1 WESTBUSINESS August 25, 204 SECURING YOUR FUTURE A YOUR MONEY SPECIAL The essential guide for your retirement How to get the right advice Unravelling the jargon How much super is enough Maximising Centrelink payments Self-managed super explained What insurance you need Making your will Determining your risk profile
2 2 SECURING YOUR FUTURE August 25, 204 Contents Who s best? Making sure you get the right adviser 4 Jargon busting Words and figures you need to know 6 Needs and wants How much super is really enough? 0 Working longer A little more pain for a lot more gain 2 Insurance What you need and when 8 Going to God A to Z of estate planning 20 Self-managed super What s all the hype about? 22 All too hard? You are not alone should get my finances in order. Ireally How often have you thought that to yourself, only to be distracted by more pressing matters, like making breakfast for the kids or working out the cause of that odd noise the car has been making. Many of Any advice contained in this publication is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Secure your future now, says The West Australian s group business editor Ben Harvey us are happy to be distracted because superannuation co-contributions, income protection insurance and account-based pensions are just too much to think about. Sure, you know there s some benefit to salary sacrificing into your super fund but what happens if that noise in the car is terminal? Where will you get the money for that? Besides, is fretting about breaching the contributions cap a good use of your time when you are currently having to use the Visa to pay off the Mastercard? And what the hell are contributions caps anyway? The good news is you are not alone in your confusion. The bad news is delaying decisions about your retirement, regardless of how far off it might be, makes things more difficult when you do finally decide to tell the boss to sod off and take that caravan trip around Australia. In the following pages The West Australian has explained, with the help of the Financial Planning Association, a few of the basics of personal finance. Do your future self a favour and take a few moments to have a read. You might stumble across some information that will allow you to go on the caravan trip sooner rather than later. If only the car was working properly... MAP OUT YOUR FINANCIAL FUTURE A Count financial adviser can help you afford your dreams Count is Australia s largest network of accountant-based professional advisers, with around 300 fi rms nationwide. For over 30 years, we have supported our partners in providing quality fi nancial advice to Australians. WHAT WE OFFER The right adviser for you depends on your personal requirements. At Count we believe it s essential you fi nd someone you are comfortable with and who you can trust. And someone who will provide you with professional advice that is based on your best interests. Why choose a Count adviser? A Count adviser can help you protect and generate wealth The peace of mind that comes from dealing with a professional We re working for you Count advisers recommend investments and strategies based on their suitability to your specifi c needs. Each investment we recommend has been through our rigorous and independent research process. Find the right adviser for you on These Count advisers are also Certified Financial Planners. JOONDALUP Queen Victoria Street Fremantle WESTERN SUBURBS FREMANTLE STIRLING 09 Hay Street West Perth Davidson Terrace Joondalup MELVILLE VINCENT CBD MIDLAND 47 Outram Street West Perth BASSENDEAN VICTORIA PARK Suite, 20 Kearns Cres Applecross CANNINGTON _GMTT25084
3 August 25, 204 SECURING YOUR FUTURE 3 Get good advice now for a life less stressful As chief executive of the Financial Planning Association of Australia (FPA), I welcome you to join us and participate in the 4th annual Financial Planning Week. This national initiative aims to educate and empower you to discover the positive difference that professional advice can make to your financial future. This year s Financial Planning Week will answer your questions about important financial topics such as superannuation, insurance, debt and retirement. We encourage you to visit the Ask an Expert forum during the week. Check in with a qualified, professional financial planner and ask any burning questions about your financial position. The FPA works to A message from Financial Planning Association of Australia chief Mark Rantall educate Australians on how financial planning can help manage financial affairs and meet life goals. The first step in this process is ensuring access to the right advice. Traditionally, people go to see a financial planner when they have a major life event, such as inheriting money, starting a family, buying a home, or approaching retirement. We hope FP Week will encourage you to seek advice so that when these major events happen, you are financially prepared. If you ve ever wondered how financial advice can help you, or want to see a planner but don t know where to start, we encourage you to visit the Ask an Expert forum. Another tool you may find valuable is the Find a Planner directory, which helps you find a financial planner in your area. You will find this directory at FP Week runs from August 25 to August 3. You can access the Ask an Expert forum at fpa.com.au Making your cash work harder with bonds is easy Learn how corporate bonds diversify your portfolio and provide you with a regular income. FIIG is the leading educator on corporate bonds in Australia and is hosting seminars on Wednesday 7th September. Level 0, 553 Hay Street. Winner best Service Provider as voted by SMSF Members: Fixed Income, Coredata SMSF Service Provider Awards 203 REGISTER FOR A PERTH SEMINAR TODAY. Call (08) or visit
4 4 GETTING THE RIGHT ADVICE August 25, 204 The eight steps to finding a planner Ben Harvey and Nick Bruining he team at The West Australian s Your Money personal finance section is regularly asked one question. It s not about asset allocation, or how much super you can salary sacrifice, or the cut-off point for receiving the age pension. It s this: Where can I find a good financial adviser? What s worrying is that many of the people asking us for direction on this point have an adviser or planner but they T either don t trust them or don t feel they are getting value for money. Unfortunately, finding a good financial adviser is harder than finding a good doctor. At least when you go looking for a new GP you know that all doctors in WA need to be registered to a board that has rigorous standards. Not so for the financial advice industry. Michael Gething, WA regional commissioner with the Australian Securities and Investments Commission, has told investors looking for a new adviser to remember that as the client, they are in charge. Remember, you re effectively interviewing planners for the job of assisting you with your finances it s your money and you have the power to select or reject a planner, Mr Gething said. Doing some homework first is vital and you ll find that by taking that approach, many will be weeded out even before the first interview. The good news is there are a few basic things you can do to minimise your chance of getting lumped with a ratbag. Don t reinvent the wheel 3 Transparency Determine who the planner really works for. All roads tend to lead to Rome in the financial planning industry Rome being the Big Four banks. Don t be surprised if the seemingly independent suburban planning outfit you walk into is actually a subsidiary of ANZ or NAB. There s nothing wrong with this there are many planners who have links to the big banks and deliver great service to their clients. But be aware there may be a bias to push you into a suite of products which are delivered by the parent company. Again, this is not necessarily a bad thing, because these products are often the best on the market. But go in with your eyes open. If you need a painter or a mechanic, there s a good chance you will ask friends and family for a recommendation. Don t be shy in asking them whether they have a financial adviser they are happy with. Just make sure the person they recommend has been providing advice for more than a couple of years you don t want a fly-by-nighter. Ask your accountant as well. Find common ground 2 Make sure a prospective planner has clients similar to you. Planners specialise, so if you are a public servant in your 40s with kids at home and a huge mortgage, don t sign up with someone who bills themselves as an expert in self-funded retirees or small business people. Qualifications 4 It wasn t that long ago that you could jump on the internet, fill out a questionnaire and walk away being able to tell the world, without lying, that you were a qualified financial adviser. Things have tightened up a bit but ideally your adviser should have a commerce or business degree in addition to an industry qualification. A B.Com, B.Bus or B.Econ means they should know the law, accounting, economics and financial mathematics. Industry qualifications such as Dip FP, ASIA and Dip FS indicate that the adviser has been taught and passed subjects uniquely associated with financial planning. Full membership of professional associations indicated by letters such as CPA, CFP, ASIA or ICA indicate that in addition to complying with the legal requirements, they are bound by professional rules of conduct with serious penalties for breaches.
5 August 25, 204 GETTING THE RIGHT ADVICE 5 Show me the money The expression trailing fees has been dragged through the mud of late but don t be paranoid if your adviser receives them. These are the fees that a planner receives from the business offering the financial products (such as managed funds or insurance) that you are signing up for. It s exactly how a mortgage broker works. They go out and find the best deal for you and you don t pay for their services because they get a clip from the bank they are taking the mortgage with. It is a completely acceptable way of doing business, as long as the advice you are getting is not influenced by the possibility of or size of the commission. And make sure the clip isn t too big. Anything more than 2 per cent should ring alarm bells. Depending on the complexity, a full financial 5 plan can cost between $3000 and $5000, and possibly much more. If you don t want to pay upfront, then the trailing fee structure is a viable option. However, in some cases the best financial advice won t involve investment products. For example, for many young families, the best advice might be to pay off debts, prepare a will and take out life insurance. Usually the cheapest option is through the employer superannuation fund. In this instance, a planner who only collects commissions may provide biased advice. If you don t like the trailing fee method then find a planner that is happy to charge either a flat fee or by the hour. Be aware that on top of these fees they may still get the clip from the companies behind the products you are signing up for. Is there someone else? Ask them how many clients they have, do they themselves prepare the plans and will they be your ongoing adviser. Proper financial planning requires continuing reviews. A review involves meetings to report on performance, re-examination of objectives, consideration of any legislative changes and to ascertain the appropriateness of the original strategies. This takes time and if the adviser has thousands of clients, he or she is unlikely to be able to provide such a service. Some advisers will contract out planning work to third parties who prepare plans based on the data collection 6 prepared by the adviser. Users of this approach argue that this ensures the plan is legally compliant and is up to date, but opponents maintain that such plans tend to be generic and usually don t fully deal with the client s needs in all areas. 8 Proof in black and white Ask to see a sample plan prepared by the planner. A comprehensive financial plan will run to many pages and should contain discussion about areas such as your objectives, cash-flow, investments, insurances, estate planning and taxation. Rather than simply generic information, it should analyse your specific situation in these areas and, where deficient, provide strategies which set out the pros and cons in an objective way. Needless to 7 say, the plan must include detailed information about the costs of implementing and maintaining the strategies and if applicable, the costs of changing investments. Feel the love This is always overlooked. You will always look at the fees a GP charges you but will likely be willing to pay a premium over the bulk-bill rate if you have a connection with the person across the desk. If you feel comfortable with a potential adviser, if they come across as genuine, answer your questions in a straightforward manner and are upfront about how they get paid, then trust your gut. If you are at an age where you feel you need a planner then chances are you won t be in your teens or early 20s. You have probably been around and can sense when something is off. If the planner provides a good service he or she will be with you, offering advice, at critical parts of your life. They will see the good, bad and ugly sides of your life as birth, death, marriage and divorce change the financial needs of your family.
