Tag Archives: Financial Happiness

Supporting your kids, without sacrificing your own retirement

By Robert Wright /July 30,2021/

In the past, wealth was often passed on through an inheritance. But with our longer lifespans, and the higher cost of living (especially housing), the desire to help our kids while we’re alive and well is increasing.

If your children are young, you may have twenty or thirty years to save and invest on their behalf, while also saving for your own retirement. If this is the case, it pays to put a strategy in place early on.

For those nearing retirement age, or already retired, you may have a large lump sum you’d like to gift to one or more of your kids. Giving money is a wonderful thing to do, but it’s not always simple. It can have tax implications, and may affect your income support payments from Centrelink. On the other hand, gifting may enable you to increase your government pension payments or benefits, if done right.

So how can you help your children without compromising your own financial security and comfort in retirement?

Ensure you’re on track for a comfortable retirement

Before you give away your wealth, it’s important to remember that you need to fund your own retirement for many years.

Australians are living longer than ever, with more years spent in retirement. If you were to retire at age 60, and live to 90, that’s one whole third of your lifetime spent in retirement.

As well as wanting to enjoy your retirement through travel or leisure activities, older age often comes with more medical and health expenses.

So it’s really important to make sure you have enough funds saved and invested to get you through. This might sound selfish, but in reality, it means you won’t become a financial burden on your children later in life.

How much will you need to retire, and, how much can you afford to give away now? It’s always best to seek professional financial advice to ensure you have enough put away to see you through. A financial planner will be able to give you tailored advice about the impact of your giving on your retirement plans.

What am I giving money for?

Next, consider what it is you’d like to help your son or daughter with. Are the funds for a property deposit? To pay for a wedding? Education expenses? This might offer some clue as to the right amount of support.

Following on from this, consider how many children you need to help. If you gift funds to one child, do you need to match that for others when the time comes? If you have several children, but some are doing better than others, do you need to help them all equally?

Balancing the family dynamics around money is important, as it can be a sensitive issue. The last thing you want to do is cause a rift in the family over some perceived inequality. If you do have several children you need to help, keep this in mind, as it will limit how much help you can offer each child.

Giving an incentive

Often the best way to support children financially is to match their own contribution. Rather than purchasing something outright, offer to base your assistance on their own savings. This also means they have a vested interest in the item, which means they’re likely to treat it more carefully.

How should I give money?

If you receive the Age Pension or other benefits from Centrelink, there is a limit to how much you can give away. The gifting rules allow you to give $10,000 over one financial year, or $30,000 over five years. You’ll need to let Centrelink know when you’re planning to give a gift of this type.

If you’re considering giving your children a substantial amount of money, it’s worth taking the advice of Dr Brett Davies at Legal Consolidated. He recommends always giving funds as a loan ‘payable on demand’, not as a gift. Creating a written loan agreement helps keep the money in your family, even if things don’t go to plan.

Consider this. You gift your daughter $400,000 to buy a house. Five years later, she divorces from her husband and the house is the only asset of the marriage. The Family Court awards half of the value of the house to the husband, including $200,000 of your donated funds.

If you instead had a valid loan agreement in place, the loan must be paid out before the assets are distributed. Hence, the $400,000 comes back to you, to do with as you please. 

Always seek professional legal advice when drawing up a loan agreement to ensure that it’s compliant with the law, properly worded and correctly executed.

Get professional advice

If you’re nearing retirement and looking to give up work, downsize your home and/or gift funds to your children, it’s important to seek financial advice.

A financial planning professional will be able to give you tailored advice about the impact of your planned giving. They can also help you work out a strategy for meeting multiple goals, such as giving to several children while funding your own comfortable retirement.

Source: Money & Life

6 steps to help you feel more positive about your finances

By Robert Wright /July 16,2021/

With one in four Australians reporting more financial stress after COVID, it’s no surprise many of us are concerned about the future. Between mounting bills, unexpected expenses and a lack of understanding around our needs in retirement, getting our savings on track and seeing the big picture can seem overwhelming.

It doesn’t need to be. If you break things down into small, manageable actions, you can create a simple plan to take immediate positive steps towards a healthy financial future.

Assess your debts

Debt is a reality for many Australian households, whether it’s a home loan, credit card, student loan, car finance or personal loan. It’s not uncommon to lose track of how much you owe and how much interest you’re paying as a result.

Understanding your debts can help you put a plan into action to pay them off sooner and in the optimal order, potentially saving you a lot of money. There are steps you can work through to manage what you owe and work out your priorities – such as making a list of all debts and their sums and categorising each as ‘good’ or ‘bad’.

