GPL Financial Group GPL Partners

January 2019

Retiring in their 30s or 40s?

The stories about people who have embraced the FIRE — it stands for Financial Independence Retire Early — movement are fascinating. 

       

 

They move to smaller homes, share Netflix accounts and squeeze the most out of every dollar to retire by the time they are in their 30s or 40s.

Once they have accumulated the required amount of money, they stop working and spend more time doing whatever they enjoy. There is always a sense of admiration for people who can be so disciplined and motivated to achieve a certain goal.

That said, just how you get the required level of confidence to have enough saved to maintain even a frugal lifestyle in order to step away from work for possibly the next sixty years is a challenge many of us may struggle with.

The guiding principles behind the FIRE movement are admirable – although it does seem to downplay the fulfilment and sense of community many people get through work. But irrespective of that, there are aspects that may prove difficult for many Australians to follow, particularly because the average super balance for those at or approaching preservation age (55-64 years) is $310,145 for men and $196,409 for women. That's far short of the $640,000 for couples and $545,000 for singles that the Association of Superannuation Funds of Australia estimates is needed for a comfortable retirement.

It's also difficult to imagine that many people will be able set aside half or more of their income, as FIRE guidelines suggest, when they are not accumulating enough even with the tax incentives and employer contributions available in super. Also, some FIRE advocates have been criticised for not mentioning income from their blogs or from a partner who continues working.

So, before you go buying the brown bananas that have become a symbol of the thrifty FIRE lifestyle, assess with a critical eye.

There are many concepts involved in the FIRE philosophy that are commendable – and make sense for people seeking to make their money go further. In many ways, FIRE is simply a new, perhaps trendier name, for what financial experts have always recommended: budgeting properly so that you live beneath, or at least well within, your means.

Pursuing the FIRE strategy can help you take the first step toward good financial health by setting long-term life strategy goals. Maybe you do want to retire early. Or maybe you just want to set aside enough money so that you can work part time while your children are at home. What matters is that you identify your goals and make plans to achieve them.

Thinking about long-term goals can help to clarify what is important to you. A larger house may suit someone who enjoys entertaining and having guests. In other words, some expenditures may be worth it. Budget according to what you value, and you will find opportunities to cut costs in some areas while, perhaps, spending more elsewhere.

Consider what moves will have the most impact. While smashed avocado on toast has become something of a cause for celebration on social media, it's wise to focus first on your largest expenditures, usually housing, transportation and debt. Reducing debt, including paying off credit-card and other bills every month guarantees much lower costs over time. Do you really need that shiny new car?

Young people in particular have an opportunity to capitalise on the benefits of keeping these larger bills manageable.

As you think long-term, consider small changes. Saving 50 per cent of your income is daunting. You don't have to do it all at once. You can start small by finding savings of, say, $50 or $100 a month. Investing what you spend on daily coffee over a month can add up to more than $100,000 over 30 years – not a bad start toward financial independence.

One fundamental way to save is by keeping your investment costs low. Vanguard research shows that an investor who sets aside $100,000 in a portfolio that earns an average of 6 per cent yearly will have $532,899 after 30 years, in a fund that charges 0.25 per cent of assets yearly, compared to $417,357 in a fund that charges 1.07 per cent.

You may or may not want to retire early, but setting long-term goals, budgeting sensibly and keeping costs as low as possible will give you the best chance to have the option.

In the investing world you get what you don't pay for.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
11 December 2018
vanguardinvestments.com.au

 

ATO targets non-arm’s length income – NALI

Following a series of ATO audits conducted on SMSFs in recent months, the ATO has been applying non-arm’s length income to a number of SMSFs resulting in serious tax consequences for these funds, warns an industry consultant.

       

 

Speaking to SMSF Adviser, super consultant and non-executive director of SuperConcepts, Stuart Forsyth said while the ATO has been conducting a big project on non-arm’s length income for a few years now, in the past six months it has resolved a number of cases and collected significant amounts of money.