6 6 MAKING SENSE OF THE JARGON August 25, 204 What does it all mean? Definitions Account-based pension / 'kaunt be sd 'p n n/ n., Also known as allocated pensions. When an eligible member commences a regular withdrawal from their superannuation, typically paid on a monthly basis. Choice of fund /t o s v fvnd/ n., Many employees are able to choose to which complying super fund their SG contributions must be directed by their employer. Choice of fund legislation requires a new eligible employee to be offered choice of fund (by the employer providing them with a standard choice form). Commonwealth Seniors Health Card / kom nw l 'sinj rz h l kad/ n., The Commonwealth Seniors Health Card is available for people who have reached age pension age (ie, 65) but do not qualify for a part age pension. It entitles you to reduced cost medicines as well as some State-based concessions. It is not asset-tested, however you must have earned less than $80,000 as a couple or $50,000 as a single person as adjusted taxable income. Concessional contributions /k n's n l kontr 'bju n/ n., These are contributions made into superannuation by a member or on their behalf, such as through salary sacrifice,for which a tax deduction can be claimed. There is a limit of how much a member can contribute each year, such as $30,000 for under 49 year olds. The limits include SG, salary sacrifice and other mandate employer contributions. Enduring power of attorney / n'djur 'pa v 't ni/ n., An enduring power of attorney (EPoA) is a legal document which gives a person (the principal) the right to choose someone (the attorney) to have the power to manage their assets and financial affairs while they are alive. This power continues when the principal becomes of unsound mind. The document must be signed by the principal whilst they have the required legal capacity to give their attorney clear and concise instructions. A EPoA ceases when the principal dies at which point the executor named in the will then takes over the responsibilities of the estate. Gifting provisions /ig ft pr 'v nz/ n., For Centrelink purposes, gifting occurs when you give away assets or cash to another person and do not receive anything in return, or adequate consideration in the form of money, goods or services, and in particular to gain a social security advantage. For that reason, although you have given away your asset, Centrelink will still consider it yours and include the value in their calculations for any social security entitlements. Health Care Card /h l k kad/ n., The Health Care Card entitles you to reduced cost medicines as well as a number of State-based concessions, such as reductions in property and water rates, reductions in energy bills, reduced fares on public transport and reduced motor vehicle registration. To be eligible, you must be receiving assistance from Centrelink in the form of social security benefits such as the age pension, Newstart or carer s allowance. Don t know your deeming rate from your allocated pension? Insight Financial Partners director and authorised representative of Count Financial, Fran Hughes, explains the basic terms of personal finance Intestate / n't ste t/ n., When a person dies without leaving a will, they are said to have died intestate. If you do not leave a will, your property will be distributed in a way laid down by the law. Each State s law around intestate differs and all are complex. Managed funds /'mæn d d fvndz/ n., In a managed fund, your money is pooled with that of other investors. An investment manager then buys and sells investments in the form of shares, property trusts, term deposits or fixed interest on your behalf. You are usually paid income or distributions periodically. The value of your investment will rise or fall with the value of the underlying assets. The investment manager may be called a fund manager or responsible entity. Preservation age /pr z 've n e d / n., To gain access to your superannuation, you must meet a condition of release (which is retire from full-time work) and reach preservation age. If you are turning 55 this year or next, you ve reached the preservation age. From 205 onwards, that age increases over time to 60. Superannuation guarantee /sup rænju e n gær n ti/ n., Superannuation Guarantee (SG) came into force on July, 992, and requires employers to provide a minimum level of superannuation support for their employees, and commonly known as compulsory superannuation by employers. It is paid every quarter of the financial year, an amount equal to 9.5 per cent of each employee s ordinary time earnings (OTE) and paid to a complying super fund of your choice. This rate of 9.5 per cent is proposed to increase to 2 per cent by Total and permanent disablement insurance /to tl ænd p m n nt n' ur ns/ n., TPD is cover that may pay a lump sum if you are totally and permanently disabled. The textbook definition says that to qualify for this benefit you have to have been unable to work for at least six months and deemed to be unable to ever continue in your predisability occupation or one for which you are reasonably suited by education, training or experience. Most superannuation funds have some level of cover included automatically. Look at your latest statement to find out if you have TPD cover. Transition to retirement /træn'z n tu r 'ta m nt/ n., (TTR) On July, 2007, a new condition of release was introduced: reaching preservation age without having retired from full-time work. This condition of release is also known as the transition to retirement condition of release. There are no work or retirement tests related to this condition of release. A person may or may not be working and still access super under this condition of release. There are important cashing restrictions for this condition of release with the amount limited to a maximum of 0% of the account balance at the start of each financial year. $58,28 The average annual Australian budget required for a comfortable lifestyle in retirement ($33,664 per year for a single) $33,035 $ By the numbers The maximum annual age pension for couples ($2,92 for singles) The amount of income tax payable on money from a private account-based pension The number of years income you should hold in cash after retirement, to protect against market volatility The average age at retirement for recent retirees Retiring at age 60? A good rule of thumb is to have saved 5 times your annual required income. The numbers for 55 and 65 are 7 and 3, respectively Thresholds and cutoffs: retirement planning is all about the numbers. ipac WA chief executive Patrick Canion explains a few important ones $250 per fortnight The amount of employment income that would be excluded from Centrelink s income test (up to $6500 per year) under the work bonus 0/0/205 The date retirees need to have started an account based pension and applied for the age pension to qualify for the current more favourable income test assessment of their account-based pension 67 $540 The age at which people born after January, 957 can access the pension The amount the government will put into your super if your spouse earns less than $0,400 and you put in $3000 $80,000 The upper combined annual taxable income threshold for a couple to qualify for a Commonwealth Seniors Health Card ($50,000 per year for a single) 0% The percentage value of the family home included in the assets test for two years after moving into aged care 00% The percentage value of the family home included in the assets test if sold after moving into aged care $35,000 Maximum amount that you can contribute to super on a taxconcession basis if you are age 49 or more on June 30, 204 Age to which you can contribute to superannuation, 75 subject to work test being met after age 65 4% Minimum annual amount that must be withdrawn from a private allocated pension under age 65 Minimum amount that must be drawn from a 7% private allocated pension between ages 80 and 84
7 August 25, 204 BUDGETING BASICS 7 Before we go further... some basics David Sharpe Managing the family budget only has two components. What you earn and what you spend. It sounds simple, but think about your own position. If you were asked what you earn, most people in the space of two minutes could give a fairly accurate answer. The subsequent question gets many more unsure looks. What do you spend? My experience is that very few families actually know the answer. So when considering the basic fundamental of wealth creation, spending less than you earn, it makes it quite difficult when you don t know half the equation. Step : Know your fixed costs Before we even get out of bed each morning we have a fixed daily cost. Rates, mortgage or rent, insurances, utilities. You need to know what these are. Invest the time to work out what your fixed bills come to each year. Step 2: Stop using only one bank account Often people might have a savings account for their next holiday that they put an amount of money into each pay. They do so because they don t want to spend the holiday money building up in their main account. Why not expand that, have multiple accounts that might be for groceries, for entertainment, holidays and importantly an account for bills or fixed expenses that you put money into regularly. In this age of online banking all of this can be set up relatively easily, potentially fee free and automatically. Often you can even customise and name your accounts, further simplifying it. Step 3: Prioritise what is most important If you have just set up your allocation and worked out what you earn doesn t add up to what you spend (or want to spend), then the bad news is there is no magic pill. You have to work out what is a priority and what is not. Is it the morning coffee, the pay-tv subscription or the Friday night takeaway? Work out what is most important to your family and prioritise. Step 4: Don t use credit cards The importance of spending your own money is paramount in running the budget. If the account hits zero then you know you are spending more than budgeted. You don t get the same reminder with a credit card, the bank just lets you spend up to the credit card limit, not your cash flow limit. Step 5: Don t waste the lump sum If you follow the strategy of multiple accounts and a fixed allocation of expenses then when a lump sum is received, such as a tax return, it isn t free spending money it is simply additional cash flow which can now be directed towards debt reduction or wealth creation. Step 6: Don t give up It takes a long time to change a lifetime of expenditure habits. Don t give up after one or two months if it isn t working. Once you are into a habit of a managed cash flow plan, the stress of the daily budget does alleviate and this enables you to focus your energy on things far more enjoyable. David Sharpe is a certified financial planner and director of Globe Financial Planning 204 WA WINNER
