Some proven financial advice strategies

Transcription

1 Some proven financial advice strategies There are numerous key financial advice strategies that may put you on the road to achieving your financial goals

2 Debt Management Debt consolidation can lower repayments to reduce financial burden, or minimise the interest paid on your loans Imagine you have a mortgage, credit card and personal loan, which you are paying off with minimum repayments. Current situation of debt repayments Possible solutions for debt consolidation Mortgage Credit card Loan $250,000 $5,000 Interest rate 7.86% 19.99% Monthly repayments $1,810 $133 Total paid $651,626 $7,946 Total interest $401,626 $2,946 Term (years) 30 5 Strategy Consolidate the loans and reduce your repayments Monthly repayments $1,991 Total paid $716,788 Example Total interest $441,788 Years to repay 30 Personal loan Total $20,000 $275, % $687 $2,630 $24,744 $684,316 $4,744 $409,316 3 Consolidate the loans and maintain your current repayments Consolidate the loans and slightly increase your repayments $2,630 $2,730 $462,193 $447,939 $187,193 $172,

3 Debt Management Debt Release How to pay off the home loan sooner? Three different strategies Direct as much income as possible into your mortgage. Develop a savings plan, either inside or outside superannuation, to create a lump sum that will eventually be used to pay off the mortgage. Use the equity in the home to obtain an investment loan on which the interest is tax deductible. The investment returns and tax deductions will potentially reduce the term of the loan. Considerations The client needs the reliability of a low-risk strategy and the added comfort of owning their own home. Considerations Saving through superannuation is tax-effective for most people. Considerations This is a higher risk strategy with potential for both higher and lower returns. Note: The strategy which is best for you depends on a variety of individual considerations, including your timeframe, current income and expenses, assets and liabilities, risk profile, etc.

4 Saving for retirement When should you start saving for your retirement? The sooner you start saving for retirement, the better. For example, if you start saving at 30 you ll only need to save $349 a month (a total of $146,721) to accumulate $600,000 by retirement. But if you delay until the age of 50, you ll need to save $1,926 a month ($346,697) to accumulate the same amount of super. How much would you need to save a month, to reach $600,000 by retirement, assuming an annual return of 6.8 per cent per annum, compounded daily? Notes: Estimates exclude any individual taxation circumstances, and ongoing fees and charges. No tax is payable on upon commencement of retirement. Returns are before tax. Retirement at age 65. If you retire earlier, you will need to start saving sooner. Past performance is not a guarantee or an indication of future performance.

5 Salary Sacrificing Salary sacrificing is an effective strategy for boosting your retirement savings. Case study Carl, a PAYE employee, earns $65,000 per year and is considering making a $21,000 contribution to his superannuation, in addition to the 9 per cent Superannuation Guarantee payment. Carl has two options: enter into a salary sacrifice arrangement with his employer or make a personal contribution using after-tax salary. Results Given these two options, Carl would be better off salary sacrificing, due to the associated taxation advantages. Carl s Options Option 1 Personal contribution Option 2 Salary sacrifice Gross Income $65,000 $65,000 Salary sacrifice amount $0 $21,000 Taxable income $65,000 $44,000 Income tax payable $12,950 $5,810 Medicare levy $975 $660 Net income $51,075 $37,530 After-tax contribution $21,000 $0 Final net income $30,075 $37,530 Gross amount into super from income $21,000 $21,000 Less contributions tax $0 $3,150 Net amount to super $21,000 $17,850 Value achieved Final net income $30,075 $37,530 Net amount to super $21,000 $17,850 Total $51,075 $55,380 Notes: This case study does not consider the effects of any lump sum tax upon withdrawals from superannuation. Superannuation benefits are tax-free after the age of 60. Tax rates effective as at 1 July Includes low income tax offset. Excludes flood levy.

