Tag Archives: Financial Planning

How much do I need in my emergency fund?

By Robert Wright /August 26,2021/

In these uncertain times, it pays to have money set aside to give you peace of mind that if your income drops, you still have ample funds to pay for your everyday expenses until you get back on your feet again.

A good rule of thumb is to have enough money for three months of expenses in your emergency account. The amount you set aside, however, will depend on your circumstances.

The Henderson Poverty Line, the amount of money you need to get by each week, including how much you need to keep a roof over your head, is a good place to start to figure out how much you need to cover the basics in the event of an emergency. This is a benchmark that was first developed in 1973, which is now widely considered to be the benchmark for the disposable income Australians need to support themselves. Its figures show:

Single people need $542.92 a week
Couples need $726.27 a week
A family of four needs $1019.70 a week

These figures are a guide only, and your expenses are likely to be higher, so it’s worth looking at your actual expenses to figure out how much to set aside. You can do this by:

Figuring out the amount of money you have spent by reviewing your transactions in online banking across a three-month period.
Dividing up costs into buckets like food, rent or mortgage payments, other loan repayments, transport and car costs, health and insurance premiums and energy and phone bills.

Once you know how much you’ve spent on these basic expenses you can work out how much you need to save in your emergency fund. It’s a good idea to add a contingency amount over and above this amount in case other expenses arise.

Safe keeping

Now you’ve figured out how much to save in your emergency fund, it’s time to decide where to store these funds. Here are some options:

Mortgage offset account or redraw facility: storing your emergency funds in an account linked to your mortgage helps reduce the interest you pay and the time it will take to pay off your mortgage.
High interest savings account: this is an option if you rent and can help to add to your emergency funds over time as you will earn interest on the money. Look for an account that pays extra interest if you don’t make withdrawals.

When to access your money

Once you’ve saved up your emergency money, it’s useful to put in place some guidelines about when to spend it. This is important as everyone has different ideas about what constitutes an emergency, depending on their views, as well as their level of wealth. Here are some ideas:

If you lose your job and need funds to pay for your mortgage or rent.
If you suffer a health emergency or need urgent dental work and need money to pay for treatment.
If your car needs urgent repairs that are not covered by car insurance.
If a family member falls ill or suffers an accident and you need to take time off work to look after them.

If you decide to dip into your emergency savings for one of these or another reason, the idea is to spend the money on daily living expenses like food and bills. Emergency money isn’t usually for play money or for entertainment purposes. You can always set aside another pot of money for this purpose.

Emergency funds are a great way to give you a sense of financial confidence and the sense you will be able to meet your obligations through life’s ups and downs.

Source: BT

Five things you and your partner should know about super

By Robert Wright /July 30,2021/

Money issues are often cited as the biggest causes of stress in a relationship. Yet despite their importance, a recent survey of Australian couples found that 43% hadn’t discussed how they’d share their incomes before they committed. And close to a third hadn’t talked about their financial situation with their potential partner at all.

Even if you and your partner manage your day-to-day finances well, have you considered the impact your relationship has on your retirement savings? Here are five things that every couple should know about super.

1. Understand how super rules apply to you as a couple

When it comes to super, you have the same rights regardless of whether you’re married, in a de facto relationship or in a civil partnership.

This means if your partner passes away, you could be entitled to receive their super – and potentially any life insurance in their super account. What’s more, if your relationship breaks down you could either receive some of their super or need to pay some out to your partner.

In a relationship breakdown, super is considered property by the courts for married couples and those in de facto or civil partnerships. And like other assets, it can be divided between the two people. You can agree to split your super, or the court can order you to do so. Alternatively, you can choose to split your other assets but leave your super benefits untouched. In some cases, you can put off your decision until later on – say, in retirement.

Remember, if you do split your super with your former partner, neither of you can access this money until you reach preservation age or meet another condition for early release of super.

2. Work out how much you need for retirement

As a rule of thumb, couples have the better deal when it comes to saving for retirement because they can pool their resources. If you own your home and are in good health, the Association of Superannuation Funds of Australia estimates that you’ll need an annual income of $40,739 for a modest lifestyle in retirement or $62,562 for a comfortable one. By comparison, a single person may need $28,179 or $44,224 respectively. So if you’re part of a couple, it may be easier for you and your partner to reach your retirement goals.

But of course, your situation will differ from other couples. You may have complex health needs, or still have a mortgage by the time you retire. Maybe you don’t own a home – or perhaps you’ll still have financial dependants after you’ve finished working. Whatever your situation, it’s important to discuss with your partner the kind of lifestyle you want in retirement – and how much super you’ll need to support it.