Mr Forsyth said he has seen numerous situations recently where the SMSF trustee has advantaged their fund some years ago with a transaction and the commissioner has now issued a position paper to them suggesting that it raise non-arm’s length income against the fund.

The ATO tends to provide a position paper in the latter stages of an audit to explain their position and give the trustee a chance to respond before it finalises the audit.

“In the ones that I’ve seen the trustee has undertaken the transactions but they haven't really gone and got a ruling from the commissioner at the time and they haven't gotten a contemporaneous valuation,” he explained.

“It's difficult to prove after the event, especially when the investment has gone very well, that the fund wasn't advantaged if you hadn’t documented it well at the time.”

A lot of the funds affected have generally been in pension phase so they’ve gone from paying zero tax to 47 or 45 per cent in more recent years, he cautioned.

“There are some serious issues there so if someone plans to advantage their fund in any way or they’re going to deal on a non-arm’s length basis with their fund, then they really need to get advice before they do that so that they've got a defensible position if the commissioner comes along some years later.”

 

Miranda Brownlee
21 December 2018 
smsfadviser.com

Admin, BDBN errors flagged for SMSFs this year

SMSF practitioners and their clients have been cautioned on some of the ongoing mistakes that continue to be made with documentation and some of the newer traps that have cropped up with the changes to superannuation.

         

 

Speaking to SMSF Adviser, SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley said there continues to be a number of administration problems that catch out SMSF trustees.

One of these is property being settled in the wrong name which will often attract the attention of auditors, said Mr Colley.

“Limited recourse borrowing arrangements can sometimes be settled the name of the superannuation fund, rather than the underlying holding trust,” said Mr Colley.

Binding death benefit nominations are another key problem area, he warned.

“Binding death benefit nominations may not have been correctly executed because the witnesses will be parties to the binding death benefit nominations itself, sometimes it won't be dated, other times, a bit like the Narumon case, parties that were not a dependant were mentioned as recipient of that binding death nomination,” Mr Colley explained.

“We've spoken to our clients to try and get them to understand that if they get it wrong, then the money may go to someone else rather than who they think it will go to if they happen to die.”

SMSF professionals with high-net-wealth clients also need to be sure that the client has considered both the accumulation and pension components of their SMSF in their estate planning.

“They've got a pension in the fund but they've now also got an accumulation account which some of them may not have had for up to 10 years when the 2007 changes came in,” said Mr Colley.

“So, they may have covered the allocation of the pension, the death benefit pension, but they may not have covered the amount that's now being transferred over to accumulation phase.”

Advisers should encourage clients to review their binding death benefit nominations, he said, to make sure the member’s total benefit is covered not just the amount that's in pension phase.

There can also be issues with powers of attorney, he said, as clients believe that because they’ve got an enduring power of attorney, that it allows them to be trustee or the fund.

“Sometimes paperwork needs to be done, merely because they're an enduring power of attorney doesn't mean that they'll be a trustee of the fund. Other members or other trustees may need to appoint a new trustee so the trust deed itself is important in terms of working out how that person holding an enduring power of attorney will be appointed as trustee or director of the trustee company,” he said.

“From an administration point of view, you will need to notify ASIC if it’s a company and also the ATO about the change of trustee or director of the trustee company.”

 

Miranda Brownlee
04 January 2019
smsfadviser.com

Verifying asset values in a SMSF.

ATO issues fresh warning on valuations after major cases.

           

 

The ATO has reminded SMSF auditors on their obligations around verifying asset values in the financial statements of SMSFs following the outcome of two cases this year.

In an online update, the ATO stated that under 8.02B of the Superannuation Industry (Supervision) Regulations 1994 (SISR), assets must be valued at market value in the SMSF’s accounts and statements. 

