Tag Archives: Financial Planning

Retirees: How to beat Inflation before it beats you

By Robert Wright /November 17,2021/

Investors with long memories – or a good education – will recall the bad old days when inflation was the economic bogeyman. It broke Germany’s Weimar Republic in the 1930s and nearly cratered America’s economy in the 1970s.

Fortunately, inflation has been a non-issue in Western economies for decades. But is that about to change? In the first quarter of FY2021, Australian inflation ran at a comfortable 1.1%. By the second quarter it had leaped to 3.8%.

Perpetual’s recent Quarterly Update summed up the problem: “With very easy monetary policy likely to continue for the next couple of years, and government spending at record-breaking levels, there remains the risk that inflation could become out-of-control. Historically, high levels of inflation have been very difficult to contain once in place.”

Inflation hurts retirees

Inflation is bad news for retirees. “A continual rise in the price of goods and services can really affect someone who’s retired or approaching retirement”, says Malissa Tobias, a Perpetual Private adviser in Melbourne. “Inflation eats your purchasing power – you get fewer goods and services for the same amount of money.”

If you’re still working, your salary can rise to keep pace with inflation. Retirees – especially those with money in low-rate assets like term deposits or cash – suffer because their spending power is cut and the real (after-inflation) value of their capital is falling.

Anti-inflation strategies for retirees and near-retirees

Manage your retirement

By managing the timing and shape of your retirement you can offset some of the inflation threat.

If you work a little longer (either full or part-time) you can earn an income that might go up with inflation. Those extra earning years also give you more time and money to build up the largest possible nest egg to generate your retirement income. Finally, but just as importantly, retiring later delays the day you start drawing on your capital.

Invest in inflation-beating assets

Investing in higher-returning assets – like shares or property – can deliver the same benefits as earning work-income because their value can rise in line with, or above, the rate of inflation. However, the inevitable complication is that higher returning assets are usually higher risk assets.

Plan your spending

Knowing how much money you’re going to need in retirement is a crucial part of retirement planning.

Draw on capital

The recent Retirement Income Review suggested many retirees die with their capital intact. But that’s not the case for everyone. In a world where the threat of inflation is rising, some retirees will need to dip into their capital to fund the retirement lifestyle they want. The key is to do that prudently.

Source: Perpetual

Market volatility during COVID-19

By Robert Wright /November 17,2021/

Market volatility refers to extreme price movements over a given period. These movements may occur in a particular area, such as real estate or shares, and may be upward or downward.

Ever since COVID-19 started spreading across the world in late 2019, affecting every aspect of our lives, the term ‘market volatility’ has been hitting headlines.

But, what does market volatility mean? And what might it mean for your finances?

Market volatility can feel like a one-off crisis. However, it’s important to remember that volatility is in the very nature of markets. Fluctuations are bound to occur and, sometimes, they’re rather extreme.

For instance, in February and March 2019, markets dropped 37%, but fast-forward to the June quarter, and they picked up 16%. That’s quite a wild swing. Anyone who panicked and withdrew from the market at the end of March would have missed out on the subsequent gains.

In the scheme of things, three months isn’t long at all. In the 141 years since the ASX was established, there have been 28 negative years, and the rest have been positive. In other words, each year, the average investor has a 1 in 5 chance of a setback, but a 1 in 4 chance of making gains.

Further, in the 20 years leading up to 2018, the ten best days in the market were responsible for 50% of returns.

During downturns, it’s easy to be swayed by the news. Headlines often focus on the negatives. When the COVID-19 pandemic began, the emotional impact of worrying financial news was intensified by the fact that the virus itself was new and unknown. Plus, so many people were unable to go to their workplaces, or catch up with friends and relatives.

If you were reading the headlines and not speaking to anyone about them, you may have been susceptible to making big financial decisions based on your emotional reactions.

That’s why it’s important to speak to your financial adviser, who will remind you of your long term plan—and that a downturn is just a short term blip, when you think of the next 20 years.

Source: TAL

How to use your tax return to build a stronger financial future

By Robert Wright /September 08,2021/

Whether you breeze through tax time or dread the extra admin, receiving a tax refund makes the effort worthwhile. For many of us, getting a financial boost will be even more welcome this year, and you might be looking around for the best ways to spend it.

Plan how you’ll spend your tax refund wisely

Never underestimate the power of a well-crafted plan – it’s easy to watch funds dwindle when you haven’t given them a clear direction.

