people if something happens to you. Check whether you have any lost super lying around from previous jobs. Tuesday | Check your utility bills Water. Gas. Electricity. Internet. Yes, it’s the boring stuff. But that’s no excuse for letting your provider take you for granted. Get online and do a quick comparison to see what deals are out there. If you have time give your current provider a quick call to see if they can do a better deal…and be prepared to take your business elsewhere if they can’t. Wednesday | Start an emergency fund You know it’s important to put money aside for a rainy day. And you’re tired of worrying about the car breaking down or the water heater packing up. If you’re among the one in five Australians who has less than $250 in their savings account, now’s the time to do something so you can meet an unexpected bill. It could help to give yourself a target. If you’re aiming for $2,000 in an emergency fund and you can manage to put away $50 a week, you’ll reach your target in less than a year. You could think about setting up an automatic payment every time you’re paid into a high interest account, so it’s working a bit harder. And then simply set and forget. Thursday | Check what interest rate you’re getting Yes, interest rates are at generational lows. But that doesn’t mean you can’t get a better rate on your savings account so your money works harder for you. The first step is to ask yourself what rate you’re actually getting. If you’re not sure, then it’s time you found out. And once you’ve double checked, have a quick look around to see what else is out there. These days you can set up a new savings account pretty quickly online. So there’s no reason to stick around if you’re not getting a good deal. But make sure you check out the Ts and Cs of any offer—a great special rate could revert to a very low rate after the honeymoon period. And while you’re at it, why not check out the rate on your home loan if you have one? See if your lender can give you a better deal. Or you could shop around other providers. There could be a bit more paperwork with switching providers, but it’s still worth getting up to speed with what’s out there. Friday | Build your 2022 goals timeline Congratulations! You’ve made it to the final day of our ‘five minutes for five days’ challenge. You’ve started the ball rolling to sort out your super, banking and utilities. And you’re hopefully feeling a bit better about your personal finances. So now it’s time to think about the bigger picture. Whatever you’re aiming for in 2022, spending time on setting your goals can reap rewards. Source: AMP

Whether you’re looking to invest in property, renovate or pay off something big, borrowing against the equity in your home may be helpful, if you’re across the risks. The equity in your property can be a valuable resource, as it may allow you to borrow money to achieve your goals, whether they be investment or lifestyle oriented. If it’s something you’ve been thinking about, here are some pointers to understanding what equity is and how it can be used, with the most important being, if you borrow against your property and can’t make the repayments, you could lose your home in the process. What is equity and how is it calculated? Home equity refers to the current market value of your home (which won’t necessarily be the price you purchased it for), minus the amount of money still owing on your home loan. To give you an example, say your home is valued at $800,000 and you still owe $300,000 on it, you’ll have $500,000 of equity. Keep in mind that as the market value of your property can go up or down, so too can the equity you have in it rise and fall. To find out how much equity you have currently, you can organise a property valuation through various banks, lenders and independent agents. Also note, even if you do have equity in your home, you won’t always be able to borrow against it. Your lender will look at additional factors, such as your age, income, debt levels, the property’s location and whether you have any children. This is because all of these factors could affect how much you can afford in repayments. With that in mind, if you do have equity, you’ll want to find out how much of it is ‘usable’. What do people use home equity for? The equity in your home can be used to secure finance for a variety of things, whether it’s a home extension, renovations, investment property, shares, new car or various other big-ticket items. When you use your home equity, you’re effectively increasing the amount you owe to your lender and using your home as security for your borrowing. With that in mind, it’s a good idea to think about the long-term impact of taking on more debt. Investing your money wisely could help you to increase your income, while borrowing money to pay for holidays or things that depreciate in value will come with greater risk. How can I grow my home equity? Add value to your property You can add to the value of your property by renovating, extending or even just making some small adjustments to improve your home’s street appeal. The key here, however, is to avoid overcapitalising, which is when the cost of the work completed outweighs the value added to your home in the process. See if the property has appreciated in value If your property is in a high-growth area or you’ve owned it for a number of years, the property may appreciate in value over time without you doing anything. However, depending on changes in the property market, the reverse could also happen. With that in mind, it may be worth keeping up to date with market trends to see how your property is faring. Reduce your home loan Another way to increase the equity in your home is by reducing the size of your home loan, which you can do in a number of ways. For instance, you could pay more than your minimum repayments (if you’re in a position to) or refinance with a different lender if they can