8 8 BALANCED PORTFOLIO August 25, 204 When is a balanced option really the right one for you? Hasan Hazra Superannuation is meant to replace our work income at retirement and should last more than 40 years. So how much time do we spend understanding our super savings compared with the time and effort we give to maintaining our jobs? For disengaged super fund members, the investment portfolio generally becomes a trustee-selected default balanced option. A balanced option is a diversified, blended pre-mix portfolio. Unfortunately, this option takes a one size fits all type approach which may not be in the best interests of individual retirement needs. A balanced portfolio generally consists of five to eight different asset classes that can be grouped into defensive (cash/bond) and growth (shares/property) assets. Different super funds (platforms) generally have different combinations of asset allocation in their balanced portfolio ranging from 25 per cent to 50 per cent in defensive and 75 per cent to 50 per cent in growth. Therefore, a balanced portfolio with higher allocation in growth assets tends to perform better when financial markets are in a bull run and other way around in a bear market. So, what could go wrong with a set and forget default balanced portfolio? Let s assume a balanced portfolio with 30 per cent defensive and 70 per cent growth assets invested in managed funds. Currently the Reserve Bank of Australia s cash rate is 2.5 per cent. Therefore, in the current market conditions the 30 per cent defensive part of the portfolio is likely to produce less or equal to inflation (2.5 to 3 per cent) taking tax and 28% % THE SUPERANNUATION INDUSTRY: A SNAPSHOT Types of entities MySuper or Retail or Wrap or Self-managed Defined-benefit simple super industry super wholesale super super fund fund Public sector or Legal structure All super funds are trusts with corporate or individual trustees large corporation funds. Regulator APRA APRA APRA ATO Investment options Lifecycle or single Limited Limited Unlimited diversified (a few to a (a few few hundred) hundred) Fees & costs Low Medium to high Medium High (e.g. admin/ (e.g. admin/member, (e.g. platform fee) (e.g. admin, audit, member fees) trustee or accounting, accounting, asset protections etc.) actuary etc.) Fund managers fee (MER) Comments % Australian Super stable option 26% 3% % fees into account. The same portfolio with 70 per cent growth assets, depending on the market conditions, might lose half of the portfolio value, as was the case during the global financial crisis. The pre-mix balanced portfolios in a super fund generally are not designed to absorb shocks in market conditions. Super fund trustees give the fund managers the job to invest members pooled funds in their blended portfolios, leaving members exposed to bumpy market conditions. Therefore, the onus goes to the individuals to take some control to grow and protect their retirement nest eggs. Hasan Hazra is a financial planner with Next G Wealth Australian shares World shares Property Bonds Other Cash Low blended premix or multimanager funds High single manager funds The fees are generally taken out of the total pooled fund, may not appear on regular statements These are Government prescribed new, simple & cost effective super solutions for disengaged members 3% Colonial SF Super conservative option Generally less engaged less sophisticated members may fall into this category with or without financial advice 7% 43% 4% 5% These are generally suitable for sophisticated members with or without financial advice Generally suitable for investment savvy members or those who have specific estate planning needs Benefits are payable on retirement or death based on an actuarial advice. Therefore, these are not investment linked member accounts
9 August 25, 204 BALANCED PORTFOLIO 9 Case study: Paul and Sharon Shelton Ben Harvey Cash-flow positive: Paul and Sharon Shelton Determining their tolerance for risk was an important first step in Paul and Sharon Shelton s retirement plan. The couple, in their mid-50s, had a typically broad range of concerns about their retirement years when they approached Next G Wealth certified financial planner Hasan Hazra in August 202. Mr Shelton is a fly-in, fly-out miner earning a good salary and his wife is busy looking after their three children. Their concern came down to the common problems of too many personal debts, tight cash flow and no investments outside superannuation. They want to retire at 65 on the equivalent of $50,000 a year so over the past two years they enacted the plan devised by Mr Hazra. A realistic cash flow budget was established and a cash surplus recognised and used prudently, Mr Hazra said. The mortgage and other personal loans are now consolidated, with this non-deductible debt scheduled to be paid off within five to seven years. To protect the family, Mr Shelton took out life insurance and the couple have drawn up wills. His superannuation was rolled into a wholesale fund and a personalised investment strategy was established. The investment portfolio has returned 6 per cent since its inception and it is projected the Port Kennedy couple will be able to retire on $.4 million in 0 years.
10 0 HOW MUCH SUPER IS ENOUGH? August 25, 204 Superannuation: how much is Troy Macmillan There has been a great deal of debate recently over the Government s intention to increase the age pension threshold from 65 to 70. And speculation is rife that the age you can access your super will also increase. How much superannuation will you need? Well, if you die before you need medical or aged care, are happy to work until you reach the age pension eligibility age and are happy to live below the poverty line in retirement, then the answer is none. Now, before you rush to social media to announce that I think super is a waste of time, consider the conditions I mentioned and ask yourself: Am I prepared to live on the $ a fortnight a single age pensioner receives? So, having established that you really do want superannuation savings, how much is enough? It is estimated that for a single person to enjoy a comfortable retirement, you will need about $42,000 per year during retirement ($58,000 for couples). This amount is the total sum required and does not include pensions or other benefits. Here s the good news: If your assessable assets, investments and superannuation are going to provide an income well below those amounts, chances are that you will be eligible for assistance. Here s more good news: The age pension assets test has a number of exempt and excluded items, including your house. And here s some great news: You can also invest in an account-based pension, which currently (it s going to change on January ) allows you to earn a regular income after retirement that is exempt from pension eligibility assessment if under certain Centrelink thresholds. As a result, you will likely receive more government assistance in the form of the age pension. This means to get that $42,000 income you won t necessarily need to come up with all of it yourself. Here s the bad news: That scenario means you will be relying on the Government s frequently changing timeframe for your retirement, not your own. The Government is changing the rules because the country can t afford to supplement under-funded retirees for the length of time they are living. And there is no guarantee that if life expectancy continues to increase a future government won t change the rules again. If you plan to retire early, the superannuation preservation age (when you can access your super) is roughly 0 years below the age pension age. So when the age pension increases to 70, so, too, will the eligibility age increase to 60 for your superannuation. Currently it sits at 55 for many people, but phases to 60 for those born after June 30, 964. So you can (probably) retire at 60 and you ll need around $42,000 a year to enjoy yourself. But how many years should you plan for? In 20, the Australian Bureau of Statistics reported the residual life expectancy (how many more years you can expect to live) for 65 year olds was 9. years for men and 22 years for women. That figure had increased for both sexes by approximately two years over the previous decade. So if you are 55 years old now, in 0 years time you can expect to need savings for around 2 years if you are a man and 24 years if you are a woman. To enjoy a comfortable retirement from age 65, men will need at least $882,000 and women will need even more $,008,000. Taking the average residual age of men and women, a couple would need $,305,000 for 22.5 years of comfortable retirement. How can you change your fortunes? By starting early. By adding a little extra to your super each year, you can benefit from the lower tax rate (currently 5 per cent), as well as increase the principal amount faster, thereby increasing the amount of interest you will earn over the life of your fund. If you have left things late and are in position to make additional payments, you can now contribute up to $30,000 pre-tax (concessional) a year (including your employer s contributions) if you are under 50 and $35,000 per annum if you are 50 or over. You can also contribute up to $80,000 in after-tax (non-concessional) contributions a year. Under-65s can combine three years to make a $540,000 lump sum payment (you will have used up your contributions for the following two years in that case). Remember the key to retiring on your terms is that your superannuation is yours (even though you can t access it unless under extreme hardship) and your other investments are yours. By taking an active interest in helping your investments grow, you will be a lot less likely to be at the whim of whatever government is in power and whatever superannuation policies are in place by the time you retire. Troy Macmillan is managing director of The Wealth Designers YOUR FORTNIGHTLY CENTRELINK SINGLE PERSON INCOME TEST Maximum rate $ Min pension paid $47.60 Income threshold $60.00 Income taper $0.50 Income Pension per fortnight rate pf SINGLE PERSON (HOMEOWNER) ASSETS TEST Maximum rate $ Min pension paid $47.60 Asset threshold $202, Asset taper/$000 $.50 Assets Pension rate pf $202,000 $ $220,000 $85.80 $240,000 $ $260,000 $ $280,000 $ $300,000 $ $320,000 $ $340,000 $ $360,000 $ $380,000 $ $400,000 $ $420,000 $55.80 $440,000 $ $460,000 $ $480,000 $ $500,000 $ $520,000 $ $540,000 $ $560,000 $ $580,000 $ $600,000 $ $620,000 $25.80 $640,000 $85.80 $660,000 $55.80 $680,000 $25.80 $700,000 $95.80 $720,000 $65.80 $740,000 $47.60 $760,000 $47.60 $764,000 $0.00 PROTECTING AND GROWING WEALTH FROM GENERATION TO...
