The Importance of Starting Early

Why we should encourage young people to save

As a young person it is easy to get carried away with the idea of new clothes, trendy breakfasts, and exciting holidays. Most of the time, money management is the last thing on your mind. What most young adults don’t realise is that they are missing out on a decade of opportunity, where “starting small and starting early” can make all the difference to their future wealth.

As illustrated by this simple chart from research house, Morningstar, the monthly savings required to accumulate $1 million by age 65 increases by over $5,000 per month if you delay your financial management until age 55. By starting at age 25, you only need $405 per month to accumulate $1 million by retirement age. Clearly, starting earlier is the much easier option. So why do we struggle so much to put these thoughts into action?

We can narrow the cause of our inefficiency down to three main factors:

  1. We procrastinate – Dr Joseph Ferrari, associate professor of psychology at De Paul University in Chicago, suggests that procrastination has become a persistent self-regulation problem in modern Western culture. Since starting is the hardest part of any action, it can often take years before we act on our thoughts.
  2. We lack the right tools or education – there is essentially no financial curriculum in Australian schools at the current moment, meaning that young adults are graduating high school with no idea about superannuation, basic budgeting, or money principles. Without this knowledge, most people don’t even know where to start, even if they want to.
  3. We don’t take a consistent approach – even the simplest concepts can be hard to maintain over a long period of time. We need patience, discipline, and long-term guidance to ensure that we make the most of our time.

So, what can we do about it?

Firstly, young people should start to get an idea of their short, medium, and long-term financial goals. When we know our goals, we can then start to establish a complete budget that allows us to create a savings plan that takes into account both our assets and liabilities. By setting goals and establishing a budget, we can start the first steps to a long-term financial plan that takes advantage of the luxury of time.

Although it might not feel like a lot, the simple act of a university student putting away $100 a month is a great way to start. After all, the secret of getting ahead is getting started. So why not get started today? At Solace Financial we are very passionate about encouraging young adults aged 18 to 30 to get ahead (especially the young adult children of our great clients). We’re happy to guide you through the process, so don’t hesitate to give us a call on 07 3106 3106 to set a time to meet with us and start the process of preparing for your future.

Potential Changes to Super Rules in the Federal Budget

The media has recently speculated that there may be alterations to superannuation rules in the 3rd of May Federal Budget. It is believed they will target annual contribution caps and / or Transition to Retirement strategies for super.

What does this mean for you?

While these changes are only speculative at the moment, now may be the best time to consider making the most of any potential benefits that are available under the current rules.

This includes considering:

  • Whether you should salary sacrifice into your superannuation to help reduce your tax payable and increase your retirement funds; and / or
  • If you should commence a transition to retirement pension whilst you are still working to help supplement your income in the lead up to your retirement.

Rules on starting a pension

Rules on the transition to retirement pension

Final Thoughts

As you would expect we are quite concerned about any potential changes to superannuation tax arrangements in the upcoming Federal Budget that may have the possibility of reducing your ability to self-fund your retirement, whether it is now or into the future.

Craig Day, Executive Manger of Colonial First State, states that while more tinkering with the rules can be expected, super is still likely to remain one of the most tax-effective ways to save for retirement, so it is worth planning how to maximise it.

If you are worried about any potential changes, you should speak to your financial adviser before May 3rd and consider taking action to ensure that you can make use of the current super rules before it’s too late.

Financial Terms explained

Financial Terms explained. We will be looking to continue to grow this into a glossary of terms over time to explain some of the financial terms and ratios used in analysing potential investment opportunities.

P/E Ratio

Price Earnings ratio (P/E) – If you divide the price of a company’s share by its earnings per share then you come up with the Price Earnings ratio for the company. This can relate to how many years it would take for the earnings of the company to equal the share price. For example, if CBA shares were valued at $85 per share and the Earnings Per Share is $5.30 then the P/E ratio would be 16. Which means at this rate it would take 16 years for the earnings from the company to equal the current share price.

Historically the average market P/E ratio is 15-25. For companies with P/E ratios under 17 it is generally considered that the share price may be good value. However, there are other factors to consider before purchasing a share, such as future growth expectations and the industry in which the company operates.

