Tag Archives: Wealth Accumulation

Adding more to your retirement savings: is it worth it?

By Robert Wright /August 26,2021/

There’s no denying that being proactive with your super may be key to increasing your retirement savings.

As an investment vehicle, super can offer significant benefits thanks to the magic of compounding interest. It also provides one of the best tax structures available.

Why super offers much promise for retirement saving

Adding more into super is not only a good way to invest your income, it also helps your retirement savings grow so that when you do retire, your money will still be worth something.

Depending on your income and how much you can afford to contribute, adding more into your super may be a decision that could benefit you in retirement.

Why? It boils down to two key things.

Magic of compound interest

The first, is the magic of compounding interest – the process of earning interest on your interest and so on.

For example, if you invested $10,000 at 5 per cent per year, each year you would earn $500 in simple interest. However, when you add in the magic of compounding and allow the $500 interest earned in the first year to be added to your account balance, then repeated each year during the 5-year period, after 5 years you would have earned a total of approximately $2,762 in interest (compared to $2,500 in interest after 5 years using simple interest). This would give you a total of $12,762 after 5 years.

But that’s not all.

One of the best tax structures available

From a tax point of view, super can be incredibly powerful.

By making extra contributions to your super fund using your pre-tax income, up to the current annual contribution cap of $27,500 (2021/22), you could benefit from those contributions being taxed at just 15 per cent. This is potentially a lot less than the personal tax you would pay on your income.

If your spouse is a low-income earner, there are tax benefits you could gain too for making a contribution to their super.

But like most good things, super is not without its drawbacks.

Limitations of super for retirement saving

Super does have some limitations as an investment vehicle. For instance, you can only make up to $27,500 in super contributions before-tax in the 2021/22 financial year (this amount includes your employer’s contribution of 10 per cent of your salary) or up to $110,000 in after-tax contributions in a financial year. You may be liable for more tax if you exceed these limits.

There are also limitations on when you can access your super.

Get support

Planning for your retirement can be a complex and a challenging area to get your head around.

So if you’re keen to supercharge your retirement savings, but aren’t sure how to go about it, then speaking to a financial adviser can be a good way to go.

Bottom line: Being proactive with your super will likely make a significant difference to the size of your final nest egg.

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

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