Plan how to pay your bills

Some 14% of Australians report they have been unable to pay one or more bills on time in recent months, a reality that may be compounded through winter as extra heating sees utilities skyrocket.

One way to manage irregular bill amounts and unexpected rate spikes is to consider bill smoothing, a process where you establish automated payments of a set (and known) amount to cover utilities over the course of a year.

Establish an emergency fund

Putting aside extra money for that rainy day sounds simple, but it’s one that many Australians neglect – in fact, one in four of us believe we wouldn’t be able to raise $2,000 in a week if we needed to do so in an emergency.

If you are that one in four, it’s a good idea to set up an emergency fund as a separate account  – it acts as a buffer from debt, helping you prepare for life’s curve balls. Keeping it away from your day-to-day savings account means you’re not tempted to dip into it for known, budgeted expenses such as rent or mortgage, groceries or school fees.

Look at your super

The government’s Early Release Scheme in 2020 saw 3.5 million Australians take advantage of the ability to dip into their super early. For many, having access to these funds helped ease immediate financial stress. If you’re not sure how to build this money back, you’re not alone – 30% of those who accessed their fund report a lack of awareness of how to recover their balances.

A good first step is to calculate how much money you’ll need in retirement – there are various online tools to help you do this – then you can consider some of the ways you could rebuild your super and work out which one suits your circumstances.

Work on a savings plan

Deciding to pay yourself first – say, 10% of your income – is one simple way to boost your savings and improve your financial future, making you contribute a set amount of money into a savings account before you manage other household expenses.

 It’s also a good idea to set up a separate savings account with a high interest rate. Then make sure that set amount of your salary, as well as any surplus in your day-to-day account, is automatically rolled over into your savings at the end of the month. Automating your accounts allows you to set and forget, so your nest egg will automatically grow every time money is deposited.

Think about any long-term financial goals

At what age do you want to be able to buy your first house? When do you want to retire? Do you know how much you need in your superannuation fund to retire comfortably? Many of us sweep these big questions under the carpet, but understanding them can help you prepare for your financial future.

Once you’ve mapped out your current financial position and established your long-term goals, you can use a range of online tools and calculators to help you get there.

You can also speak with your financial adviser to help get your savings goals on track and make sure you head toward retirement with peace of mind.  Source: AMP

Learning the lessons of 2020: An extraordinary year

By Robert Wright /June 11,2021/

When the COVID-19 pandemic hit Australia in March 2020 it brought immediate and severe financial gloom. Shares plunged 37% and the economy slumped to its first recession in nearly 30 years. However against that backdrop, 2020 turned out far better for diversified investors than initially feared.

The development of vaccines became the good news of the second half of 2020 and offered hope of a return to life as normal. The anticipation of economic recovery, paired with ultra-low interest rates, drove a rebound in many investment markets and we did see a strong growth rebound in the second half of the year.

In 2021, we expect to see solid returns as markets shift from pandemic winners to cyclical investments, but the gains will likely be slower than seen coming out of the March pandemic lows of 2021.

For investors, 2020 was better than feared

The list of negatives brought about by the COVID-19 pandemic cannot be ignored. Unemployment surged, with severe disruption to industries like airlines, retail and the office sector. Globalisation took a further blow and tensions rose with China. Public debt skyrocketed. However there were a number of key positives.

The massive fiscal support provided by governments shielded businesses from collapse and saved jobs and incomes. Debt forbearance schemes headed off defaults, while plunging interest rates helped borrowers service loans.

Economies began to reopen after social distancing helped contain the virus, with nations like Australia, New Zealand and Asian nations doing better on this front than the US and Europe.

The November 2020 election of US President Joe Biden offered the prospect of less global policy uncertainty and reduced international tensions in 2021 and beyond.

Disruption caused by the pandemic massively accelerated a number of broader productivity gains. These include the faster take up of technology like virtual meetings, e-commerce and use of the cloud to cut costs and boost output for business.

As a result, the pandemic has shown it is possible for people to work from home and enjoy a more balanced lifestyle – increasingly in regional areas where property prices are generally more affordable.

The benefits of science – typified by the rapid development of vaccines – has also served as a rebuke to populist politicians and offers hope for better management of issues like climate change in the future.

The lessons of 2020

  • Timing market moves is hard – getting out at the top of the share market in February 2020 was hard, but getting onboard again for the rally in March last year was even harder.
  • Don’t fight the central banks – while they could not prevent the magnitude of the fall in share markets, their massive money easing was a key driver of the recovery.
  • Investment valuations need to be assessed relative to interest rates – low rates make shares relatively attractive.
  • Depressions can be avoided – 2020 showed that a large, rapid, well-targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly.
  • Turn down the noise – stick to a long-term investment strategy.