Further, as the known earnings per share is historical, you are making the assumption that the earnings of the company will remain the same in the future. If the earnings per share increases/reduces or the share price changes the P/E ratio will also adjust accordingly.

Dividend Yield.

Current Dividend Yield = Most recent full year dividend divided by the current share price. This calculates the interest that you earn on shares when you purchase them. For example, if you purchased Telstra shares at $6.30 and the full year dividend is $0.295 then the dividend yield is 4.68%. Some investors look at this as a good return when compared to the interest they can receive on term deposits. However, it is important to remember that share prices can go up and down and the dividend paid may change in the future

The All Ordinaries index

The All Ordinaries index is a measure of the movement of the stock market. It considers about 95% of the shares in our market. Larger companies like BHP and the Commonwealth bank have a greater impact on the movement of the All Ordinaries index due to their size and how much they are traded. While not completely accurate, a simplistic way to think about how the All Ordinaries index works is to add up the share prices of most of the companies in our market and you will come to a figure of approx. $5,300. Which is similar to the All Ordinaries index 5,300 points. So when you see on TV at night that the Index has increased by 50 points, this represents that some shares went up in value by more than those that decreased in value on that particular day.

Centrelink benefits – Just the Age Pension?

Centrelink benefits – Just the Age Pension? Many clients are aware that the Age Pension can provide a stable portion of an individual or couples retirement income. For some, it becomes the primary source of retirement income. However, to some, more beneficial are the additional benefits that are received as a result of becoming eligible for the Age Pension.

The additional benefits may include:

  • Rent assistance and Rent deduction scheme;
  • The Clean Energy Advance / Energy supplement and / or Pension supplements;
  • Pensioner Concession Card (more on this below);
  • Work bonus, Pension Bonus Scheme or Pension loans scheme;
  • Carer Allowance;
  • Bereavement Payments.

Of these the Pension Concession Card can provide substantial other benefits over and above the Age Pension including:

  • Reduction of the costs of medicines under the Pharmaceutical Benefits Scheme (PBS);
  • Bulk billing of doctor’s appointments (dependent on the doctor);
  • Additional refunds for medical expenses via the Medicare Safety Net;
  • Assistance with hearing services;
  • Discounted Australia Post mail redirection.

Further benefits can include concessions from state and territory governments and your local council:

  • Discounts / reductions on property and water rates;
  • Energy bill reductions;
  • Reduced public transport fares;
  • Reductions to motor vehicle registration costs;
  • Free rail journeys.

There are also additional Government concessions for states and territories, further information on these can be found at www.australia.gov.au. In QLD, there are also additional concession cards that can be applied for being the:

  • QLD Seniors Card;
  • Seniors Card +go (same as above though also functions as a go card);
  • Seniors Business Discount Card.

These cards can provide discounts at participating outlets. Interestingly the Seniors Business Discount Card has only one eligibility requirement – reaching Age 60. Therefore this card can be applied for at a younger age than the Age Pension.

With all of the available discounts and concessions utilised these benefits can by some be more beneficial than the part Age pension that is received. As a result there are a number of strategies that can be utilised that can assist clients to meet the eligibility requirements for the Age Pension, especially where there is one member of a couple whom is of Age Pension age.

When both members are of Age Pension age, all of your assessable assets and income are taken into consideration. Where one member of a couple is younger and has not met Age Pension age, superannuation assets of the younger member are not considered, potentially reducing the overall assets / income to a point where a part Age Pension payment is obtainable (along with the additional benefits of the concession cards).

For those of Age Pension age that have assets above the required thresholds there is also still hope, via the Commonwealth Seniors Health Card. Whilst not providing the same level of benefits, it still provides some of the benefits of the Pensioner Concession Card such as access to cheaper medicines through the PBS.

This card is assessed based on income only and therefore your total asset position is not taken into account.

In summary, with the Age Pension potentially making up such a big part of a retirement income, coupled with substantial ancillary benefits, it makes sense to determine what areas of your financial affairs can be restructured to either become eligible, or increase the rate of these additional income sources.

Estate Planning – Just a Will?

