All posts by Robert Wright
What you should know about creating your will and estate plan
By Robert Wright /February 18,2022/
If you want to protect your family and assets, it’s worth documenting what you’d like to happen if you can’t make your own decisions later in life or if you pass away.
If you’ve got people in your life who you love and assets you’d like to be distributed in a certain way, you might be at a point where you’re thinking an estate plan would probably make good sense.
What is an estate plan?
An estate plan involves drawing up a will, but also much more. It involves formalising how you want to be looked after (medically and financially) if you’re unable to make your own decisions later in life, as well as documenting how you want your assets to be protected while you’re alive and distributed after you pass away.
How does an estate plan help?
You can make your wishes known
One of the benefits of a solid estate plan is you can formalise your wishes in writing. This can help if someone challenges what you said you wanted after you pass away, or if you’re unable to speak for yourself.
You could minimise disagreements
Unfortunately, disputes can happen when assets need to be distributed among people when no clear guidelines have been set.
Being prepared with an estate plan could go a long way in preventing such disagreements should family members need to divide assets among themselves or make other hard decisions on your behalf.
You may improve tax consequences for your heirs
As the distribution of assets (including your income) can come with different tax obligations, a good estate plan could minimise any tax that your heirs may need to pay.
If they decide to sell something they’ve inherited, for instance, they may need to pay capital gains tax depending on what type of asset it is.
Considerations when creating an estate plan
Do you want your will to be legally binding?
A solicitor or estate planning lawyer can help you draw up a will that is legally binding and covers what you’d like to happen with your assets, children (if you have any) and funeral when you pass away.
It’s important this document is kept up to date and that any changes to your situation (marriage, divorce, separation or otherwise) are accounted for, so those who matter most are taken care of.
While it’s also possible to draw up your own will (there are various kits available online), these may not be adequate in complex situations, which is why engaging an estate planning professional, even if you think your situation is relatively simple, will generally be worthwhile.
Keep in mind, if your will is deemed invalid, your estate will be distributed according to the law in your state, which may not align with your wishes, and claims could be made by unintended recipients.
Who are your nominated super and insurance beneficiaries?
You might assume that how and in what proportions you want your super to be distributed can be included in your will, but this isn’t necessarily the case.
You’ll need to nominate your beneficiaries with your super fund and you’ll also want to make sure you’re across how long different nominations are valid for.
If you don’t make a nomination, the super fund trustee could use their discretion to determine who your super money goes to.
Meanwhile, if you have insurance outside of super, you’ll also want to make sure you’ve listed your beneficiaries on your insurance policy and that those beneficiaries are also kept up to date.
Will you appoint an enduring power of attorney to make decisions if you can’t?
There may come a time when you’re unable to make legal or financial decisions on your own because of advanced age or medical issues. Granting power of attorney means you assign someone to make these decisions on your behalf should a situation like this arise.
For this reason, it’s important to choose someone you trust, as they’ll be responsible for looking after your bank accounts, ongoing bills, and even selling your house if you need to move into a care facility.
It’s also worth noting that you may be able to appoint a different type of power of attorney depending on what tasks you’d like this person to carry out on your behalf. For example, you may want your son or daughter to make general lifestyle decisions for you, while you appoint a financial adviser to make financial decisions.
Have you chosen an executor to help carry out your wishes when you’re gone?
Generally, an executor is the person legally in charge of managing and distributing your estate, according to the terms set out in your will, with the assistance of a solicitor.
When you nominate an executor in your will, which your solicitor should also have a copy of, it’s important to let your family know, to avoid disputes after you pass away.
The executor should also have a good understanding of their duties and where your will and other important documents are kept. You may also want to let your family know where this information is stored.
The executor will typically be responsible for things like making funeral arrangements, ensuring your debts are paid and bank accounts closed, and collecting any life insurance.
They’ll also usually need to apply to the court for a grant of probate, which is a legal step that’s required before your estate can be distributed. A grant of probate certifies that your will is valid.
Do you need help with your estate plan?
Estate planning can be a complex process and there could be legal and tax implications if you don’t set things up correctly and understand the fine print.
For these reasons, it’s important to speak to a legal professional and your financial adviser before making any decisions and signing on any dotted lines.
Source: AMP
Do you value your assets more than yourself?
By Robert Wright /February 18,2022/
Value is a funny thing. One person’s trash can be another person’s treasure, as the old saying goes. The value we place on something tends to be very individual, and is generally a product of many different factors ranging from cultural background and upbringing to personality type and even life stage.