11 August 25, 204 really enough? ENTITLEMENTS EFFECTIVE FROM MARCH 20, 204 Nick Bruining There s no doubt that the Australian retirement income system is a confusing mish mash of rules and regulations. The sad reality is that unless you know your way around the system, you will almost always unwittingly, mess something up. In many cases, this results in getting less than you are entitled to. Probably the greatest area of confusion is Centrelink s income test and how income is calculated for Centrelink benefit puposes. It bears almost no similarity to taxable income. Centrelink will include gross earnings from employment. If you are over Age Pension age and working for an employer, the first $250 per fortnight of this income is disregarded. Net rental receipts from property are included, which means gross rent, less expenses like interest, rates and fees. All bank accounts, shares, managed funds, unrestricted accumulation superannuation benefits (if over pension age), cash and bullion are pooled together and are deemed to be earning a notional rate of interest. For singles, the first $48,000 is deemed to be earning 2 per cent per annum. For couples, this limit is $79,600 and in both cases, financial assets above the thresholds are deemed to be earning 3.5 per cent. This amount is divided by 26 and applied against the income test of $60 per fortnight for singles and $284 for couples. Income over these limits reduces the total pension by 50 per dollar. Actual income like interest or dividends is completely disregarded. ABPs have a unique method of calculating income. The initial investment value is divided by the Australian Bureau of Statistics life expectancy at the time the pension is commenced and this figure is deducted from the actual payment received. In many cases, income from the ABP is ignored. From January, new ABPs or people reaching pension age after that date will simply have the ABP value included in deeming. COUPLE INCOME TEST Maximum rate (ea) $ Min pension paid $35.90 Income threshold $ Income taper/$ $0.25 Income Pension per fortnight rate pf $ $, $ $, $ $, $ $,22.60 $ $,87.60 $ $,62.60 $ $,37.60 $ $,2.60 $ $, $ $, $ $, $ $,02.60 $ $ $ $ $ $ $, $92.60 $,00.00 $ $, $82.60 $, $ $, $72.60 $, $ $, $62.60 $, $ $, $52.60 $, $ $2, $42.60 $2,00.00 $ $2, $32.60 $2, $ $2, $22.60 $2, $62.60 $2, $2.60 $2, $87.60 $2, $7.80 $2, $7.80 $2, $7.80 $2, $0.00 COUPLE (HOMEOWNER) ASSETS TEST Maximum rate (ea) $ Min pension paid $35.90 Asset threshold $286,500 Asset taper/$ (ea) $0.75 Assets Pension rate pf $286,500 $, $300,000 $, $325,000 $,22.85 $350,000 $,75.35 $375,000 $,37.85 $400,000 $,00.35 $425,000 $, $450,000 $, $475,000 $ $500,000 $ $525,000 $92.85 $550,000 $ $575,000 $ $600,000 $ $625,000 $ $650,000 $ $675,000 $ $700,000 $ $725,000 $62.85 $750,000 $ $775,000 $ $800,000 $ $825,000 $ $850,000 $ $875,000 $ $900,000 $ $950,000 $ $975,000 $ $,000,000 $ $,025,000 $62.85 $,050,000 $25.35 $,075,000 $87.85 $,00,000 $7.80 $,34,000 $0.00 HOW MUCH SUPER IS ENOUGH?... and why you shouldn t panic Nick Bruining It s the question most often asked of financial advisers and is often used as a precursor to entice people to invest in dodgy and outright fraudulent investment schemes. How much money will I need to retire on? It s fuelled by an industry that would have you think that any less than a million dollars will have you spending your retirement picking through the discards bin at your local supermarket and lining up outside the local op-shop for clothing. What online retirement calculators and some advisers choose to ignore is that for many Australians retiring in the next few years, the age pension will provide a significant part of their retirement income. Understanding how this integrates with our savings is the key to a stress-free and low-risk retirement. Let s assume we have a 65-year-old home-owning couple with $250,000 in super, $7000 in the bank and a five-year-old car and contents which would cost $50,000 to replace. We ll also assume that the superannuation is converted into an account-based pension which at 65, will require our couple to draw down 5 per cent, or $2,500 per year. In Australia, the age pension is a means-tested benefit. In essence, the philosophy is that if you have the means to either fully or partly fund your own retirement, you are compelled to do so. If you chose to hang on to your inherited Eagle Bay beach house then no problem, just don t expect society to pay you an age pension as well. Under the rules, two means tests are applied based on assets and income and whichever test produces the lowest age pension is the one used. Returning to our couple. Under a rule to be closed down to new retirees from January, the draw-down at a rate of 5 per cent will produce no assessable income for Centrelink s income test purposes. Under the income test, they will be entitled to a full age pension. Were the income to exceed the allowed $284 per fortnight (combined and indexed), our couple would lose 50 for each dollar over. To access the more generous rules you must be on an aged pension and have commenced an ABP before January. Note that both boxes must be ticked. If you turn 65 after December 3 204, you will miss out. The asset test allows a home-owning couple to hold $286,500 in assets before the pension starts to reduce at a rate of $.50 per $000. In our example, the couple s assets will include the $250,000 in the ABP, the $7000 in savings but the value of contents and car is not the replacement value but the scrap value. In fact, Centrelink are likely to accept a value of $20,000 in total. So, our total assets of $277,000 are well under the threshold. Our couple is therefore entitled to a full pension of $33,035 plus the ABP income of $2,500 or a combined $45,535 per year. Add to that the money saved on medicine, rates, power and water and you have an income that roughly equates to $.2 million in a bank earning a whisker under 4 per cent. Nick Bruining is a WA financial adviser The benefits of consolidation Ben Harvey With people changing jobs more often than they used to, many workers have multiple superannuation accounts. Consolidating them into one account to avoid unnecessary fees is an important change and one which Terry Clifton realised he needed to do. Many workers in the mining sector change jobs regularly and if they do not nominate a specific superannuation fund for an employer to pay into, their compulsory contribution can be spread across several funds. Mr Clifton, a fly-in, fly-out mining worker in his 40s from Huntingdale, approached to Next G Wealth certified financial planner Hasan Hazra to make the most of his good cash flow to secure a comfortable and possibly early retirement. His super funds were consolidated and an outside-super investment strategy devised which saw Mr Clifton s non-deductible mortgage debt paid off in four years. Mr Clifton s home equity is used for a tax-effective investment portfolio. The home equity loan is to be paid off in four years ensuring he can retire debt free. He has built 40 per cent equity in an investment portfolio of shares and managed funds worth several hundred thousand dollars. The deductability means he also gets a healthy tax return each year. It is projected that at 65 Mr Clifton will have a retirement asset base of $2.06 million, putting him in a comfortable position.