Estate Planning – Just a Will?

When it comes to managing our affairs during our lifetime, we are all focused on increasing our wealth and hopefully therefore our lifestyle, reducing our taxes to the minimum, and generally getting the best value for the monies we have accumulated.

Unfortunately, we can be quite blasé when it comes to ensuring that we have the same level of commitment to passing on wealth to our beneficiaries.

Most people have a Will to help in this regard, yet many do not take the time to understand the limitations that a Will may have.

For instance, if you have a family trust, superannuation, Self Managed Superannuation Fund, or a private company, these different entities do not form part of your estate and are not covered by your Will.

There are many options in regards to these different entities and a range of potential outcomes that need to be considered.

I recently met with a young mother with a child under 2. The child’s father tragically passed away in a car accident, with the bulk of the estate being made up of superannuation. As there were no binding nominations or directions made by the deceased to his super funds, in the end claims were made:

  • In the child’s name;
  • By the child’s mother;
  • By additional third parties.

The situation was further complicated as the deceased had not drafted a valid Will.

Half of the estate was awarded to the young child, to be held in trust by the child’s mother until the child turned 18. The remaining super continued to be claimed on by multiple parties.

Putting in place a direction to the trustee of the super fund could have avoided this issue entirely, as well as reduced the stress involved for all parties during the process.

There are a number of directions that can be made:

  • Non-binding nomination

This is a general direction for the trustee of the fund to consider paying the benefits to the member’s desired beneficiary. However, it is not binding on the trustee, and therefore the outcome may not be as originally intended;

  • Binding nomination

A binding direction to the trustee that the death benefits must be paid to the nominated beneficiary. With this type of nomination the trustee is given no discretion.

  • Lapsing and non-lapsing nominations
    • Lapsing nominations generally remain in place for a period of time (3 years is the norm). Once the 3 years have passed, the nomination is no longer providing directions to the trustee. It is important to review and renew nominations when required.
    • Non-lapsing nominations reduce the risk of a nomination not being in place at time of death. However, is it still the correct beneficiary? Our personal circumstances change, and leaving the nomination as your now ex-partner may not have been your intentions. Without updating and reviewing your nominations this is a very real risk.

Other factors also need to be considered such as tax. Where a death benefit is left to a spouse the benefits are received by the spouse tax free. However, when left to an adult child, the benefits may include both a tax free and a taxable component, reducing the total benefits remaining for the adult children.

Regardless of the entities and assets that you have, ensuring that a considered approach is put in place for the eventual transfer of these assets to your intended beneficiaries is a must. Speak with your adviser today if you feel that your arrangements may need to be reviewed, as well as seeking advice from your solicitor on legal implications.


Giles Stratford
Principal / Financial Adviser
GradDipFinPlan AFP®

 

 

Insurance Premiums

Insurance Premiums such as Life, Total and Permanent Disability, Income Protection and Trauma can be expensive and is one of the biggest reasons why people don’t take out cover.  There are two main ways that premiums can be setup.  Stepped or Level.  As its name suggests Level premiums stay level while you have your insurance cover.  Some level premiums can increase in line with inflation, but things like your increasing age or risk do not affect the amount of the premium.  This cover is usually more expensive to start with, but you can be assured the premiums will not increase and over the long term could be the cheaper option.  Stepped premiums on the other hand can increase every year as you get older.  This cover can be very cheap to start with but over the years the premiums could become unaffordable and at a time when you may need the insurance the most.

Some insurances can be placed inside of your superannuation fund, which means that your super fund pays the premiums of your cover.  Some super funds also allow you to choose between Stepped and Level premiums.  Contact us for more information about this.

Are your finances in shape? Get “money-fit” with these tips

We all know that if we want to keep our bodies fit and in good order it takes some effort – make a decision to commit, get organised and have a battle plan, and then just do it.

So why would our financial health and wellbeing be any different?  It doesn’t just happen on its own! Are your finances in shape?

Here are five tips to get your finances fit and healthy.

1. Set a target
When you know the kind of future you’re planning for and what you want to achieve along the way, you’ll be better motivated, better focused and better financially prepared.