give you a better deal that’s going to cost you less. What should I consider first? Before you use your home equity to take on an additional loan, or increase the one you have currently, there are questions worth asking: What do you want to use your home equity for and is it a good investment decision? How much will your repayments increase by and will you still be able to live comfortably? Will you need to extend the term of your loan? Have you accounted for a possible rise in interest rates? What happens if your property depreciates in value and your loan is worth more than your property? Do you have a household budget in place to accommodate for additional or unexpected costs? Can you access the equity in your property via your current lender, or will you need to refinance? If you do swap lenders, have you thought about break costs and application costs, including establishment, legal and valuation fees, stamp duty, and when lender’s mortgage insurance may apply? Accessing the equity in your home could be a smart move in helping you to achieve your goals. However, it’s important to stick to a workable budget, add in a buffer for emergency situations and be committed to making your repayments on time. Remember, with any debt you take on there will be risks and using your home equity means you could lose your home if you don’t meet your repayment plan. If you would like some assistance, please contact your adviser.   Source: AMP

Superannuation, shares, property, cash, other investments; a dizzying number of options are available when it comes to living comfortably through retirement. Financial advisers often promote a diversified portfolio to reduce the risk of concentrating ‘all eggs in one basket’.  Still, Aussies love their property, with more than 2.2 million of us opting for investing in property, with almost 60% of those aged 50 or over holding property investments. Aside from simply owning a secure place to live through retirement, investing in property can also provide regular post-work income and might offer some assurance as a ‘safe’ investment option. Property is a physical asset and can seem less volatile than other investments, particularly when heading into a phase of life that holds uncertainty and where you may think: “What happens if I outlive my savings?” But different risks and tax obligations in retirement can alter the attractiveness of investments and, when it comes to property, there are a range of strategies that offer different pros and cons when using it to fund retirement. Living off rental income from an investment property On the surface, living off rental income in your retirement is an attractive prospect. But you may need to first make sure the lifestyle you want doesn’t exceed your investment property’s returns, taking into consideration any mortgage repayments, taxes and maintenance costs, as well as factoring in for times when the property may not have tenants. Many people find they need multiple properties in their investment property portfolio to generate enough income to support their retirement lifestyle.   Pros of living off rental income Capital appreciation: If you’ve owned a property for a while or have made significant improvements, chances are it may have grown in value – and may continue to do so. Growth in value can also mean higher rental rates and returns. Interest rates are at all-time lows: Which means low mortgage repayments, if you have them. Outgoings can be low: If you’re healthy and handy, you can leverage your free time in retirement to save maintenance costs by doing your own property management and minor repairs. Holiday ahoy: Many Australians choose to purchase investment properties in holiday locations. When leased, your tenants provide an income stream; when not, you have an instant holiday house for yourself or perhaps a short-term rental. Cons of living off rental income Ongoing costs can pile up: In addition to anticipated outlays – property management, insurance and rates – you risk unexpected costs like emergency repairs and oft-forgotten long-term appliance or structural replacements.   Income from your investment property may be subject to income tax: This will depend on the net amount per financial year – and the amount and type of any other income. Liquidity is restricted: If you need funds unexpectedly e.g. for medical costs, to take a holiday, or for emergencies, you can’t sell a single room of your investment property as you can with shares of stock – the whole thing has to go, and it will take some time before you get the actual sale proceeds. Your income isn’t guaranteed: the rental market can change, and it might mean that your property can be empty for periods of time. Living off equity This option essentially sees you paying-off as much as you can on your property while working (reducing the loan-to-value ratio) and then funding your retirement by borrowing against the equity (the value of your home, less any mortgage) if and when you need it. A number of strategies are available, including home reversion, reverse mortgage and home equity release. Keep in mind that the amount of money you can access depends on your age, the value of your home and the type of equity release. Pros of living off equity It’s tax free: You don’t have to pay tax on this ‘income stream’ as it is effectively a loan. You can tailor the amount of equity you borrow: Whether it’s regular payments, a lump sum, line of credit or a mix. You don’t have to sell: If the equity is in your own home, you get to keep living there and you don’t have to make repayments while you do. Negative equity protection: means you will never end up owing your lender more than your home is worth if you take out a new reverse mortgage. Cons of living off equity There are costs involved: Application, service and end-of-agreement fees may apply. Check with your lender as they may vary from lender to lender. A volatile