3. Find out if you’d benefit from spouse super contributions

If you’re a high earner and your spouse earns $40,000 or less a year, you could both potentially benefit from the spouse contribution strategy.

Here’s how it works: you make an after-tax contribution of at least $3,000 into your spouse’s super. If your spouse earns $37,000 or less, you could then earn a tax offset of $540 – and your spouse gets a welcome boost to their super. You may still receive a partial offset if your spouse earns up to $40,000.

4. Consider splitting your super

Did you know that couples can split up to 85% of their Super Guarantee (SG) contributions each year – plus any salary sacrifice and personal super contributions you might make? To do this, your spouse must be under preservation age and not retired, and you must split your contributions at the end of financial year in which they were made.

Splitting super could benefit you as a couple if one of you has substantially more super than the other, and where:

There is an age difference: The older spouse can reduce their super balance by splitting it with the younger spouse, and then they may be entitled to a part Age Pension when they retire.
You want to withdraw large lump sums in retirement: Currently, lump sum withdrawals are capped at $215,000 (that’s set to increase to $225,000 for 2021-22). But if you split your super, you could potentially both withdraw up to $430,000 tax-free (or $450,000 from 1 July 2021).
You want to avoid going over the $1.6 million super cap: While you can have more than $1.6 million in your super account, you can only transfer a maximum of $1.6 million into a tax-free pension account. The transfer balance cap will be indexed and increased to $1.7 million from 1 July 2021.

5. Decide if you want to nominate your partner or spouse as a beneficiary to your super

You can decide who you want to nominate as a beneficiary for your super. You might want to nominate your spouse – but you don’t have to. Instead, you could choose someone else who is considered your dependant. For example, a child (including an adopted child or stepchild) or someone who is financially dependent on you.

One strategy is to leave your spouse the family home so they can continue living there – and then leave your super to your children. Or, if you’re a business owner, you could potentially leave the business to your spouse to continue running it and leave your super to your children. A financial adviser can help you work out what approach is most appropriate for your financial situation.

Whoever you decide to leave your super to, it’s a good idea to set up a binding death benefit nomination so you have more certainty about how your super will be paid out if something happens to you.

Source: Colonial First State

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

How much can you confidently spend in retirement?

By Robert Wright /July 16,2021/

So much happiness in retirement comes from peace of mind, not money. Of course, the two are intertwined. Understanding your monthly budget, whatever it is, and not worrying about running out of cash in retirement, enables peace of mind.

But the academic research throws in plenty of other factors – good health, social connections, having a purpose, still learning whether by doing a crossword every day or playing a musical instrument, and being optimistic.

Most of the factors are controllable, to some extent, by individuals. And the sooner they think about planning for retirement, the better chance they have of achieving peace of mind. When it comes to money, figuring out how much you’ll need to spend in retirement is a good start. Achieving a ‘safe’ level of spending depends on the level of saving, investments and life expectancy.

What is a ‘safe’ spending level?

A spending level is considered to be ‘safe’ if the household has a high degree of confidence that they can continue spending their desired amount for at least as long as both spouses are expected to live (their life expectancy). You may have a different idea of the amount you can safely spend and still have confidence that your savings will last.

For example, a 67-year old person who has total retirement savings of $600,000 should be confident of being able to spend $40,000 each year. But if they chose to spend $60,000 each year, then their level of confidence would change as they’ll likely run out of money later in life.

For a couple with $600,000 each, they can be confident of being able to spend $60,000 combined and have enough money till the end of their lives. Understanding these numbers is important for peace of mind.

Using a retirement spending planner helps people understand what they need to meet basic living costs, and how much they want to cover for the discretionary, but not necessary, spending. Ideally, this combined matches closely to what an individual, or couple, can safely spend.

But what if it’s not? If the retirement planner tells you that you can safely spend more than what you are currently spending, there’s few concerns. But what if it’s the other way around?

Running out of money late in life is a big concern for many retirees. The latest research from National Seniors Australia, found that most older Australians (53%) are worried about outliving their savings, with women (59%) more worried than men (47%).

There are retirement products that can help fill the gap. While many retirees will have to rethink their spending plans, having an additional layer of protection in retirement that gives you guaranteed income for life (regardless of how long you live) in the form of a lifetime annuity, will be attractive to some.

A lifetime annuity provides guaranteed income for life. And it can help some retirees access more of the Age Pension. Combined, lifetime annuities and the Age Pension can ensure retirees can rely on guaranteed, regular income for their whole life. But perhaps the greatest benefit of all is peace of mind.

Securing your retirement income

As we’ve seen in the last year, things can change quickly and unexpectedly. Getting your retirement income sorted can help support a positive outlook in retirement.

Source: Challenger