6 Transition to retirement NCAPs (non-commutable allocated pensions) allow older Australians to access their preserved superannuation without having to retire. The risk-free strategy By beginning an NCAP, Beth can supplement her income using her current superannuation fund, while sacrificing a substantial pre-tax amount of her income into superannuation. Case study Beth, aged 55, works as an IT Consultant and earns $110,000 a year Beth enjoys her work and imagines she may retire from full time work when she reaches 65. Her current superannuation balance is $450,000 $900,000 $800,000 The result Without an NCAP, Beth would have $709,513 at retirement. With an NCAP, she would have $793,907. That s a difference of $84,394. Beth achieves these results because investment earnings and growth are tax free, and the NCAP income payment is concessionally taxed. Beth achieved this result while still receiving the same take-home income. $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ Years Without NCAP With NCAP Notes: No change in take-home pay before/after strategy. No change in risk profile. Estimated investment returns is 6.2 per cent annum (super growth), 7.1 per cent annum (pension growth), Super contribution remains at 9 per cent. Salary is indexed by 3 per cent per annum. All results are expressed in today s dollars by discounting at this rate. Past performance is not a guarantee or an indication of future performance.

7 Financial protection Do you have enough insurance? Research suggests that most Australians to not have adequate insurance cover to protect themselves and their families. Low value assets tend to have a high percentage of value insured, while high value assets have a low percentage of value insured Percentage of asset value insured 89% 87% 77% While Australia has an increasing level of default cover, under-insurance is still a major problem 5 million Australian families under-insured by $1.4 trillion Low 14% 6% 5% 3% High Our she ll be right attitude is a key driver of the under-insurance problem Asset value Motor vehicle Home contents Home building Life Income TPD Trauma

8 Financial protection Income Insurance What is your most valuable asset? Is it insured? Case study Bill just bought a new car. He knew about the importance of car insurance, and did not drive away from the car yard before it was insured. Bill also recently purchased his first home. After saving years for his deposit, there was no way he was going to leave it uninsured. Bill earns $60,000 per year and, like most people, he expects to be working until the age of 65. What he doesn t realise is that his income over the rest of his working life will amount to over two million dollars after tax. $30,000 $500,000 He hasn t yet insured his income Unlike the premiums for house and car insurance, the premium for Bill s income insurance is tax deductible. $2,600,000 Notes: Bill is 30 years old and expects to be working for another 35 years. Income is after tax and is indexed at 3percentper annum. Lines are not drawn to scale.tax rates effective 1 July Does not include low income tax offset or flood levy.

9 Negative Gearing Borrowing to invest, or gearing, is a powerful way to build wealth. Negative gearing is borrowing to invest in an income producing asset that returns an income lower than the associated costs of borrowing. Savings Borrowed funds (gearing) Total investment Investing income 6% per annum Less interest expense at 10% per annum Taxable income Tax benefit/tax payable at 38.5% After tax income/loss Unrealised capital gain 6% per annum Tax on unrealised gains at 38.5% Negative gearing Andrew un-geared $50,000 $0 $50,000 $3,000 $0 $3,000 ($1,155) $1,845 $3,000 ($578) Justin geared $50,000 $100,000 $150,000 $9,000 $10,000 ($1,000) $385 ($615) $9,000 ($1,733). Case study negative gearing Andrew invests $50,000 and earns 6 per cent per annum, giving him an income of $3,000. Justin invests $50,000 and borrows another $100,000 at 10 per cent per annum. He earns 6 per cent per annum on the $150,000 invested, giving him an income of $9,000. Effects of gearing The shares have also grown in value by 6 per cent per annum, which leaves Justin with a higher return on his investment. If the value of the shares had not increased, Justin s geared investment strategy may have incurred losses greater than Andrew s un-geared investment strategy. Return after tax Return after tax as a per cent of own funds $4, % $6, % Notes: Assumes a 50 per cent CGT exemption applies. Past performance is not guarantee or indication of the future performance.

10 Disclaimer This presentation has been prepared by Charter Financial Planning and is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. It does not contain and is not to be taken as containing any advice or recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making financial or investment decisions. Charter Financial Planning does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as any liability under statute cannot be excluded, Charter Financial Planning, its employees and Authorised Representatives do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person.