market: This strategy only works well if your property is increasing in value. You are converting capital to debt, for yourself or your beneficiaries: Some dub this investment strategy “spending wealth, rather than cash flow.” The amount you can ‘borrow’ is restricted: If you’re 60, you can only access 15-20% of the value of your home. As a guide, add 1% for each year over 60. Over time, your payback interest rates may be greater than an average home loan. With home reversion, you ‘sell’ a share of your home usually for well under market value. Selling property to fund retirement To sell or not to sell? It’s a question many Australian homeowners face as they enter retirement, regardless of whether it’s the family home or an investment property. If this is to be your major income through retirement, check that any profits you reap will equate to comfortable golden years. Also consider the effects of re-buying or renting in the same market if you’re downsizing.   Pros of selling property Selling your property may mean you have an increased cash flow: You can use it to pay off debt or invest in shares or in managed superannuation funds, which may provide additional tax benefits and liquidity. You may not have to pay capital gains tax: This may apply if your property is your primary residence, or you purchased it before September 1985. Cons of selling property Capital gains tax: When selling an investment property you’ve never … Read more

Account-based pensions offer a flexible and tax-effective method of drawing a regular income stream from superannuation. They are an essential part of your overall retirement strategy and are usually used from retirement until death. But what happens to your tax-free account-based pension when you do die? Superannuation does not automatically form part of your Will unless a Death Benefit Nomination is completed to that effect. In this article we examine the nomination of an individual beneficiary, where the nomination of a member’s estate and a reversionary beneficiary nomination is not in place. What are your beneficiary’s options? The short answer is it depends. To receive your account-based pension your nominated beneficiary may have two options: Commencing a death benefit pension; or Receiving a lump-sum payment. Both options are subject to additional eligibility criteria. Let’s briefly explore both options with our focus being option 1, commencing a death benefit pension. Option 1: Commencing a death benefit pension Features of a death benefit pension A death benefit pension can basically be considered as allowing your account-based pension to live on after you die, for the benefit of your eligible beneficiary. Features of this pension are much the same as those for an account-based pension. Arguably, the most attractive feature is the tax-free nature in which the assets will reside. Recipients are required to receive a minimum cash pension payment each year which is based on their age and pension balance as at the previous 30 June. Death benefit pensions can also be rolled into another fund at any time, however, they retain their identity as a death benefit. Therefore, a death benefit pension cannot be combined with other pensions or rolled back to the accumulation phase. Is your nominated beneficiary eligible? Generally, only your spouse is eligible. Adult children and your legal personal representative (your estate) would have to receive the benefit as a lump-sum withdrawal, i.e., the assets are removed from the superannuation environment and subject to tax on the taxable component. A dependent child (or children) may also receive a death benefit pension in limited circumstances; if they are under age 18; under age 25 and financially dependent on you; or have a prescribed disability. Transfer Balance Cap Another important matter to consider is your eligible beneficiary’s Transfer Balance Cap (TBC). To reiterate, the TBC is a lifetime limit on the total amount of funds that can enter the tax-free pension phase, currently at $1.7 million. Where your beneficiary has already commenced an account-based pension and does not have a sufficient remaining TBC to receive the death benefit pension, they may roll back their existing account-based pension into the accumulation phase to create room for the death benefit pension. Option 2: Receiving a lump-sum payment The alternative is to receive the amount as a lump-sum payment. With this option, the funds exit the superannuation environment. The benefits may be cashed as either in-specie or cash depending on your fund’s governing rules. Conclusion The death benefit pension option presents an opportunity for your eligible beneficiary to maximise the total amount of funds held within superannuation. While there are limitations on who can exercise this option and matters complicated by TBC, it is still worth considering as the assets will reside in a concessional tax environment. Source: Bell Potter

Retirees wanting to downsize their home may consider the option of living in a granny flat, or an extension to / spare room of a relative or friend’s home. Money, the transfer of an asset or a combination of both, may be given as consideration for the right of accommodation, or a life interest in a property. For social security (including DVA) purposes this is called a ‘granny flat arrangement’. Under social security rules, a person can give away assets or money of up to the harsher of $10,000 per financial year, or $30,000 over a five year rolling period. However, Centrelink may allow a greater amount to be given away where the person pays for a granny flat arrangement. Any amount exceeding specified limits as allowed by social security will fall under the deprivation rules, commonly referred to as ‘gifting.’ Where an amount is ‘gifted’ it is assessed for the social security means test for five years. Payments that do not fall under ‘gifting’ Centrelink recognises that granny flat arrangements are usually family arrangements. Payment for construction costs to provide accommodation for the person, or the transfer of property (such as the family home to the grantor of the right), is not considered ‘gifting’. However if the amount paid exceeds the construction costs, or is in addition to the property which has been transferred, Centrelink will apply the reasonableness test. The reasonableness test Where the reasonableness test applies, amounts up to the value of the granny flat interest do not fall under gifting. The value of the granny flat interest is the greater of the reasonableness test amount, and the: value of the property that was transferred or value of property purchased for the grantor or construction costs incurred. The reasonableness test is a quasi-actuarial calculation to value the granny flat interest for social security purposes. It uses a conversion factor that is based on the person’s age next birthday and the maximum partnered pension rate at the time the granny flat arrangement is entered into: The annual combined maximum partnered rate x conversion factor The calculation is the same whether the person is single or partnered. For couples, the conversion factor is based on the younger spouse’s age next birthday. Example 1 Janice, aged 69, pays her son Justin $800,000 for the right to live in a granny flat to be built in Justin’s backyard. Construction will cost $150,000. As the amount paid for the granny flat arrangement exceeds $150,000 the reasonableness test will apply. The conversion factor based on 70 years is 17.36 and the annual combined maximum partnered rate at that time is $39,923.60. The reasonableness test is calculated as:   $39,923.60 x 17.36 = $658,353.70 The value of the granny flat interest is calculated as $658,353.70, being the greater of the reasonableness test amount and construction costs. The amount of $141,646.30* (i.e. $800,000 less $658,353.70) will be considered a ‘gift.’ Example 2 James, aged 80 and Anna, aged 78, transfer the title of their home valued at $600,000, plus $100,000 to Katy, who agrees to grant the couple a life interest in the home. As money was paid in addition to the transfer of property, the reasonableness test will apply. The value of the granny flat interest is $600,000, as this is the greater of the value of the property transferred and the reasonableness test amount calculated at $427,182.52 ($39,923.60 X 10.70). The $100,000* will be assessed as a gift. *Deduct $10,000 per financial year that is allowed to be gifted (once per amount), up to a maximum of $30,000 over a five year rolling period. Terminating a granny flat arrangement within five years ‘Gifting’ may apply where a pensioner terminates a granny flat arrangement if it was expected at the time of commencement, that the pensioner would leave the accommodation within five years. For example, where the pensioner needs aged care. The value of the granny flat arrangement will be assessed by Centrelink for the remainder of the five year period. Example 3 If Janice from the first example, left after three years, Centrelink may include $658,353.70 for the next two years in Janice’s means test calculations. With respect to a granny flat arrangement, it’s important to investigate all details of the arrangement before it’s entered into, and to determine whether the reasonableness test will apply. You should also consider the advantages and disadvantages of the strategy including any tax, social security, and estate planning impact. Pensioners who ‘gift’ to gain or retain more Age Pension may actually receive less than what they give away. ‘Gifting’ may be an option for self-funded retirees who have financial resources to spare, however pensioners who depend on social security should think carefully before ‘gifting’ large amounts of cash or other assets. To find out more please contact your adviser. Source: BT

Introduction Investors continued to focus on rampant inflation and, in turn, potential changes in monetary policy settings. By the end of January, five interest rate increases in the US had been priced in to markets; a more aggressive tightening in policy settings than had been anticipated previously. These evolving expectations saw bond yields rise in all major regions – resulting in negative returns from fixed income markets – and spooked share markets. Major equity indices in the US, Europe and Australia all closed January substantially lower. Australia: The Reserve Bank of Australia expects inflation to continue to trend higher in the short term. CPI seems likely to be above the 2-3% target range, due to a combination of effects including higher petrol prices and interruptions to global supply chains. The higher inflation prints are expected to be temporary, however, rather than being more structural in nature. Policymakers remain unconvinced that inflation is ‘sustainably within the target band’ – the stated hurdle for interest rates to be raised. Accordingly, the Reserve Bank is likely to be more patient than current market pricing suggests when it comes to raising cash rates. Officials again made specific reference to stronger wage outcomes being required for inflation to be sustainably within the target range. With the unemployment rate forecast to fall only modestly during 2022, the central case appears for only a gradual pick up in wages. All of this suggests interest rates could start to be raised in Australia in 2023, rather than this year. That timing could be brought forward if wage outcomes surprise on the higher side in the near term. New Zealand: Like elsewhere, there was an ongoing focus on inflation. CPI quickened to a 31-year high of 5.9% in the December quarter, driven by rising energy prices, higher prices for new and used cars, and rising rents and construction costs. Consensus forecasts suggest unemployment fell in the December quarter. With labour shortages in some areas