12 2 KEEP WORKING August 25, 204 Benefits of a bit more graft Matt McCarney Working longer than initially planned can provide more certainty, security and flexibility in retirement. Take our hypothetical couple John and Jenny, for example, who plan to retire at age 60. They hope to generate an income of around $53,500 a year after tax in retirement. If John and Jenny reach their respective life expectancy, 83 for John and 86 for Jenny, they would more than likely outlive their retirement nest egg. This assumes their super fund generates an after-fee return of 6 per cent a year and an inflation rate of 3 per cent a year. Centrelink age pension entitlements have not been included for this analysis. The life expectancy figures are based on averages and John and Jenny would be wise to plan for life beyond Jenny s 86th birthday. To provide a greater probability of reaching their retirement goals, John decides to work part-time from 60 to 65. He works three days a week and earns $3,200 a year. By working part-time for an additional five years, John and Jenny increase the likelihood of meeting their retirement income objectives. Their super balance is estimated to be around $84,000 more at age 65. By supplementing their super pension (from age 60) with part-time work, John and Jenny retire with a greater balance. The bigger balance generates more income and allows them to better cope with the volatility of investment markets and deal with an economic environment in which cash rates remain low. Matt McCarney is executive director at Vantage Wealth Management Age shall not weary him: Working isn t harming Rupert Murdoch. Case study: Clive and Janet Walker DON T PUT YOUR FEET UP YET Ben Harvey Super balance (LHS) Living costs adjusted for inflation (RHS) Like many West Australians, former police officer Clive Walker wondered how much better off he would be working longer compared with retiring right now. Mr Walker, 64, has a GESB Gold State superannuation account and he and retired wife Janet have a mortgage. HPH Solutions financial planner Randall Stout and Chris Speijers, from Infocus Securities, looked at the Leeming pair s finances and devised a range a strategies. They found that under current arrangements their savings would last only 9 years if they lived on $55,000 a year. With a few other changes, delaying retirement by one year would see their savings last 23 years and working two years extra stretched their nest egg to 25 years. The tweaks to their strategy included: Using an offset account linked to his current mortgage debt to save $600 a year in interest rather than earn a low rate on his savings that is taxable Mapping retirement cash flow and tax position to determine that retiring now would see their savings only last 9 years Starting a tax-free pension from super as Mr Walker was over 60 Salary sacrificing heavily to Mr Walker s West State super fund Janet and Clive Walker Using a transition-to-retirement model to save $6,000 in tax Utilising the West State super fund s different concession limits only available to WA Government public servants Ensuring the couple qualified for the Commonwealth Seniors Health Care card Clive is taking on a higher degree of risk with his default investment mix, Mr Stout said. We had an honest conversation about how much volatility he can truly handle with his savings. Superannuation balance over time if a couple stops working at 60 and lives on $53,500 a year $000 $ Age Superannuation balance over time if one partner works part-time until 65 $000 $ GENERATION Age 0
13 August 25, 204 ACCOUNT-BASED PENSIONS 3 The tax magic of account-based pensions Damien Quirk With flexible investment choice and tax-effective payments, account based pensions can play an important role in accessing your super nest egg to fund your retirement. Today s ABPs typically allow accounts to be monitored online and allow you to see when the next payment is due, how your assets are performing and how often your superannuation provider credits investment returns to your account. To counter the impact of turbulent markets, you can even purchase insurance to mitigate some of the dips in asset values and therefore provide a more certain future. This may be important when investing in markets during the initial years, to prevent a poor sequencing of returns. These insurance-based options come at an extra cost, but can guard against losses. You can invest in familiar options such as cash or fixed interest (bonds), Australian or international shares and property and alternative assets. Once established, the ABP will pay you a regular income, based on government-mandated aged based minimum limits. One advantage in keeping your retirement wealth in an ABP is that any income and capital gains derived by the assets used to generate your pension income will be completely tax free. And, after the age of 60, the income you receive from the ABP is free from any personal income tax. What happens if I die with money in my ABP? Couples in retirement can generally nominate each other to continue receiving the income from the deceased spouses ABP. Alternatively, you can nominate another dependant to receive any remaining balance of your ABP. You can also have the funds directed to your estate according to your will. Change is coming The government has recently made some reforms to the effectiveness of ABPs over other types of retirement income when it comes to claiming benefits such as the Age pension. From January, the account balance of your ABP will generally be deemed under the Centrelink income test. However, certain established ABPs can be grandfathered if a government benefit is being received before January. How will the reform affect aged pensioners? People with a grandfathered ABP will continue to have a return of capital portion of their income payments exempted under Centrelink s income test (called the non-assessable portion or NAP). For ABPs established after January, or new applications for the age pension (from this date ) by people with an existing ABP, the deeming rules will apply. Currently, the deeming thresholds are $48,000 for singles, $79,600 for pensioner couples and $39,800 for members of allowee couples. The deeming rate is 2 per cent a year for amounts below the thresholds and 3.5 per cent above the thresholds. Income costs of reform While deeming rates are relatively low, a non-home owning couple with an ABP of $300,000 (ignoring other assets) will see an annual reduction of up to $96 in age pension payments. Should the lower deeming rate rise to levels such as 5 per cent, the annual reduction in age pension payments to the non-home owning couple could be as high as $5,46 annually. By having the account balance of your ABP deemed, these losses in age pension incomes are compounded significantly considering the average life expectancy at 65 is 8 years for a male and 22 years for a female. A sting for couples Members of a couple are generally able to nominate each other as their reversionary beneficiary. So, upon the death of a partner of a couple, grandfathering of an ABP can be extended to ensure that an existing ABP can be received by Minimum drawdown of your account-based pension by age Under 65 4% % % % % % 95 or over 4% the remaining partner under the same Centrelink rules provided they are in receipt of an income support payment from Centrelink. However, there is a potential sting because, if the reversion is not set up correctly in the beginning, the ABP grandfathering will not be extended. There s complexity, and cost if you don t consider the importance of advice. The cost of not being eligible for the Centrelink age pension is much higher than the cost of advice. Damien Quirk is an authorised representative of AMP Financial Planning Pty Ltd and a financial adviser with Blueprint Wealth Your retirement may last longer than your savings. Do you have aplan? Blueprint Wealth is committed to helping you build your plan to financial freedom. Contact us today to book a free initial consultation with a Blueprint Wealth Financial Advisor. /23 Richardson Street, South Perth, WA 65 P: (08) E: You should know Blueprint Planning Pty Ltd ABN trading as Blueprint Wealth is a Corporate Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN Australian Financial Services Licence Australian Credit Licence This advertisement contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances _6x256_πJSTT25084
14 4 FIXED INCOME August 25, 204 Bonds: a licence for stability Simon Lyons Investors in retirement need to be more protective of their capital. They simply cannot afford the same amount of risk in their portfolios as younger investors who are still employed. Unfortunately, many retirees continue to run with the bulls and invest high percentages of their portfolio in growth assets where income and prices can fluctuate. Investors in retirement need to be able to plan their lives and to do that they need certainty of income. They need low-risk investments with salary-like cash flows so they can pay bills and live the way they ve been accustomed to prior to retirement. Bonds provide the certainty that retirees need. There are three different types of bonds that can be used in portfolios to suit different economic conditions but I would suggest having an allocation to all three to protect your portfolio no matter what happens to interest rates. Investors in fixed rate bonds know upfront the returns they can expect over the life of the bond. These bonds pay half yearly interest payments and are very protective in a declining interest rate environment. Income for floating rate and inflation linked bonds varies as the bonds are linked to the bank bill swap rate and inflation, respectively. So if investors think either interest rates or inflation will rise, then these bonds would suit their portfolios. Both bonds pay interest quarterly. Investors who need a certain minimum quarterly or monthly income can devise a portfolio to suit their needs. To demonstrate, if we assume an investor invests $25,030 in a bond portfolio with five bonds, they can manipulate the choices they make so that the bonds provide a steady, consistent cash flow. The table on this page shows a sample portfolio and the projected cash flow it will produce for the next year. I ve purposely invested in bonds to provide a smooth income of around $3,500 per quarter to demonstrate how the choices of direct investing can benefit investors. The first bond to mature in the portfolio is the National Wealth Management subordinated debt, which matures in 206 when your cash flow is boosted by $50,000, at which time you may choose to reinvest in another bond. Bank of Queensland then matures in 207, G8 Education in 209 and Stockland and Sydney Airport in Total projected cash flow for your $25,030 investment over the next seven years would be $337,92. These bonds are not listed on the Australian Securities Exchange. They are only available through the over-the-counter bond market. The bond market in Australia is valued at $ trillion and is part of a huge global market. To be able to buy these bonds you need to have a relationship with a bond broker or dealer such as FIIG Securities. At FIIG we enable access to the bond market for a minimum upfront investment of $50,000 (bonds can be purchased from $0,000 per bond). Opening an account is easy and can even be done online, but we have a dedicated team here in Perth to assist you along the way. Investing in growth assets has its rewards but a fixed-income portfolio that provides known returns provides a lot of certainty for your future. Simon Lyons is a director FIIG Securities STABLE RETURNS Issuer Bond type Projected cash flows Total 4Q4 Q5 2Q5 3Q5 *Bank of Queensland Floating $876 $876 $876 $876 $3,504 G8 Education Fixed $,93 $,93 $3,826 National Wealth Management Floating $408 $408 $408 $408 $,632 Stockland Fixed $2,079 $2,079 $4,58 Sydney Airport Inflation linked $29 $293 $294 $296 $,74 Total $3,654 $3,490 $3,657 $3,493 $4,294 Source: FIIG Securities Note: The Sydney Airport inflation linked bond assumes inflation is constant at the RBA target mid-point of 2.5% *Wholesale investors only Cashflows for floating rate and inflation linked bonds accurate as at August 4, 204 but subject to change Case study: Michael and Wendy Deane Ben Harvey Like many West Australians in their late 50s, Bayswater couple Michael and Wendy Deane are thinking about their retirement. And like many West Australians, their nest egg is a little shy of where it should be for them to stop work sometime in the next few years. Mr Deane, 59, is an architectural draughtsman who runs his own company. He expects to semi-retire in about six years. His 53-year-old wife works full-time as a teacher and wants to start teaching part time when she is 65. With their home owned outright and an investment property, the Deanes had options when Vantage Wealth Management reviewed their plans. Vantage executive director Matthew McCarney recommended they both stretch out their working days as long as they could to bolster their nest egg. And he tweaked their strategy to ensure they got maximum bang for their superannuation buck. By bumping up her annual salary sacrificing to superannuation to $35,000, a move which saves $5752 a year in tax, Mrs Deane will be able to grow her super fund. Implementing a transition-to-retirement income stream, commonly known as a working pension, Mr Deane will save $7,973 in tax over the next six years....to GENERATION. Sacrifice: Wendy Deane would benefit from salary sacrificing.