But as much as the way we view value varies from person to person, there are also some common views that tend to draw us together. According to research commissioned by TAL, Australians are seven times more likely to name their possessions as their most valuable asset, rather than themselves.
The research revealed almost all Australians find it difficult to understand their own value. As a result, we tend to base our self-valuation on the amount we earn and own, while neglecting the intangible things such as the value of the social and emotional contributions we make to the lives of our loved ones.
The things we value will change over the course of our lives
Unsurprisingly, the research showed that throughout every generation, the things we place value on will change as we move through different life stages.
For those in their 20s and 30s, building a rewarding and successful career tends to be a strong focus, whereas those approaching or enjoying retirement tend to be more focused on staying healthy and supporting loved ones with practical tasks.
But where it gets interesting is when we look at how Australians felt their changing views on value over time had impacted the decisions they made along the way.
The long-term impact of our views on value
According to the research, the majority (78%) of Australians undervalue themselves and their contributions to others which over time has led to some regrets, including poor life decisions relating to their long-term wellbeing, as well as actions around protecting what they value.
The common views on value that draw us together
Despite our views on value changing as we move through different life stages, the research also found there are key areas of our lives which we are each underestimating when it comes to understanding our personal value, and this can subsequently have an impact on the choices we make.
In fact, Australians tend to fall into one of four different personal value profile types, which will influence the things they value and choices they make across their lives:
Gregarious Go-Getters (24% of Australians) – these people generally strive to have a successful career and are more likely to undervalue the importance of taking care of their health.
Conscientious Carers (28% of Australians) – these people highly value the emotional support they give to their loved ones but may question the decisions they make in life and sometimes wish they did things differently.
Family-Focused Optimists (32% of Australians) – these people tend to take a family orientated approach to life. They take care of their health but place less importance on their career than other areas of their lives.
Ambitious Organisers (16% of Australians) – these people are more likely to sacrifice their long-term happiness to focus on a successful career and tend to underestimate the value of their emotional support and time to loved ones.
So why does the way we view value matter?
With the research showing that many Australians believe underestimating their own value has led to some regrettable life decisions, it’s important to consider how your present choices may impact you in the future and the things you will come to value over time.
After all, you are your most valuable asset – in every hour of every day, month and year of your life, especially to your loved ones.
Source: TAL
Constructing a retirement portfolio in a low return world
By Robert Wright /February 18,2022/
Portfolio construction is a much-used term that can be misunderstood. Fundamentally, the term portfolio construction refers to the process of selecting investments to create the optimal balance of risk and return.
By mixing different types of investments and different asset classes, portfolios can be built in a way that maximises the return for any given level of risk.
This concept of risk is fundamental to portfolio construction. The key to effective portfolio construction is understanding that each individual experiences risk differently and investment needs change dramatically as people’s priorities change over the course of a lifetime.
Risk tolerance
Depending on what stage of life they are at, individual investors can have quite different goals.
An investor early in their career can afford to seek higher returns from their investment portfolio by taking a higher level of risk because they have more time to make back any downturns in markets.
They also have less need for income from their investments than someone approaching or in retirement and can weight their portfolio towards growth assets.
A younger investor can be less concerned about inflation than a retiree because they can rely on wages growth that can maintain their purchasing power. They can also afford to lock up investments for a longer period without worrying about liquidity because they have time before they need to draw down on their assets.
In contrast, retirees tend to be more concerned about capital preservation because they need to draw on their asset pool throughout their retirement.
As they are no longer earning income from work, they need to draw income from their portfolio. This means they should consider weighting their portfolios towards income-generating assets.
Any increase in inflation erodes a retiree’s purchasing power as it costs more to maintain standard of living which means their capital can be eroded faster than planned.
And liquidity is critical for a retiree as assets may need to be sold quickly – for example if there is a medical emergency – without punitive valuations.
The concept of sequencing risk is also a critical difference between early and late-stage investors.
Sequencing risk
Sequencing risk refers to the risk of being forced to sell investments after a fall in valuations. A younger investor can typically ride out market volatility and even buy more assets when valuations are low.
However, late career investors and retirees who are forced to sell assets at low prices to fund their lifestyles have no way of regaining the lost value. A sensible portfolio construction process can protect against this.
Hedging risk
A question that often comes up is the role of downside protection in portfolio construction. The answer is different depending on where an investor is at in their investing journey.
Take the example of a pre-retiree and a younger investor with portfolios split equally between equities and bonds going into the global financial crisis (GFC) – with and without downside protection using options strategies.