due to border closures and a lack of immigration, wages are rising. House prices were also up an eye-watering 27.6% in 2021. All of this suggests policy settings could be tightened further in the months ahead. The Reserve Bank of New Zealand has already raised interest rates twice in the past few months, but further increases are anticipated this year. US: With inflation running seemingly out of control, it has become clear that interest rates in the US will be raised sooner rather than later. Headline CPI has risen to an annual rate of 7.0%, the highest level in nearly 40 years. Most investors are now expecting officials to lift the Federal Funds rate in March. It remains to be seen whether policymakers will raise the official interest rate by 0.25%, or opt for a more aggressive 0.50% hike. More importantly, consensus forecasts now indicate the Federal Funds rate will be raised by around 1.25 percentage points this year. This will be the start of the ‘policy normalisation’ process, following two years of Covid-related zero interest rates. Less than 200,000 new jobs were created in December – the lowest monthly total of 2021 – although the US economy added nearly 6.5 million jobs in the year as a whole. Despite the buoyant job market and rising wages, consumer spending has been subdued recently due to Omicron. Europe: German officials reported GDP contracted 0.7% in the December quarter, raising concerns about a possible recession in Europe’s largest economy. The latest sentiment gauge fell to its lowest level in nine months, as pandemic restrictions dampened confidence levels. More encouragingly, economic growth in France and Spain was ahead of expectations. In aggregate, Europe appears to be recovering from the pandemic more slowly than the US. The IMF has lowered is outlook for the euro-area for this year, and suggested inflationary pressures in the region will persist. Tensions between Russia and Ukraine threaten to send energy prices in the region even higher, which could hamper corporate and consumer spending. Inflation remains a concern in the UK too, having risen above 5%/year in December. Interest rates seem likely to be increased further in the months ahead, following December’s initial hike. Asia: Inflationary pressures are being seen in Japan, a country that has grappled with deflation for most of the past 20 years. Bank of Japan officials raised their official inflation expectations for the first time since 2014. Growth in China is expected to come off the boil this year and next, decelerating to an annual pace of around 5.0%. That compares with GDP growth above 8.0% in 2021, and a rate of between 6% and 7% in the five years pre-Covid. Australian dollar: The Australian dollar often underperforms during periods of ‘risk-off’ market sentiment, and January was no exception. The ‘Aussie’ lost ground against the US dollar, falling 3.1% to a little over 70 US cents. The currency depreciated by a similar margin against a trade-weighted basket of other international currencies. Australian equities: Australian equities experienced their worst month in January since the coronavirus pandemic began, and endured the worst start to a calendar year since the Global Financial Crisis. The S&P/ASX 200 Accumulation Index declined 6.4%. Valuations came under pressure from concerns about potential interest rate hikes, rising inflation and geopolitical tensions overseas. IT stocks fared particularly poorly. All constituents in the sector lost ground, with WiseTech Global, Altium and Xero all declining by more than 20%. The Energy (+7.9%) and Materials (+0.8%) sectors were among the few that moved higher in January. Both sectors were supported by strong commodity prices. Iron ore and oil both moved around 20% higher in AUD terms over the month. Iron ore benefited from expectations of growing Chinese steel demand, thanks to anticipated increases in infrastructure investment, along with restocking demand ahead of the Lunar New Year holiday period. The ‘risk-off’ sentiment had a particularly adverse influence on small cap stocks, as investors favoured the relative safety typically associated with larger companies. The S&P/ASX Small Ordinaries Accumulation Index declined 9.0%, with fewer … Read more

Value is a funny thing. One person’s trash can be another person’s treasure, as the old saying goes. The value we place on something tends to be very individual, and is generally a product of many different factors ranging from cultural background and upbringing to personality type and even life stage. But as much as the way we view value varies from person to person, there are also some common views that tend to draw us together. According to research commissioned by TAL, Australians are seven times more likely to name their possessions as their most valuable asset, rather than themselves. The research revealed almost all Australians find it difficult to understand their own value. As a result, we tend to base our self-valuation on the amount we earn and own, while neglecting the intangible things such as the value of the social and emotional contributions we make to the lives of our loved ones. The things we value will change over the course of our lives Unsurprisingly, the research showed that throughout every generation, the things we place value on will change as we move through different life stages. For those in their 20s and 30s, building a rewarding and successful career tends to be a strong focus, whereas those approaching or enjoying retirement tend to be more focused on staying healthy and supporting loved ones with practical tasks. But where it gets interesting is when we look at how Australians felt their changing views on value over time had impacted the decisions they made along the way. The long-term impact of our views on value According to the research, the majority (78%) of Australians undervalue themselves and their contributions to others