“Two recent cases involving SMSF auditors, Cam & Bear Pty Ltd v McGoldrick [2018] NSWCA 110 and Ryan Wealth Holdings Pty Ltd v Baumgartner [2018] NSWSC 1502, [have] highlighted the obligation of SMSF auditors to verify asset values in the financial statements,” the ATO stated.

The two court cases held SMSF auditors responsible for investment losses. The Cam & Bear Pty Ltd v McGoldrick case was a decision by the NSW Court of Appeal, which ruled that the auditor was negligent in failing to make proper enquiries as to the recoverability of certain investments held in the fund and report back to the trustee.

The second, more recent case, Ryan Wealth Holdings Pty Ltd v Baumgartner, similarly found that the auditor’s failure to detect irregularities in the fund over a number of years meant the SMSF trustee was unable to redeem money lost on a series of unsecured loans.

The ATO stressed that SMSF auditors need to obtain sufficient appropriate audit evidence from SMSF trustees to verify the value of a fund’s investments.

While the ATO said that it is not the auditor’s job to undertake a valuation, it said that they should seek evidence that shows how the asset was valued, including the method used and the data relied upon.

“If the auditor is unable to obtain sufficient verification that material assets are valued at market value, they should qualify the financial and compliance report sections of their SMSF independent auditor’s report stating they have been unable to obtain sufficient appropriate audit evidence to verify the asset values,” the tax office said.

They should also lodge an auditor or actuary contravention report for the contravention and notify the trustees in a management letter, the ATO stated.

The ATO noted that the most common contravention not identified or reported by auditors who were referred to ASIC this year was regulation 8.02B.

SuperConcepts executive manager of SMSF technical and private wealth Graeme Colley previously told SMSF Adviser that where there is limited evidence supplied to the auditor about assets, especially more complex ones, then the fund could be hit with a contravention.

“Next year, advisers and trustees will be required to provide more thorough and comprehensive information to auditors so that they’re satisfied that the fund has made an investment which is recoverable,” Mr Colley said.

“That’s really important, because if the auditor is not satisfied or they can’t see that it’s recoverable, then they’ll likely qualify the accounts of the fund, fill out a contravention report and let the ATO work out whether the investment is recoverable under the operation of the SIS legislation.”

 

Miranda Brownlee
19 December 2018
smsfadviser.com

Your guide to smarter holiday reading

Given all of the talk about many Australians being apathetic about their superannuation, it seems counter-initiative that one of the fastest-selling books ever in Australia is about how to improve your personal finances.

           

 

Nielsen BookScan names The Barefoot Investor by Scott Pape as a top three contender to become the overall best-selling book (fiction and non-fiction) in Australia for 2018.

The Barefoot Investor was the overall best-selling book in Australia in 2017 and is the best-selling non-fiction book in Australia since Nielsen began surveying our market.

The fact that an Australian personal finance book can beat the big-name international thrillers from the likes of John Grisham and Tom Clancy suggests that many of us really care about our personal finances.

Twice this year, The New York Times has published feature stories about the phenomenon of The Barefoot Investor.

In June, the paper published an article, Australians can’t get enough of the Barefoot Investor, by Australian journalist Amelia Lester. As Lester writes, Pape’s “folksy manner delivers down-home truths”. These include avoid trendy investments, reduce your debts and don’t become overexposed to overvalued property.

And in September, The New York Times published the second piece, I highly recommend joining this cult, by another Australian journalist Lisa Pryor.

Pryor, as does Lester, emphasises the sheer popularity of The Barefoot Investor – selling well over a million copies (and fast climbing) in a country the size of Australia. (The first edition was published two years ago.) No wonder she calls it a “cult”.

In her opening paragraph, Pryor neatly summarises what the book’s about: “It’s called common sense. Don’t live beyond your means. Don’t borrow what you can’t repay. Don’t charge what you can’t pay off when the bill comes due. It’s how our parents lived. Don’t try to keep up with the Jones. I guarantee the Jones are likely in hock.”