So whether you want to retire comfortably, save for your children’s education costs, buy a home, or take the holiday of your dreams, start by setting a target you can focus on.  Why not “all of the above”?

2. Don’t skimp on the training
You can’t just wake up the week before a marathon and decide to be part of the race, with no training or preparation. And you can’t just wait until you turn 60 before you start saving for retirement.

It is much easier to build up speed and strength, little by little. It’s the same with investing: Time is the main ingredient to achieve “the miracle of compounding” (earning interest on your interest).

3. In for the long haul
Like a marathon, if you try and do too much too quickly it could all end earlier than you hoped.

A disciplined savings plan that builds your wealth gradually is a very effective way to get you where you want to go, without suffering too much pain along the way. Even a small amount can build up to something surprisingly big over time.

For example, if you put $1,000 in a managed fund at age 30 and then invested just $100 a month, you would have saved more than $59,000 by age 50 (assuming 7.7% growth annually after fees). If you waited until age 40 before getting started, you would end up with only around $19,000.*

4. Mix it up
Just as you should mix up your physical training sessions with intervals, hills and cross-training for greater impact, it makes sense to use a variety of different investments to spread risk and to better enable you to reach your lifestyle goals.

So while it may be tempting to focus on paying off your mortgage, don’t forget to pay attention to your superannuation and other investments as well. A mix of investments inside and outside of superannuation could help you achieve your goals both now and in the future.

5. Get a good coach
Every athlete would perform better with expert advice from someone who knows the race profile, the terrain and devises a personalised training program. And that’s exactly the role a financial adviser plays when it comes to managing your money.

So if you’d like to achieve a financial PB (Personal Best), consider talking to Solace Financial.

 

Stephen Horton  CFP®  B.Com
Principal / Financial Adviser

* Based on an investment return of 7.7% pa, inflation rate not included. This example is for illustrative purposes only and returns are not guaranteed in any way.

Aged Care

Aged Care

I have been specialising in Aged Care for the past 7 years and have seen over 500 families move into Aged Care.  Please give me a call if you would like to discuss your situation and I can answer any general questions you may have.

The move into aged care is a very difficult time for the family.  It is normal to be stressed and overwhelmed with what to do and what’s best for Mum and/or Dad both financially and personally.  Usually it is the responsibility of one family member to organise the move into care and it is normal for other siblings to have differing opinions on what is best.  Below is a couple of the “tips and tricks” for moving into Aged Care.

Tip One – Be prepared
Over the years I’ve seen a lot of cases where Mum and/or Dad has had a fall in the home and has needed to be hospitalised.  In these cases the hospital is very reluctant to release Mum and/or Dad home and may ask you to nominate a short list of Aged Care facilities to release them to.  Hospitals are generally at full capacity and will want to free up a bed very quickly (can be within a week).  So the pressure is on.  Those people who have already looked at an Aged Care facility or have spoken to the family about this are a lot more prepared.

Tip Two – Call a meeting
If possible, call a meeting with the family and invite a professional with experience in Aged Care to this meeting.  This way the family can discuss what is best for Mum and/or Dad and the professional can talk to you about the rules and regulations that fit specially into your situation.

Tip Three – Finding a facility
There are two ways to find a suitable Aged Care facility.  The first is to take the time to call and organise appointments with facilities to have a look at them.  The second is to speak to a placement consultant about a suitable facility.  A placement consultant will know a large number of Aged Care facilities, which ones are full, what they offer and match up a short list for you with the features that are important to the family.  I have a lot of experience in Aged Care and know most of the facilities in Brisbane, but personally I would still engage a placement consultant for my family. However, as with any industry there are good and not so good placement consultants.

Tip Four – Finances
There was a large over-hall to the Age Care system in July 2014.  This has made it difficult for facilities and new residents to learn and administer the new rules.  The government has a lot of information on their website at http://www.myagedcare.gov.au/ about the different fees and charges.  If you would like more information about the fees and charges please give me a call.