15 August 25, 204 ANNUITIES 5 Locking in returns with annuities HUNTING CERTAINTY Strategy Investment Amount Inflation Amount invested Income in Inflation-adjusted type invested indexed as a % of strategy first year (204) income in 2035 Growth Account- $200,000 No 50% $35 $22,028 based pension Defensive Term annuity - $20,000 Yes 30% $6328 $0,628 indexed Defensive Lifetime annuity $80,000 Partial 20% $4037 $6780 part indexed N/A Age Pension - N/A Yes 0 $28,609 $48,05 indexed TOTAL $52,089 $87,488 Brendan Candy If you think the age pension will be enough to live on for most of your retirement, stop reading now. If you have some super or investments and want more than just the pension, take five minutes to think about how you re going to achieve that. It s not easy. After years of forced saving into your super fund, when you retire you re left with not only a big sum of money. You re also left with a big problem. How do I make my money last as long as me? How do I guarantee my lifestyle for the next 20 or 30 years? A good starting point is your eligibility for at least some government age pension. About 80 per cent of people aged 65 or older receive at least a part payment. In terms of your investments, shares can be great but dividends and capital gains aren t certain and losses are a real possibility. Term deposits are safe, but their interest rates can be low so expose you to inflation. Safe-sounding investments such as higher-yielding bonds look good but are more complex, and aren t guaranteed. If you think this isn t a very satisfactory situation, you re not alone. A recent government inquiry found that the most popular retirement product, the account-based pension, fails to solve retirees main problem of securing reliable income for the rest of their lives. It was also interested in annuities, which act like a pay cheque in retirement over either fixed terms (up to 50 years) or for your entire life. They pay interest and the regular payments can be made to rise with inflation, if you choose. Annuities are much safer than shares and high-yielding bonds because they can only be issued by government-regulated life insurance companies, whose shareholders have invested their money to protect yours. With some annuities, you or your estate can access your capital for the first 5 years and the life company will pay 00 per cent of it back at year 5, if you decide to cancel. Annuities can also help secure higher age pension payments and when the time eventually comes, lower aged care costs. Annuities are often used with account-based pensions, as shown in the following example case study of David and Susan. They are both 65, own their home, have $400,000 in super and want $50,000 a year to live on. While they don t know how long they ll live, they ve done some research and discovered that they should plan for at least 25 years in retirement, although there s a good chance either or both of them will live longer than that. They split their super 50/50 into growth assets (shares in an account-based pension) and secure assets (a term and a lifetime annuity). They re entitled to 87 per cent of the age pension, or $28,609 a year. All income is tax-free. This plan should deliver $52,809 of income in their first year of retirement, growing to more than $87,000 when aged 90. Importantly, the guaranteed lifetime part of their income is nearly $3,000, climbing to $55,000 when they re 90. That s what I call a secure future. Brendan Candy is WA State manager, Challenger Limited ACHIEVE FINANCIAL FREEDOM with careful professional planning It s never too early.., it s never too late YOUR ROADMAP TO WEALTH ALL WORKING ADULTS MUST HAVE A WEALTH STRATEGY. IF NOT, LIKELY CONSEQUENCE IS RETIRE POORER. RETIREMENT STAGE WEALTH STAGE FOUNDATION STAGE A D Budget & Cashflow Analysis Superannuation Choices 7. Retirement income strategy 6. Pre-retirement strategy 5. Progressive wealth & tax planning 4. Periodic reviews to keep finances on track 3. Wealth creation & tax strategy 2. Plan to pay-off all debts prior to retirement. Manage mortgage/banking in a planned way B E Home mortgage & debt analyses Will & Estate C F LIFE CLOCK Retirement 50 Working Life Personal & Family Lifestyle Protection Emergency Fund Childhood Teenage Backpacker/ UNI Copyright Next G Wealth Pty Ltd. Next G Wealth Pty Ltd AFSL & ACL ABN Call us now for a complimentary consultation 8/3 Lawrence Ave WEST PERTH WA 6005 P: E:
16 πBLAF TIMING YOUR INVESTING Transparent advice that gives you total clarity... Timing key Do you rely on your income to live a comfortable lifestyle today as well as create a brighter future? If you are a 30 year old, non-smoking male, earning $80,000 pa, it is estimated you would earn around $5 Million dollars over your working life to age 65. Isn t that worth protecting? To protect your most valuable asset you could expect to pay as little as $25 per month after tax if you work in a professional capacity. We are Relacs... A business devoted entirely to Seniors. Authorised Representative of: Chalice Nominees Pty Ltd ABN AFSL We are not aligned to any banks or insurers so you can rest assured you are getting impartial, quality advice to suit your needs. Call our team for a complimentary review on or us at Strategic Prosperity Group Pty Ltd is an Authorised Representative of Sentry Financial Planning Pty Ltd ABN , Australian Financial Services Licensee No Considering downsizing? Interested in lifestyle villages? Do you or a loved one need help in finding suitable aged care accommodation? Concerned about the financial implications of your options? Our goal is to help you maximise your financial position as you decide your living options. We can also estimate your costs of care and assist you to maximise your Centrelink benefits (08) Beaufort St, Mt Lawley WA 6050 Services have been excellent, this company has my complete trust. - Jim, Mount Claremont Let LIFE Financial Planners show you how to take control of your financial future. We can help you: Protect you and your family in the event of illness or death Protect your income Manage your cashflow Plan for your retirement Redundancy or inheritance The only WA finalists in the 204 National IFA Excellence Awards - Best Client Servicing Company Independantly Owned P: W: lifefinancialplanners.com ABN 76 2 ASFL THAT S PERPETUAL PRIVATE. GET YOUR FREE FINANCIAL HEALTH CHECK At Perpetual Private many of the relationships we ve built with financially successful Australian families are now into their fourth generation. By tailoring our advice to the unique and complex needs of our clients, we develop bespoke strategies that optimise and preserve wealth. No matter what stage of your life, we can provide a tailored solution to achieve your goals. For your complimentary consultation, call Brian Martin in our Perth office on or visit perpetual.com.au Perpetual Private financial advice and services are provided by Perpetual Trustee Company Limited (PTCo), ABN , AFSL This advertisement has been prepared by PTCo. It is general information only and is not intended to provide you with advice. John Cameron When you retire and start living off your investments, things change. A good long-term average return is not good enough. When you receive these returns is more important than how big they are. For example, if you have very bad returns in the early years and consequently run down your capital, your end result will be much worse than if you have some very good returns in the early years, followed by a run of negatives. The early good returns have built up a buffer to absorb the later bad returns, unlike in the case of having the poor results early on. This applies even though the average return throughout the period may be the same in both instances. This has been labelled sequencing risk. To look into this, we commissioned Delta Research and Advisory to build a model that enables us to compare different portfolios with different start dates, since 969. What we found was that account balance varied greatly, depending on the period in question and the make-up of the portfolio. The main contributor was the different financial conditions that existed in the different periods, particularly the different levels of inflation and interest rates, and different stock market performances (including dividends). The bar chart above shows the amount of capital left at the end of the period, expressed as a multiple of the original, after drawing income of 5 per cent. The results: Portfolios starting in the late 960s or early 970s experienced the worst kind of sequencing risk terrible returns in the early years. Anybody who invested totally in shares saw their money gone by 984 (if they started in EFFECT OF FINANCIAL CRASHES ACCOUNT BALANCE AT //204 FOR INVESTMENTS BEGINNING //2007 Cash Shares % of original left //204 0% 00% 75% 20% 80% 76% 40% 60% 78% 60% 40% 79% 80% 20% 80% 00% 0% 8% ACCOUNT VALUES FOR INVESTMENTS STARTING IN 969 AND 988 End value At start % of original remaining at end Cash Shares 969 start 988 start 0% 00% Nil 380% 20% 80% Nil 320% 40% 60% 40% 270% 60% 40% 60% 20% 80% 20% 72% 50% 00% 0% 84% 00% Source : Delta Research & Advisory Pty Ltd 969) or 985 (if they started in 970). People who started in the mid-970s onward have seen their real income maintained and the real value of their capital rise substantially. In some cases their capital has risen to between eight and 0 times its original value. People who invested in the mid-80s have seen their account values impacted by the global financial crisis but they still show a healthy rise. This is an example of the other side of sequencing risk big falls after a series of good returns that have built up a buffer to absorb the impact of the falls, compared with serious falls at the start causing massive erosion of initial capital. Somebody who retired in 969 would have done best by having all their funds in cash, while shares were the best performer for somebody retiring in 988. For somebody retiring in 2007, it didn t matter. Why the big difference? The period from 969 was notable for high inflation, volatile interest rates and H A M A f