Most titles on Smart Investing’s annual holiday reading list appear year after year with good reason. These are the personal investment classics. If you read some of the suggested books last year, why not reread your favourites?

The best investment/personal finance titles tend to give pointers about how to accumulate wealth slowly and progressively through an understanding of sound saving and investment practices.

Here are eight to consider adding to your reading list for summer 2018:

  • Thinking, fast and slow by Daniel Kahneman: A winner of the Nobel Prize for economics, Kahneman points to the many flaws in financial decision-making – including overconfidence and excessive loss aversion (inhibiting appropriate risk-taking and encouraging a short-term focus). His views underline the benefits of having an appropriately-diversified portfolio while avoiding the traps of market-timing, trying to pick future winners on the share market and making emotionally-charged investment decisions. He strongly warns about the “biases of intuition”.
     
  • The only investment guide you’ll ever need by Andrew Tobias: His overall message is to take a common-sense approach to looking after your investments and other personal finances. For instance, only buy investments you can understand, avoid inestments that seem too good to be true, and don’t have credit card debt.
     
  • The behaviour gap – Simple ways to stop doing dumb things with money by Carl Richards: The central message of this entertaining, easy-to-read guide by a financial planner turned personal finance columnist is to keep our negative behavioural traits under control when saving, investing and spending. His tips include: adopt strategies to avoid buying shares at high prices and selling low, don’t spend money on things that don’t really matter, identify your real financial goals and simplify your financial life.
     
  • The millionaire next door by Thomas Stanley and William Danko: Long-term research by late academics Stanley and Danko suggests that “prodigious accumulators of wealth” are typically content to progressively build their wealth while being inconspicuous in their spending. In other words, these wealth accumulators are not in a hurry to make their money by taking excessive risks or in a hurry to spend their money. Conspicuous consumption should not be taken as a sign of wealth – it often means the opposite.
     
  • A random walk down Wall Street by Burton Malkiel: The basic theme of this classic is that investors – individuals and professionals – cannot expect to consistently outperform the market. Malkiel, a Princeton University economics professor, favours investing in market-tracking index funds (including ETFs), dollar-cost averaging (regularly investing set amounts), appropriate portfolio diversification, periodic portfolio rebalancing and low-cost investing. And he too emphasises the need for investors to understand the risks of irrational behaviour.
     
  • The little book of common sense investing by Jack Bogle: As Bogle writes, “successful investing is all about common sense”.  Don’t try to pick the best time to buy and sell stocks – consistent success with market-timing is rarely achieved; diversify to minimise risks and spread opportunities; recognise the rewards of compounding returns; focus on long-term returns; and keep investment costs low.
     
  • The Intelligent Investor by Benjamin Graham: Warren Buffett has long named this as “by far the best book about investing ever written”. Graham believed that an intelligent investor was patient, disciplined, a keen learner and determined to keep emotions under control. Buffett writes in the preface to the current edition: “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” That’s what Graham is all about. Graham famously introduced the fictional character “Mr Market”. In short, Mr Market – that is the share market” – is an emotional, often irrational character with plenty of highs and lows.
     
  • The Barefoot Investor by Scott Pape: This serves as both a valuable starter guide to personal finance and investment, yet its common-sense principles also apply to experienced investors.

 

Supplied by Robin Bowerman
Head of Corporate Affairs at Vanguard.
18 December 2018
vanguardinvestments.com.au

 

Global outlook summary: Down but not out

As the global economy enters its tenth year of expansion following the global financial crisis, concerns are growing that a recession may be imminent. 

         

 

Although several factors will raise the risk of recession in 2019, a slowdown in growth – led by the United States and China – is the most likely outcome. In short, economic growth should shift down but not out.

We expect the global economy to continue to grow, albeit at a slightly slower pace, over the next two years, leading at times to so-called growth scares. In 2019, US economic growth should drop back towards a more sustainable 2% as the benefits of expansionary fiscal and monetary policy abate. Europe is at an earlier stage of the business cycle, though we expect growth there to remain modest.