The main cost that a facility will talk to you about is there Refundable Accommodation Deposit (RAD).  This cost is generally in the hundreds of thousands and is fully refundable when the resident leaves the facility.  What I’m finding at the moment is that some facilities are offering to give you a discount if you pay the Refundable Accommodation Deposit (RAD) at the date of entry.  It’s worthwhile asking the facility if they offer this.

Scott Quinlan
Principal/Financial Adviser
Masters of Financial Planning
Bachelor of Commerce
CFP®

Navigating Aged Care

Navigating Aged Care

Navigating Aged Care. The move to Aged Care is a difficult time for families.  In most cases it’s usually mum who moves into Care and the children or Enduring Powers of Attorney left to work out what’s best for mum.  Besides the emotional difficulties of moving mum out of the family home and into an unknown environment, the government has made a complex web of rules and financial regulations regarding Aged Care.  To make matters worse, mum usually needs care urgently and contracts and financial arrangements need to be made on the spot.

If this situation sounds familiar to you, then please give me a call to discuss your situation and arrange a time to come in for an obligation free appointment.  Having specialised in Aged Care advice for the past 7 years my goal when you call regarding Age Care is to reduce the burden of moving mum into Care and reassure you that I can help navigate the financial Aged Care rules and work out what’s best for mum financially.

Understanding Managed Funds

Managed Funds
Managed Funds are professionally managed investment portfolios that individuals can buy into. This can provide an individual with access diversification across different asset classes, companies, industries, sectors and countries in an easy to manage, cost effective manner.
Different Managed Funds will focus on different underlying investments allowing us to tailor a portfolio to focus on our clients’ needs such as income, capital growth or preservation. A Managed Fund may focus on just one asset, such as shares, or hold a diversified portfolio with many different assets classes in the one fund. This provides a very flexible and efficient investment structure that can be adjusted overtime.
Managed Funds also provided access to investment with a lower entry cost. You can gain an exposure and benefit from assets like Infrastructure, Commercial Property, Government Bonds and Alternative investment that are usually out of reach for individual investors.

How long will my Super have to last?

The decision to retire after a lifetime in the workforce is a major event and for many people it is a very anxious time.

There’s the change in routine, the potential loss of an important social network and that feeling of ‘purpose’, and foremost for many people is the very real fear that they will outlive their money.

The main guide has always been the government’s Life Expectancy Tables, but it is important to remember that these are simply statistics that determine a very broad average indeed.  They fail to factor in improvements in mortality rates, and they cannot possibly take into account other critical factors such as our surroundings, our personal health and medical history, and family history of longevity.

The first step is to be aware of this risk – it’s been dubbed Longevity Risk.  One site, www.mylongevity.com.au offers a calculator into which you can add your specific details to find a more realistic estimation of your life expectancy.  And once armed with a new reality your retirement and savings plans should be reviewed, as they should regularly in any event.

So, what to do?  In my experience, the tried-and tested Rules always apply.  The earlier you make your plans, and the earlier you start to save for retirement, the easier the job becomes.  And that’s what we are here for!

Making the transition to retirement

Making the transition to retirement. Transition to Retirement (TTR) strategies were designed to assist Australians move into retirement, without fully retiring from the workforce. Helping Australians remain in the workforce for longer, it enables an eligible person to begin drawing a pension from their superannuation assets. This can enable a reduction in work hours, such as dropping back to 2 days per week, while supplementing the reduced income received through employment with a superannuation pension.

An eligible person is someone whom has reached their preservation age (the age at which you can legally begin drawing money from super when certain conditions are met. There is no requirement to reduce your work hours in commence this strategy, however, the preservation age ranges from 55 to 60 depending on your year of birth.

This can enable you to start accessing your superannuation assets and reduce debt, supplement cash flow, make contributions to superannuation with tax free monies (a separate strategy in itself), or reduce your tax liability through combining a TTR pension with increased salary sacrifice to superannuation.

The TTR pension has requirements as to the level of pension that you can take, with both a minimum and a maximum annual amount able to be received. The maximum is 10% of the account balance as at 1 July each year. The minimum is generally 4% of the account balance, however this is also dependent on your age.

So if you wish to reduce your tax liability, reduce your work hours, increase your cash flow, or pay off mortgages prior to retirement, a Tran