Recent research has revealed that 87% of us admit to splurging an average of $2,172 annually as a result of comfort spending, a figure that has increased for one in three Australians since COVID-19 hit. Additionally, 37% of us are struggling to repay debt.

Like any goal, your ambitions for this year’s tax return can be more easily realised if you have a concrete plan in place. In fact, studies have found that taking the time to write down your goals and plans can improve your chances of making them happen.

When you have a clearer picture of your finances, decide exactly how you plan to use your tax refund to avoid excitement spending once it lands in your account. This includes any money you’re hoping to use for a holiday or other splurge – work it into your financial plan to avoid spending beyond your means.

Anticipate your upcoming living expenses

When making your plan, you might want to consider your upcoming living expenses, particularly any large, irregular bills such as car insurance and registration costs, utility bills and general home maintenance.

Putting aside some of your tax refund as a cushion for upcoming expenses or into an emergency fund for unexpected expenses helps you avoid reaching for other financial support – such as personal loans and credit cards – when the bills start to build up.

Pay off debt

If you have some debt to repay, you’re not alone: the average Australian household debt-to-income ratio is around 190%, meaning we owe almost twice as much as we earn each year4 Putting your tax return towards any outstanding debts, including mortgage repayments, personal loans, and any credit card debt, may help reduce any interest charges.

Source: AMP

Money worries and your mental health

By Robert Wright /September 08,2021/

It’s been a trying time for many people, with our collective mental health taking a toll as the COVID-19 pandemic rolls on. The Melbourne Institute says one-in-three Australians are now reporting financial stress, while one-in-five are feeling ‘mental distress’.

It’s well known that our financial wellbeing and mental health go hand in hand. Severe or prolonged financial stress can trigger symptoms of anxiety and depression, relationship breakdowns, trouble sleeping and anti-social behaviour. This in turn can lead to further poor decision making when it comes to money.

Fortunately, there are things you can do to improve your financial security and wellbeing. If you’re experiencing financial stress, here are some practical steps you can take to get back on track.

Give yourself a financial health check

When you’re experiencing financial stress or hardship, it can be tempting to avoid the problem altogether; but this only makes things worse. Once you gain a clear understanding of your financial position, you’ll feel more in control and can take steps to improve your position.

Start by doing a financial health check to assess where your income is going. Use a spreadsheet or budget planner to list your income, debts, and expenses. Then look for opportunities to reduce your expenses, pay down debt and increase your savings.

Renegotiate your bills

Renegotiating what you owe is a smart way to free up some cash flow for daily living and ease the pressure you feel about meeting your obligations.

If you’re having a hard time meeting expenses, it’s important to speak to your service providers as soon as possible. Let them know you’re doing it tough and ask to negotiate lower repayment amounts and extended timeframes.

Don’t be shy to ask for a better deal on any services you use, including phone bills, internet, and utilities. Most organisations will try to work with you – it’s better for them to get paid (albeit slowly) than for you to default on what you owe them.

Pay down debt

With more cash flow available, you can concentrate on clearing your debts, a key step on the path to financial freedom. If you have lots of debt, it’s worth seeking the advice of a financial adviser. They can advise you on the most efficient and cost-effective way to repay what you owe. You might be able to refinance, take advantage of ‘no-interest’ periods or consolidate your debts into a single monthly repayment at a lower rate.

Make bank accounts your best friend

Keeping all your money in one bank account makes it hard to keep track of how much you have and how much you owe. One simple strategy to help you manage your money is to set up several bank accounts, each with a different purpose. For example, one to receive your income, another to pay household expenses, one for discretionary ‘spending’ and one for saving.

You can set up automatic payments to transfer the right amount of money into each account when you get paid. That way, you’ll always have the money put aside to pay your bills as they arise. Make sure to set up direct debits or automatic payments for each of your regular household bills from your expense account, so there’s no chance of falling behind in future.

Build your savings

Feeling financially secure goes hand in hand with having a good financial safety net in place. The more you have put aside for a rainy day, the less stressed you’ll feel when things don’t go to plan. Aim to build up your emergency fund to cover six-months’ worth of living expenses for yourself and your family. Again, creating an automatic transfer of funds to your ‘emergency’ savings account each month is an easy option. Then sit back and watch your savings grow.

Where to get help

If you’re experiencing financial hardship, struggling to make ends meet, or find yourself on the wrong end of one too many late payment notices, remember, there is help available.

Source: Money and Life