Reasons for optimism through the remainder of 2021

Recent bumps in the road of vaccine roll out has not stifled the overall goal of achieving herd immunity in many developed countries by the second half of this year. Fiscal stimulus and easy monetary policy continue to work through the system, with even more fiscal stimulus being injected into the US economy. Continuing high saving rates indicate significant spending potential as confidence improves. Low inflation, and hence low interest rates, mean we are still in the “sweet spot” of the investment cycle.

After having run up so hard since early November 2020, shares are still vulnerable to a short-term pull back. We are likely to see a continuing shift away from investments that benefitted from the pandemic and lockdowns (technology, health care stocks and bonds) to investments that benefit from recovery (resources, industrials, tourism stocks and financials).

We expect global shares to return around 8% this year, but we anticipate there may be a rotation away from tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.

Australian shares are likely to be relative outperformers returning around 12%.

Australian home prices are likely to rise 10-15%, boosted by record low mortgage rates and government incentives, but the pause in immigration and weak rental markets will likely weigh on inner city areas, and units in Melbourne and Sydney.

Nine things for investors to remember

  • Harness the power of compound interest – under the principles of the ‘Rule of 72”, it takes 144 years to double an asset’s value if it returns 0.5% p.a, but only 14 years if the asset returns 5% p.a.
  • Don’t get thrown off by the cycle – investors can often abandon a well thought out strategy at the wrong time during falling markets – as some may have done in March last year.
  • Invest for the long term – get a plan that suits your wealth, age and risk tolerance and stick to it.
  • Diversify – don’t put all your eggs in one basket.
  • Turn down the noise. As discussed earlier.
  • Buy low, sell high – the cheaper you buy an asset, the higher its prospective return, and vice versa.
  • Beware the crowd at extremes. Don’t get sucked into the euphoria or ‘doom and gloom’ around an asset.
  • Focus on investments that you understand. It’s probably best to avoid companies that have complex and hard to understand valuations or business models.
  • Accept it’s a low nominal return world. Historically, when inflation is around 1.5%, the average return of 7% for super funds begins to look pretty good.

Source: AMP Capital

How to save for retirement in your 50s

By Robert Wright /April 16,2021/

For many people, your 50s are your golden years, a time when you may be at the pinnacle of your career and some of the big expenses you needed in your 20s, 30s and 40s have levelled out. But, while it may be easy to slip into a comfortable pattern of splurging on yourself and your children, this is the final stretch towards reaching your financial goals – a time when you should be maximising your financial know-how.

Shift your mindset to your saving goals

You might have a regular income now (in fact, statistics say you’re likely to be earning your highest income between the ages 45 and 51). But how will your life change when you retire, and your finances are potentially reduced or more sporadic? What happens when you need to prioritise saving overspending?

An important tip for saving for your retirement in your 50s is to change your mindset early and focus on what’s essential, rather than nice. Now is the time to prioritise your needs over your wants so you can reach your savings goals. The first step is to use a retirement calculator to help get an idea of how much you’re likely to need.

Hold your nerve

If you’re like many Aussies, your retirement savings and other investments might have been hit by the effects of the coronavirus pandemic.

You may, however, need to re-evaluate some of your retirement plans and consider pushing back your retirement by a few years if you can.

Transition to retirement

Still keen to exit the workforce sooner rather than later? Another option to consider is transition to retirement, a stepped pathway into full retirement that lets you access some of your super funds while you’re still working.

This scheme is open to those aged between 55 and 60 who are still working and comes with a range of options that could help you leave full-time employment behind.

Aim to be debt-free

Your focus for the next decade should be on how you can enter retirement with as little debt as possible. The average mortgage in Australia is $384,7003, according to the Australian Bureau of Statistics.

Imagine if you were able to retire without having to make monthly repayments on sizable amounts like this? There are numerous strategies for shrinking your mortgage fast, from setting up offset accounts to making lump-sum repayments.

Don’t forget other, smaller debts as well. While your home loan likely comes with an interest rate of between 2.5% and 5%, credit cards and personal loans often have much higher interest rates attached to them. The sooner you get rid of this debt, the sooner you can channel money into your retirement finances to help you build a comfortable retirement income.

Teach your kids to be independent

A recent report found that more than five million Australians provide support to their adult children, and now is certainly a time that many parents will be thinking about it. If your children were among the 3.1 million people who withdrew money under the early super access scheme and you’re in a position to be able to help, consider working out a way that you can help them to repay the money over the coming months.

Source: AMP