Tag Archives: Cashflow

Say goodbye to tax troubles

By Robert Wright /June 03,2022/

Do you find yourself drowning in random receipts when EOFY comes around? Learn to lodge your tax return the easy way with these last-minute and longer-term tax hacks.

Tax paperwork is something few of us take in our stride. In fact, the majority of people hand over much of this responsibility to someone more qualified. But even your accountant can’t do it all for you. Gathering together receipts and records you need to pass along can become a headache when you leave it all to the last minute.

1. Maximise deductions

Depending on your situation – married or single, salaried employee or sole trader for example – there are all sorts of legitimate expenses you can claim against your income to lighten your tax burden. A good accountant can certainly advise on which types of deductions you could potentially include in your return. But whether you’re lodging through an agent or doing your tax return DIY-style, knowing what expenses to record can help you keep receipts organised throughout the financial year.

A visit to the ATO website (www.ato.gov.au) can keep you in the know about eligible deductions in the current financial year. There are also a host of other apps available for keeping track of your spending, and not just the tax-deductible kind. Expensify has been popular for a few years now. Not only does it scan and store receipts, it pulls information including date, time, amount and merchant, into a CSV file ready for your accountant at tax time. There’s also a more concierge-style solution called Squirrel Street available here in Australia. For a monthly subscription you can mail your receipts to be scanned, uploaded and categorised on your behalf.  

If you’re eligible to claim some of your car expenses as a deduction, there’s also a nifty app to make this easier too. Providing you’re following the logbook method for calculating vehicle usage, Vehicle Logbook is an ATO compliant app that gives you an easy way to capture and collate all that essential journey info.

2. Be super savvy

Depending on your working arrangements, you may have already contributed to your superannuation in this financial year, either through the Super Guarantee or voluntary personal contributions. By making extra contributions into super, you’re saving more for retirement and may be eligible for tax concessions too. This will depend on your marginal tax rate and how much you’ve already paid into super.

3. Know your offsets

Making extra super contributions, for yourself and on behalf of your spouse, could also see you qualify for tax offsets. Under current Federal Government legislation, tax offsets are available to lower income earners, and for contributions made on behalf of your spouse if they’re on a low income.

 4. Investment costs

Just like money you earn from working, income from investments is liable for tax. Whether that’s rent from a property or dividends from shares, there may be deductions you can claim against these investment earnings. While an accountant can certainly offer guidance on these deductions, a Financial Planner can advise you on the overall costs and benefits of your investments. Tax is just one of the costs you need to keep in mind when exploring investment options and coming up with an investment strategy to meet your financial goals.

5. Tidy-up for next time

By knowing what deductions and offsets you can legitimately claim, and keeping on top of record-keeping, you could be boosting your chances of getting a tax windfall after lodging your return. But if your overall finances are in a bit of muddle, there may be just as much value in doing a spot of financial housekeeping and decluttering your finances to get all your money matters in the best of shape for the future.

Source: FPA Money and Life

Roughly 500,000 Australians plan to retire in the next 5 years.

By Robert Wright /June 03,2022/

According to the ABS, some half a million people intend to retire within 5 years.

While many Australians will remain working until they can access their superannuation savings and/or the Age Pension, some 32% of people choose to retire beforehand due to health reasons, retrenchment, or a lack of suitable employment opportunities.

No one can predict the future. Unforeseen circumstances can strike at any time, so it’s best start your retirement plans early while you are young, healthy and earning an income.

A well-structured retirement plan can guide you towards your dream retirement while giving you a sense of security and confidence about the years ahead.

An effective retirement plan will outline how you can make the most of your money and investments today, so that you can afford the retirement lifestyle you imagine in the future.

As retirement planning specialists, we can show you how to make your retirement goals a reality.  Even if you feel you have left it a little too late, it’s never too late to get started.

For further information about how we can tailor an effective retirement plan for you, don’t hesitate to contact us today.

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