which over time has led to some regrets, including poor life decisions relating to their long-term wellbeing, as well as actions around protecting what they value. The common views on value that draw us together Despite our views on value changing as we move through different life stages, the research also found there are key areas of our lives which we are each underestimating when it comes to understanding our personal value, and this can subsequently have an impact on the choices we make. In fact, Australians tend to fall into one of four different personal value profile types, which will influence the things they value and choices they make across their lives: Gregarious Go-Getters (24% of Australians) – these people generally strive to have a successful career and are more likely to undervalue the importance of taking care of their health. Conscientious Carers (28% of Australians) – these people highly value the emotional support they give to their loved ones but may question the decisions they make in life and sometimes wish they did things differently. Family-Focused Optimists (32% of Australians) – these people tend to take a family orientated approach to life. They take care of their health but place less importance on their career than other areas of their lives. Ambitious Organisers (16% of Australians) – these people are more likely to sacrifice their long-term happiness to focus on a successful career and tend to underestimate the value of their emotional support and time to loved ones. So why does the way we view value matter? With the research showing that many Australians believe underestimating their own value has led to some regrettable life decisions, it’s important to consider how your present choices may impact you in the future and the things you will come to value over time. After all, you are your most valuable asset – in every hour of every day, month and year of your life, especially to your loved ones. Source: TAL

Portfolio construction is a much-used term that can be misunderstood. Fundamentally, the term portfolio construction refers to the process of selecting investments to create the optimal balance of risk and return. By mixing different types of investments and different asset classes, portfolios can be built in a way that maximises the return for any given level of risk. This concept of risk is fundamental to portfolio construction. The key to effective portfolio construction is understanding that each individual experiences risk differently and investment needs change dramatically as people’s priorities change over the course of a lifetime. Risk tolerance Depending on what stage of life they are at, individual investors can have quite different goals. An investor early in their career can afford to seek higher returns from their investment portfolio by taking a higher level of risk because they have more time to make back any downturns in markets. They also have less need for income from their investments than someone approaching or in retirement and can weight their portfolio towards growth assets. A younger investor can be less concerned about inflation than a retiree because they can rely on wages growth that can maintain their purchasing power. They can also afford to lock up investments for a longer period without worrying about liquidity because they have time before they need to draw down on their assets. In contrast, retirees tend to be more concerned about capital preservation because they need to draw on their asset pool throughout their retirement. As they are no longer earning income from work, they need to draw income from their portfolio. This means they should consider weighting their portfolios towards income-generating assets. Any increase in inflation erodes a retiree’s purchasing power as it costs more to maintain standard of living which means their capital can be eroded faster than planned. And liquidity is critical for a retiree as assets may need to be sold quickly – for example if there is a medical emergency – without punitive valuations. The concept of sequencing risk is also a critical difference between early and late-stage investors. Sequencing risk Sequencing risk refers to the risk of being forced to sell investments after a fall in valuations. A younger investor can typically ride out market volatility and even buy more assets when valuations are low. However, late career investors and retirees who are forced to sell assets at low prices to fund their lifestyles have no way of regaining the lost value. A sensible portfolio construction process can protect against this. Hedging risk A question that often comes up is the role of downside protection in portfolio construction. The answer is different depending on where an investor is at in their investing journey. Take the example of a pre-retiree and a younger investor with portfolios split equally between equities and bonds going into the global financial crisis (GFC) – with and without downside protection using options strategies. Without downside protection, the retiree would have seen a pullback in the value of their assets of about 25 per cent and, because they were drawing down on their assets to live their life, they would not have been able to fully participate in the subsequent recovery. Had they used downside protection on their portfolio, they would have been back on track by 10 years later. The same is not true of the same strategy deployed by a younger investor. Without downside protection, young investors just keep buying into the market through a downturn and continue to accumulate assets. But with downside protection – which comes at a cost – they see a drag on their returns, lowering their ultimate savings. It’s a reminder of the difference between younger and older investors. Human beings also have the potential to make mistakes in their investing lives. If a retiree investor facing the same kind of GFC drawdowns