In emerging markets, China's growth will remain near 6%, with increasing policy stimulus applied to help maintain that trajectory. Unresolved US-China trade tensions remain the largest risk factor to our view, followed by stronger-than-expected tightening by the US Federal Reserve should the US unemployment rate drop closer to 3%.

Global inflation: Unlikely to shoot past 2%

Previous Vanguard outlooks have rightly anticipated that the secular forces of globalisation and technological disruption would make achieving 2% inflation in the United States, Europe, Japan and elsewhere more difficult. In 2018, we accurately projected a cyclical firming in core inflation across various economies. In 2019, we do not see a material risk of further strong rises in core inflation despite lower unemployment rates and higher wages. This is because higher wages are not likely to funnel through to higher consumer prices, as inflation expectations are likely to remain well-anchored.

In the US, we expect core inflation to remain near 2% and even weaken by the end of 2019; an escalation in either tariffs or oil prices would probably affect US core inflation only temporarily. In Europe and Japan, price pressures are likely to increase gradually as labour market slack erodes, though core inflation is likely to stay well below 2%. Higher wages are likely, yes, but higher inflation is not.

Monetary policy: Convergence commences, with the Fed stopping near 3%
As inflation moves towards central banks' target, financial-stability risks rise and unemployment rates continue to approach or drop below estimates of full employment, global central banks will stay on their gradual normalisation paths.

In the United States, we still expect the Fed to reach the terminal rate for this cycle in the summer of 2019, bringing the policy rate range to 2.75%–3% before halting further increases in the face of nonaccelerating inflation and decelerating top-line growth. Other developed markets central banks, though, will only begin to lift interest rates from post-crisis lows. We expect the first rate increase from the European Central Bank in September 2019, followed by a very gradual hiking path thereafter. Japan is late to the party and we do not expect any rate increases in 2019, though some fine-tuning of its policy framework is likely to ease the financial-stability risk. Emerging markets countries don't control their own destiny and will be proactively forced to tighten along with the Fed, while China is able to buck the trend with the help of tightened capital control and further modest currency depreciation.

Investment outlook: No pain, no gain
With slowing growth, disparate rates of inflation and continued policy normalisation, periodic bouts of volatility in equity and fixed income markets are likely to persist and perhaps accelerate. Our near-term outlook for global equity markets remains guarded, but a bear market would not appear imminent given that we do not anticipate a global recession in 2019. Risk-adjusted returns over the next several years are anticipated to be modest at best, given the backdrop of modest growth and less accommodative policy.

But all hope is not lost. Longer-term, our ten-year outlook for investment returns is beginning to slightly improve when we factor in higher short-term interest rates across major developed markets. This is the first (modest) upgrade in our global market outlook in more than ten years.

US fixed income returns are most likely to be in the 2.5%–4.5% range, driven by rising policy rates and higher yields across the maturity curve as policy normalises. This results in a global fixed income return outlook of 2.2%–4.2% for US-dollar-based investors compared with last year's outlook of 1.5%–3.5% – albeit still more muted than the historical precedent of 4.7%.

Returns in global equity markets are likely to be about 5%–7% for US-dollar-based investors. This remains significantly lower than the experience of previous decades and of the post-crisis years, when global equities have risen 12.6% a year since the trough of the market downturn. We do, however, foresee improving return prospects building on slightly more attractive valuations (a key driver of the equity risk premiums) combined with higher expected risk-free rates.

As was the case last year, the risk of a correction for equities and other high-beta assets is projected to be considerably higher than for high-quality fixed income portfolios, whose expected returns over the next five years are positive only in nominal terms.

In our upcoming annual economic and market outlook, we'll further define our expectations for the global markets in 2019 and beyond.

 

Supplied by Robin Bowerman
Head of Corporate Affairs at Vanguard.
06 December 2018
vanguardinvestments.com.au