17 HOW MUCH YOU WOULD HAVE AFTER 25 YEARS DRAWING 5 PER CENT End value multiple of original ASSUMPTIONS Monthly Returns (3/2/969 to 28/2/204). Australian Shares Growth = MSCI Australian Shares Index PR Australian Shares Income = MSCI Australian GR MSCI Australian PR Cash Returns = 90 day Bank Bill rate Franking Credits user input (assume 30% tax + 70% franking every year including before 987) Dividends, Franking Credits, Interest paid to cash account No transaction costs. All income is tax free and franking regulatory change. By contrast, the period from 988 was characterised by improving conditions. It was after the 987 crash and inflation began to fall. Interest rates stayed high until 992 but there was much greater overall stability than in the previous period. The result is for the first period (starting in 969), cash has been by far the better strategy, whereas it is shares for the second period (starting in 988). The GFC Now let s look at the August 25, 204 to results 00% cash 50/50 00% equities situation of somebody who started their retirement investment in January The table below shows very little difference between cash and shares. This was because of the very low interest rates that applied for much of that time. And inflation was low. For most of 2009 bank bill rates were about 3 per cent, compared with 6 per cent to 7 per cent in In an environment of 3 per cent interest rates, if all your money is in cash there will not be enough interest to cover your drawings and most credits received Drawdown taken from cash until cash balance is zero, then from sale of shares Minimum draw is adjusted for inflation The required income is $50,000 pa (or 5% pa) adjusted for i n fl a t i o n No rebalancing Tables and charts that are in real dollars (i.e. after inflation), are adjusted for inflation from the start year. of the drawings will come from capital. You will run down your cash balance very quickly. By contrast, shares continued to pay good dividends, especially after taking tax credits into account. Although dividends fell, they did not fall by anywhere near as much as interest rates. Although shares fell in value, the higher dividends (compared with interest rates) helped offset some of this fall. John Cameron is the principal of Black Swan Event Financial Planning Principal John Cameron is one of the industry s most respected, thoughtful and experienced advisers. need help with your financial future? Geraldton Greenough Financial Services provide high-quality professional advice to ensure your savings last a lifetime. Specialising in Superannuation & Retirement Planning Strategies. We are based in the Mid-West and have state-wide knowledge of financial issues affecting people living in regional areas. 30 Augustus Street, Geraldton WA 6530 P: Beachcroft Holdings Pty Ltd t/a Geraldton Greenough E: Financial Services is a Corporate Representative of Wealthsure Pty Ltd ABN: AFSL: Got all the facts? The world of financial markets, institutions and legislation is constantly changing and this makes it hard to know whether you re still well placed to meet your financial and lifestyle goals. Our Second Opinion Service offers you an objective, unbiased review in the following areas: Call or us today to schedule a meeting westernpacific.farmerblack.com.au We empower you. Professional Financial & Credit Advice, Service & Value Paul J. Peos Scheos Investments Pty Ltd How to invest a lump sum If you receive a lump sum, whether it is superannuation, a redundancy payment, an inheritance, or accumulated funds, how you invest it can have a big impact on your future. This is especially true in the case of retirement. That is why Black Swan Event Financial Planning has researched how well a range of investment strategies has performed since 969, while drawing an income. The results are revealing. Depending on when you retired, you would have got the best results by putting everything into shares, or everything into cash, or some mixture of cash and shares. Economic conditions and fl exibility are important. For a copy of the research study, phone Black Swan Event Financial Planning on and we ll post you a copy of Phone: (08) the research for free (limited numbers). You can also or write. Web: th Floor, BGC Building, 28 The Esplanade, PERTH WA Black Swan Event Financial Planning is a Corporate Authorised Representative of Paragem Pty. Ltd. (AFSL ) Established 982 ABN: Colin Street, West Perth Office: (08) Mob: Australian Credit Lic No Authorised Representative No of Just Financial Pty Ltd ABN Australian Financial Services License No B.Ec FFIN AFPA Managing Director πRCTT25084
18 8 INSURANCE August 25, 204 Insurance: what cover is Matthew Robertson With life claims paid to Australians last year exceeding $5 billion for the first time, equivalent to more than $3.6 million paid every day, life insurance is rightly becoming a common topic for more Australians. However, many families do not have adequate levels of insurance. Before we get started, let s look at the different types of personal insurance cover available. Life insurance is fairly black and white; if your heart stops beating, it generally pays out. Many policies also now have a terminal illness clause allowing for the insurance to be paid out early when you are diagnosed with less than 2 months to live. TPD insurance provides cover where you, because of illness or injury, are reasonably unlikely to work again. A claim here is occupationally assessed (ie, it is not based on the illness or condition you have, but based on your ability to work). There are different types of TPD cover so seeking advice is crucial here. Trauma insurance (sometimes referred to as critical illness or living insurance) pays out if the insured is diagnosed with a listed medical condition. Quite often it is a requirement that the insured survives for a minimum period (eg, 4 days) post-diagnosis. This insurance has evolved over time, with some policies now covering 40 plus different medical conditions, and providing partial claims for less severe events. Unlike TPD, a claim is assessed based on the medical diagnosis, not your ability to work. Income protection, as the name suggests, is designed to pay you a replacement income while you are unable to work because of illness or injury. Generally,. YOUNG AND FREE STEPPED PREMIUM LEVEL PREMIUM Life: $250,000 Trauma: $50,000 Income Protection Life: $250,000 Trauma: $50,000 Income Protection TPD: $250,000 $5,000 p/mth TPD: $250,000 $5,000 p/mth Male, 25 $3 p/mth $25 p/mth $29 p/mth $30 p/mth $35 p/mth $34 p/mth Female, 25 $8 p/mth $29 p/mth $32 p/mth $26 p/mth $39 p/mth $42 p/mth 2. STARTING A FAMILY Life: $,000,000 Trauma: $250,000 Income Protection Life: $,000,000 Trauma: $250,000 Income Protection TPD: $,000,000 $5,000 p/mth TPD: $,000,000 $5,000 p/mth Male, 35 $65 p/mth $45 p/mth $32 p/mth $30 p/mth $95 p/mth $48 p/mth Female, 35 $62 p/mth $54 p/mth $4 p/mth $0 p/mth $92 p/mth $68 p/mth insurers will allow you to cover up to 75 per cent of your current income. You select a waiting period (time off work before a claim commences) and a maximum benefit period (maximum length of time a claim would be paid). So, how do we make sure we have adequate levels of insurance cover and fit these into the family budget? There is no one size fits all model for personal insurance. Everyone is different. However, we set out below four stages in the insurance life cycle : Young and Free, Starting a Family, Children Getting Older, and I m Getting Older. Young and Free. Best categorised as someone without financial dependants, often having little or no debt and trying to build a career. A good starting point is protecting your income. Your financial future rests on you being able to get out of bed and earn an income. Life insurance may not be overly important just yet if you have no debt or financial dependants, but often a base level of lump sum insurance such as Life, TPD and Trauma insurance is appropriate. A level premium (paying a little more in the early years of cover, for the premium to remain relatively level over time) can make sense, as it will often be an insurance need right through to retirement (when premiums can start to become expensive). Let s consider Joe and Sarah who are young and free (25 years old), both earning $80,000 and their paths haven t crossed yet. They want to put in place a base level of Life, TPD and Trauma cover as well as some Income Protection. Table is an example of the sort of premiums that may be available. Starting a Family Often meeting the right person, settling down and buying the first home. This can increase debt levels dramatically while having a family that is financially (and otherwise) dependent on you. Reviewing income protection cover regularly is a good idea, as you progress in your career and your income changes. You may also find that with increased debt and new responsibilities, your lump sum insurance needs have increased above the previous level of cover. A stepped premium (cheaper initially, but increasing each year with factors such as age) may be appropriate for this additional cover, as hopefully this top-up need will reduce over time. For example, life insurance needs to cover debt repayment and replacement income needs for those left behind, so this insurance need will fluctuate year-to-year as debts are paid down and children get older, etc. The top-up need will hopefully reduce over time and cease to be a need when debts are repaid and children are adults. Some people argue against paying an increased premium in the early years of insurance to keep a level premium over time, when this insurance need is going to (more than likely) reduce over time. Superannuation may also be an appropriate vehicle for funding life and TPD cover (to reduce the impact on your cash flow). Make sure you have adequate insurance on the life of your partner as well, and consider adding child cover options to your existing policies. So, now let s assume Joe and Sarah have met, fallen in love, just turned 35 and started a family (still both earning $80,000). They want to cover a $500,000 mortgage and need $50,000 a year for 0 years in the event of either of their deaths (so let s assume $ million) and want the same level of TPD and a quarter of this insured amount for trauma ($250,000). Table 2 is an example of the sort of premiums that may be available if implementing new cover now. Children Getting Older. The mortgage is (hopefully) starting to come down, but just as this happens secondary school fees start to roll in. The kids are