Without downside protection, the retiree would have seen a pullback in the value of their assets of about 25 per cent and, because they were drawing down on their assets to live their life, they would not have been able to fully participate in the subsequent recovery.
Had they used downside protection on their portfolio, they would have been back on track by 10 years later.
The same is not true of the same strategy deployed by a younger investor. Without downside protection, young investors just keep buying into the market through a downturn and continue to accumulate assets.
But with downside protection – which comes at a cost – they see a drag on their returns, lowering their ultimate savings. It’s a reminder of the difference between younger and older investors.
Human beings also have the potential to make mistakes in their investing lives. If a retiree investor facing the same kind of GFC drawdowns suddenly became risk-averse and shifted their portfolio to 30:70 equities and bonds, this would be an understandable and apparently rational decision to preserve assets.
But markets recover. If that retiree waits until the storm passes and takes three to five years to switch back their allocation to 50:50, they would be 30 per cent worse off than if they did nothing at all.
Asset allocation
So, what assets should retirees look for?
In our view, the key is to seek out desirable risk attributes and not simply take the approach of investing by asset class.
In Australian equities for example, franking credits offer a good income stream for retirees by refunding the tax paid by the underlying companies. It should also be noted, however, that in seeking a higher exposure to Australian equities in pursuit of franking credits, a portfolio will acquire other concentrations of risk, for example: exposure to China. Good portfolio construction should consider and diversify away these concentrations.
In direct assets, infrastructure offers good opportunities for retirees. Many infrastructure assets earn a return on an availability basis regardless of actual usage or economic conditions, providing a stable income. The key consideration for direct assets is liquidity, as holding large allocations of illiquid assets could mean having to disproportionately sell down liquid assets, like equities, at an inopportune time if larger sums of cash are needed for, say, a medical emergency.
For bonds, the traditional defensive characteristics may not be available in a world of near zero interest rates and the potential of rising inflation.
In the last 30-40 years we have seen a terrific run in markets, particularly with bond rates coming down from as high as 16.5 per cent in the case of 10 year Australian government bond yields almost 40 years ago to near zero now. The performance was further buoyed by lower tax rates, falling tariffs and the rise of globalisation.
The corollary of this is that throughout those 40 years, forward return expectations have been declining.
In fact, a fund with a traditional asset allocation split 60:40 between equities and bonds is near its highest ever valuation level.
We believe this means return expectations from investment portfolios should be expected to be lower going forward until interest rates normalise.
Inflation is also a looming threat to portfolios. US annual consumer price inflation pushed up beyond 6 per cent in October of 2021 and there is a risk that price pressures associated with deglobalisation and decarbonisation defy the widely held ‘transitory’ thesis and stick around.
Goals-based investing
Given lower expected returns and higher inflation, what’s the right portfolio response?
Doing nothing is one approach – simply accept that returns are going to be lower.
Another approach is to increase risk – adding riskier, more leveraged asset classes will improve the probability of getting a return but also increase the probability of losing money.
A third approach is to lower your expectations. This means not changing how portfolios are constructed but accepting the likelihood of lower returns and perhaps adjusting things elsewhere in your life accordingly. In our view, this isn’t of much use or comfort however to today’s pre-retirees and retirees.
And the final – and more important – approach is to adjust strategy to those areas most likely to achieve objectives. This could include taking a goals-based approach to investing.
For example, a retiree could decide that rather than taking a traditional asset allocation approach to portfolio construction, they instead want to take on the goal of protecting and maintaining their standard of living in retirement. That goal might be measured by providing returns equal to the consumer price index plus 3.5 per cent as an example.
By focusing on the desired outcomes rather than simply considering traditional asset class allocations, investors can consider including alternative investments and strategies that may not be available under a traditional approach.
Source: AMP Capital
Should you use property to fund your retirement?
By Robert Wright /February 18,2022/
Superannuation, shares, property, cash, other investments; a dizzying number of options are available when it comes to living comfortably through retirement.
Financial advisers often promote a diversified portfolio to reduce the risk of concentrating ‘all eggs in one basket’. Still, Aussies love their property, with more than 2.2 million of us opting for investing in property, with almost 60% of those aged 50 or over holding property investments.
Aside from simply owning a secure place to live through retirement, investing in property can also provide regular post-work income and might offer some assurance as a ‘safe’ investment option. Property is a physical asset and can seem less volatile than other investments, particularly when heading into a phase of life that holds uncertainty and where you may think: “What happens if I outlive my savings?”