suddenly became risk-averse and shifted their portfolio to 30:70 equities and bonds, this would be an understandable and apparently rational decision to preserve assets. But markets recover. If that retiree waits until the storm passes and takes three to five years to switch back their allocation to 50:50, they would be 30 per cent worse off than if they did nothing at all. Asset allocation So, what assets should retirees look for? In our view, the key is to seek out desirable risk attributes and not simply take the approach of investing by asset class. In Australian equities for example, franking credits offer a good income stream for retirees by refunding the tax paid by the underlying companies. It should also be noted, however, that in seeking a higher exposure to Australian equities in pursuit of franking credits, a portfolio will acquire other concentrations of risk, for example: exposure to China. Good portfolio construction should consider and diversify away these concentrations. In direct assets, infrastructure offers good opportunities for retirees. Many infrastructure assets earn a return on an availability basis regardless of actual usage or economic conditions, providing a stable income. The key consideration for direct assets is liquidity, as holding large allocations of illiquid assets could mean having to disproportionately sell down liquid assets, like equities, at an inopportune time if larger sums of cash are needed for, say, a medical emergency. For bonds, the traditional defensive characteristics may not be available in a world of near zero interest rates and the potential of rising inflation. In the last 30-40 years we have seen a terrific run in markets, particularly with bond rates coming down from as high as 16.5 per cent in the case of 10 year Australian government bond yields almost 40 years ago to near zero now. The performance was further buoyed by lower tax rates, falling tariffs and the rise of globalisation. The corollary of this is that throughout those 40 years, forward return expectations have been declining. In fact, a fund with a traditional asset allocation split 60:40 between equities and bonds is near its highest ever valuation level. … Read more

If you have a family member who wants to get into the market sooner than that, you may have discussed whether you’d be willing to speed up the process (if you’re in a position to) by going guarantor. This is where you use the equity in your own property as security for the loan they’re taking out. It’s essentially a promise by you (the guarantor) to the lender, that the borrower will make the necessary repayments and if they don’t, or are unable to, you’ll repay the loan for them. While there may be benefits for the person you’re going guarantor for (they mightn’t need such a big deposit or could avoid paying lenders mortgage insurance), here are some things to avoid before making a decision. Not knowing what you’re signing up for Depending on the lender (and each will have their own terms and conditions if they allow for this type of arrangement), you can use your property as security on someone’s entire home loan, the entire loan amount plus additional costs, or limit the guarantee to a portion of the loan. The role of guarantor will generally be limited to immediate family members, but may include siblings, grandparents and even former spouses, depending on your lender. Meanwhile, how long you act as guarantor will depend, but once this person’s loan has reduced beyond a certain level, you can ask to be removed as guarantor, although this will have to be approved by the lender and fees may apply. Not considering changes in circumstances You always want to hope for the best but over the term of this person’s home loan, there could be a point where they lose their job or become injured or ill and be unable to make repayments for a while. For this reason, you may want to find out if they have a back-up plan, any emergency cash stashed away or personal insurance (what type and how much). If things don’t go as expected, repayment of their home loan becomes your responsibility, so unless you have additional funds, worse-case scenario, you may have to sell your home to clear this person’s debt and there could also be flow on affects regarding your credit report. Not giving much thought to your own bucket list Going guarantor reduces your ability to borrow funds, so it’s important to think about whether you have other plans that could be affected – such as holidays or other big purchases. You may also want to give some thought to your retirement. June 2021 figures (which assume you own your home outright and are pretty healthy) show individuals and couples, around age 67, who are looking to retire today, need an annual budget of around $44,818 and $63,352 respectively to fund a comfortable lifestyle. With that in mind, you don’t want a sudden liability, such as being called on as guarantor, to jeopardise your retirement plans. Not expressing your expectations Before making any decisions, it’s important to discuss and consider: both parties’ circumstances and expectations over the life of the loan. having an agreement in place to help make sure everyone is on the same page. how long you expect to be involved and what your exit strategy as guarantor might be. Not exploring other financial avenues There may be other financial avenues that could work better for you and the borrower depending on your situation. Could you gift a deposit? If you can afford it, gifting a deposit might be something you’d prefer to do. A good deposit will reduce the amount your family member needs to borrow, and the interest paid over the life of their loan. Going down this avenue also means any loss you incur will be limited to the amount of the gift. Bear in mind, if you happen to receive Centrelink payments (or are planning to in the future), you’ll need to consider that a gift of this nature