standing on their own two feet a bit more, though their tastes are becoming more expensive. Again, review your income protection insurance (every one to two years, or as required). With debts hopefully reducing, the children getting older, and the years to retirement decreasing, hopefully your lump sum insurance needs are also reducing. Consideration may be given to reducing the stepped premium component. You may be feeling the pinch on premium increases on these policies. Running the ruler over different insurers to make sure you have the best cover can be useful. A valuable legacy to a life s work Ben Harvey Pravin Maharaj knew the importance of having appropriate levels of insurance. The Doubleview GP had pressed his two daughters to ensure they took out enough cover to ensure they would be protected financially if one of them died, became sick or was unable to work. Pravin had been practising medicine at a GP clinic in Churchlands for four years when he died suddenly from a suspected brain aneurism late last year. His death came as a shock to the 55-year-old s loyal patients at Churchlands and his passing was mourned as far away as Tasmania, where he spent almost 20 years looking after patients until moving to Perth in 2009 to be closer to his daughters. The shock felt by his patients was nothing compared with the despair endured by his loving wife of 33 years, Asha. Besides a legion of adoring patients, two daughters and a granddaughter, Pravin left another legacy. Asha was financially secure because he ensured his life insurance cover was adequate and his premiums always paid. He would have wanted to make sure we were OK, Asha said. I don t know how I would have coped having to worry about money on top of everything else. It would have been unthinkable. HPH Solutions financial planner Randall Stout, who was Asha s daughter s adviser, was charged with looking after Asha s affairs. Mr Stout s job was made easier thanks to Pravin s insurance payout. Asha is debt-free and financially secure. Mr Stout has ensured Asha s self-managed super fund has insurance. And she has a new will with provision for an enduring power of attorney and enduring power of guardianship. Pravin and Asha Maharaj
19 August 25, 204 INSURANCE 9 needed and at what time? 3. CHILDREN GETTING OLDER STEPPED PREMIUM LEVEL PREMIUM Life: $,000,000 Trauma: $250,000 Income Protection Life: $,000,000 Trauma: $250,000 Income Protection TPD: $,000,000 $5,000 p/mth TPD: $,000,000 $5,000 p/mth Male, 45 $49 p/mth $5 p/mth $60 p/mth $350 p/mth $235 p/mth $00 p/mth Female, 45 $30 p/mth $6 p/mth $90 p/mth $290 p/mth $90 p/mth $55 p/mth 4. I M GETTING OLDER Life: $250,000 Trauma: $50,000 Income Protection Life: $250,000 Trauma: $50,000 Income Protection TPD: $250,000 $5,000 p/mth TPD: $250,000 $5,000 p/mth Male, 55 $20 p/mth $240 p/mth $55 p/mth $30 p/mth $360 p/mth $80 p/mth Female, 55 $00 p/mth $75 p/mth $240 p/mth $260 p/mth $230 p/mth $270 p/mth Quotes a guide only. If you are a smoker or blue collar worker you may pay more. Joe and Sarah just celebrated their joint 45th birthday party. Keeping the insured amounts the same as the previous example, table 3 shows an example of the premiums available. I m Getting Older, The mortgage is under control and your superannuation savings are building. With stepped premiums increasing dramatically because of age, you are really reaping the rewards of a level premium on your income protection and base level life, TPD and trauma cover. Regular reviews and reducing your stepped premium cover as appropriate will save you money. With the children leaving the nest, you now discuss the importance of personal insurance with them, and potentially converting their child cover into a personally owned policy in their name (to start their own personal protection portfolio). Now Joe and Sarah have hit 55 and the children are starting to leave home. Premiums are increasing (refer table 4) and the option of a level premium for new policies may be unaffordable (and locking in a base level of life, TPD, trauma and income protection back at age 25 refer to table now looks very attractive). Matthew Robertson is a private client adviser with Vantage Wealth Management Aged Care The decision to enter a loved one into aged care is a difficult one for any family to make, both emotionally and logistically. JVA is proud to be the trusted custodian of thousands of West Australian s financial futures. Your JVA adviser is 00 percent committed to making sure your financial strategy is responsible, realistic and rewarding. For 44 years our sole purpose has been to match each client s specific circumstances with intelligent solutions. We take a big picture approach and do whatever it takes to craft a reliable and realistic solution to protect your future. Talk to us today on or visit jvafs.com.au for more information. We do more than simply listen... we hear. 4 Cambridge Street West Leederville WA 6007 Many things need to be taken care of, like choosing the right aged care facility, financing the costs of aged care and deciding whether to sell the family home. It can be a stressful time, particularly when there are other family members to think about. But with the help of an ipac financial adviser, you can make the whole process much simpler. Contact ipac WA on Important information: Pajoda Investments Pty Ltd ABN trading as ipac western australia is a corporate authorised representative (CAR number 32849) of Charter Financial Planning Limited (AFSL ). Both the written and graphic content of this document is copyright to ipac securities limited and AMP. Nothing in this document may be reproduced in whole or part without our prior written authorisation. The information in this document is of a general nature and does not take into account your individual needs and objectives. Please do not act on any information within this document before seeking advice from a licensed financial adviser. August /4 When you re new to the aged care system, it helps to discuss your situation with someone who is familiar with the rules and pitfalls. ipac WA are specialists in aged care. We can help guide you and your loved one through the process and ensure you avoid common mistakes, so you can be confident you re making the right decisions.
20 20 WILLS AND ESTATES PLANNING Determine who gets what, while you can Catherine Chivers Securing your future is not only about accumulating wealth, but about protecting it, too. It s about securing your own future as an individual and securing your family s future as well. After years of working hard to build your nest egg, you want to make sure it s protected, and that when you re no longer around it goes to the people you care about most. Having a well-structured estate plan can give you peace of mind that your wealth is transferred in accordance with your wishes, that your intended beneficiaries will ultimately benefit from the estate and that it is done so tax-effectively. It might be a sitcom rather than a reality TV show, but the Modern Family is changing estate planning. We are living much longer and our family dynamics are complex. That s why you need to Will: For there to be clarity about act as attorney and deal with the an individual s testamentary wishes, donor s financial affairs while they an individual needs a will which are alive. Where it is enduring, the revokes all other previous wills. A attorney can continue to act will also appoints the executor of the notwithstanding the donor s lack of estate and the trustee of any form of mental capacity. It cannot be used to testamentary trust that may become make health and lifestyle decisions operative on an individual s death. In on behalf of the donor. addition, a will serves to enable an Enduring Guardianship: This individual to specify their funeral document concerns decisions made wishes, to nominate the guardian/s during an individual s lifetime, in of any minor children and to make relation to their medical treatment specific gifts. and lifestyle decisions, such as Memorandum of Wishes: While where they live. not legally binding in any Australian Advance jurisdiction, this document provides Health some useful guidance on an Care individual s specific wishes and Directive: preferences with regard to their In the event estate and, more frequently, the of serious ownership and control of their illness or non-estate assets and entities, such injury, this as family trusts and companies. document Power of Attorney: This allows for document appoints individual/s to medical have your financial affairs in order before it s too late. Here are some of the most important issues Modern Families face. Blended family: where an individual re-marries or otherwise forms a new relationship, there may be a new spouse to take into account, plus questions about how to provide for existing children and those that arise from that relationship Multi-national families: In our multicultural society an individual s wealth may also be held in international jurisdictions Relationship breakdowns: Managing a divorce settlement can be difficult. Spousal support and the timing of any asset sales can be crucial plus there may be August 25, 204 Estate planning toolbox for a Modern Family treatment decisions to be transferred to another person. An Advance Heath Care Directive can be used to provide an indication of an individual s wishes, for example, if they do not want their life prolonged artificially, when there is no reasonable prospect of recovery after a serious illness or injury. Superannuation Death Benefit Nominations: Assets held within the superannuation environment do not ordinarily form part of the deceased member s estate. In order tax, super and child support issues Illness or dementia: An ever-increasing portion of the population is ageing and at risk of being unable to manage their own financial and personal affairs Intergenerational wealth transfer: This is becoming a big issue as baby boomers (who hold the Achieve more with your Financial Planner Benchmark Consultants is a Corporate rat Authorised Representative of RI Advice Group Pty Ltd ABN AFSL Focus on what really matters The FPA Western Australian Chapter recognize and thank the following sponsors for their valuable support. t f e Suite 2, Barber House, 6 Mead Street WA 6076 Po Box 944, KALAMUNDA WA Phone πvptt25084