But different risks and tax obligations in retirement can alter the attractiveness of investments and, when it comes to property, there are a range of strategies that offer different pros and cons when using it to fund retirement.
Living off rental income from an investment property
On the surface, living off rental income in your retirement is an attractive prospect. But you may need to first make sure the lifestyle you want doesn’t exceed your investment property’s returns, taking into consideration any mortgage repayments, taxes and maintenance costs, as well as factoring in for times when the property may not have tenants.
Many people find they need multiple properties in their investment property portfolio to generate enough income to support their retirement lifestyle.
Pros of living off rental income
Capital appreciation: If you’ve owned a property for a while or have made significant improvements, chances are it may have grown in value – and may continue to do so. Growth in value can also mean higher rental rates and returns.
Interest rates are at all-time lows: Which means low mortgage repayments, if you have them.
Outgoings can be low: If you’re healthy and handy, you can leverage your free time in retirement to save maintenance costs by doing your own property management and minor repairs.
Holiday ahoy: Many Australians choose to purchase investment properties in holiday locations. When leased, your tenants provide an income stream; when not, you have an instant holiday house for yourself or perhaps a short-term rental.
Cons of living off rental income
Ongoing costs can pile up: In addition to anticipated outlays – property management, insurance and rates – you risk unexpected costs like emergency repairs and oft-forgotten long-term appliance or structural replacements.
Income from your investment property may be subject to income tax: This will depend on the net amount per financial year – and the amount and type of any other income.
Liquidity is restricted: If you need funds unexpectedly e.g. for medical costs, to take a holiday, or for emergencies, you can’t sell a single room of your investment property as you can with shares of stock – the whole thing has to go, and it will take some time before you get the actual sale proceeds.
Your income isn’t guaranteed: the rental market can change, and it might mean that your property can be empty for periods of time.
Living off equity
This option essentially sees you paying-off as much as you can on your property while working (reducing the loan-to-value ratio) and then funding your retirement by borrowing against the equity (the value of your home, less any mortgage) if and when you need it. A number of strategies are available, including home reversion, reverse mortgage and home equity release.
Keep in mind that the amount of money you can access depends on your age, the value of your home and the type of equity release.
Pros of living off equity
It’s tax free: You don’t have to pay tax on this ‘income stream’ as it is effectively a loan.
You can tailor the amount of equity you borrow: Whether it’s regular payments, a lump sum, line of credit or a mix.
You don’t have to sell: If the equity is in your own home, you get to keep living there and you don’t have to make repayments while you do.
Negative equity protection: means you will never end up owing your lender more than your home is worth if you take out a new reverse mortgage.
Cons of living off equity
There are costs involved: Application, service and end-of-agreement fees may apply. Check with your lender as they may vary from lender to lender.
A volatile market: This strategy only works well if your property is increasing in value.
You are converting capital to debt, for yourself or your beneficiaries: Some dub this investment strategy “spending wealth, rather than cash flow.”
The amount you can ‘borrow’ is restricted: If you’re 60, you can only access 15-20% of the value of your home. As a guide, add 1% for each year over 60. Over time, your payback interest rates may be greater than an average home loan. With home reversion, you ‘sell’ a share of your home usually for well under market value.
Selling property to fund retirement
To sell or not to sell? It’s a question many Australian homeowners face as they enter retirement, regardless of whether it’s the family home or an investment property. If this is to be your major income through retirement, check that any profits you reap will equate to comfortable golden years. Also consider the effects of re-buying or renting in the same market if you’re downsizing.
Pros of selling property
Selling your property may mean you have an increased cash flow: You can use it to pay off debt or invest in shares or in managed superannuation funds, which may provide additional tax benefits and liquidity.
You may not have to pay capital gains tax: This may apply if your property is your primary residence, or you purchased it before September 1985.
Cons of selling property
Capital gains tax: When selling an investment property you’ve never lived in, you may be liable for capital gains tax on any profit.
All those costs of selling a property: Real estate agent fees, legal fees, moving costs and so on.
Timing: If you need to sell in a hurry to fund your retirement, you may not be selling into the best market. Liquidating during a market downturn can mean a significant hit to your retirement income.
On the other hand, selling at the top of the market could mean boosting your super balance with a large lump sum, but remember the pension transfer balance cap limits the amount you can invest in a tax effective retirement pension.
Your bank balance: Selling your home may impact the amount of Age Pension you receive.
No one-size-fits-all approach works when it comes to using property for retirement. With so many factors influencing your decisions, it’s wise to consider your options and speak to your financial adviser.
Source: AMP