could impact your benefits, so do your research. Could you go in as a co-owner? When you buy a home with family members, you share responsibility for the costs involved while receiving the benefits of investing in property, depending on your arrangements. It’s important to understand that as a co-owner you are included on the loan and only own a share of the property. If you sign as a joint borrower, you’re also equally responsible for the home loan so are equally liable for the entire debt with the principal borrower. Again, it’s a good idea to document each person’s rights and obligations. For example, is the person who is going to live in the property going to pay you rent, which you would otherwise expect in an investment property situation? Going in as a co-owner is a big commitment and you’ll need to understand the risks and get the right advice, so you’re across everything, including tax and possible Centrelink issues. Could you let them save money by living with you? If it’s your child you’re thinking about going guarantor for, you may be interested to know that many parents have adult children living at home rent-free to help them save for a home. With that in mind, you may prefer offering your child their old room for a while for low or no rent to help them get some more savings behind them. Where to go if you need a bit of help Acting as a guarantor is a serious legal responsibility and you may be required to get legal advice before a lender will accept the arrangement.  It’s also a good idea to discuss any potential risks, benefits and tax implications with your financial adviser as well. Source: AMP

Depending on the situation, you might get some of your ex partner’s super, or they may get some of yours. See what you need to know. A divorce from your husband or wife, or a separation from your de facto, could mean a division of your assets and debts, whether they’re held individually or together, and superannuation is no exception. The agreement or decision to split super is part of the overall settlement process, which will consider all of the assets and liabilities of a couple. Even if one of you hasn’t contributed to super for a long time, that person could still be entitled to a percentage of the other’s super. Below we explain a few things you may want to know, noting that if you’re a de facto couple living in Western Australia, different rules may apply, as you’re not subject to the same superannuation splitting laws. How is super split in a divorce or separation? There are several ways superannuation can be split. A super agreement can be put in place before, during or after your relationship, as part of a broader binding financial agreement, which can specify how super is to be split upon separation or divorce. If you don’t have a binding financial agreement in place but have agreed how you’d like your super to be split, an Application for Consent Orders can be filed in court, without your attendance, to formalise the arrangement you’ve both come to. If you can’t reach an agreement, you may instead consider applying for financial orders, where a court hearing will determine how super is to be split between the two of you, noting there are time limits in place to do this. What’s involved in the process? You may need to get information regarding the value of the super money that could be split between you. You can do this via your or your ex’s super fund, provided the request is for purposes related to the separation. To get this information, you’ll need to provide various forms to the super fund, which you can locate in the Federal Circuit and Family Court of Australia’s Superannuation Information Kit. Once the super splitting order is made, whether by consent or after a court hearing, you’ll also need to provide a copy of the order to the super fund for it to be effective. Depending on the situation, if you want to defer making a decision around how super is to be split, or if you have an older style fund where splitting is not available until you’re eligible to start taking the benefit, you could establish a ‘flagging agreement’ where the super fund is unable to pay out super until the flag is lifted. What potential costs might you come across? Super funds may charge an administration fee for carrying out any requests around splitting super. These are separate to any costs for legal or financial advice, or court fees. With that in mind, it’s worth checking what the super fund may charge for things like: an application for information a super split implementing a flagging agreement lifting a flagging agreement. When will the money be paid? Because there are rules around when super can be accessed, be aware that splitting super won’t necessarily result in an immediate cash payout, as super is treated differently to other assets and debts. So, after the agreed amount has been transferred to your or your ex-partner’s super account, the money must remain there until a condition of release is satisfied. What that means is, generally, you can’t access super until you’ve reached your preservation age (which will be between 55 and 60, depending on when you were born) and you retire. What other things should you consider? Some couples choose to leave their super untouched. Instead, they factor in the value of their super accounts while dividing up their other assets. With that in mind, it’s worth knowing the details of all your financial accounts, including your super, noting many Aussies have more than one super account. You can search for lost or unclaimed super by doing a super search with your current super fund or by logging into your MyGov account. Where can you go if you need more help? Working out what you’re entitled to can be complicated which is why it may be a good idea to get independent legal advice, even if things are amicable. You might also think about consulting with your accountant or financial adviser. Source: AMP