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Assess your retirement financial resources

#4 in a series of informative blogs on this topic, links to three others are below.

Assessing financial resources is surely at the top or near the top of most investors' lists of what really matters for their retirement planning. Have you given this issue enough attention?

         

 

Without a proper assessment, you may be pleasantly or unpleasantly surprised at how far or how little your financial resources stretch in retirement. Further, you may miss out on opportunities to improve and efficiently manage your finances.

A recently-published report, Vanguard's roadmap to financial security: A framework for decision-making in retirement, provides a useful summary of what retirement financial resources should be all about. “The role of financial resources in retirement is to help reach the goals that have been set and to protect against the risks that could ruin the chances of achieving them.”

The report suggests a four-part framework for retirement planning covering retirement goals, risks, financial resources and finally bringing it together with the creation of a retirement plan.

Smart Investing is looking at each of these parts of retirement planning in a series of weekly blogs, examining this week how to assess your retirement financial resources. (Blogs published earlier in the series are: How to plan for a better retirement, Determine your retirement goals and Understand your retirement risks.)

Your retirement financial resources can be broadly divided into: guaranteed income, liquid assets and additional resources (which may include part-time work in retirement and your home equity).

Guaranteed income

Full-or-part Government Age Pensions are, of course, the main source of guaranteed income for the majority of retirees. Income annuities and defined-benefit pensions are other forms of guaranteed income. Considerations here include knowing your Age Pension entitlements and understanding whether an annuity is appropriate for your circumstances.

“In many cases,” the Vanguard retirement report notes, “using one resource to mitigate one risk may actually increase another risk. “For example, purchasing an annuity increases income security but decreases liquid reserves in the near term.”

Liquid assets

In short, these are assets for which a retiree makes the investment decisions. These are typically account-based superannuation pensions and non-super assets. Key decisions concern how these assets are invested and spent throughout retirement.

Additional resources

These include possibly working past traditional retirement ages, working part-time in retirement and perhaps accessing the value of a retiree's home.

Apart from supplementing retirement income, a longer working life provides a chance to save more for what will be a shorter and, therefore, less-costly retirement.

Possible ways to use housing wealth – if financially feasible and appropriate for a retiree's circumstances – include paying off a home mortgage before retirement to remove monthly repayments or downsizing to a less-valuable home.

Taking a reverse mortgage is another way to access the wealth in a retiree's home. (ASIC's MoneySmart website emphasises that reverse mortgages are complex financial products with risks and other potential implications that should be understood before signing a loan agreement.)

Retirement spending

A crucial factor to take into account when assessing your retirement financial resources is your intended approach to spending in retirement, given from your super and non-super assets.

As the authors of Vanguard's report comment: “Developing and implementing an effective portfolio-spending strategy can increase peace of mind and the likelihood of reaching retirement goals.”

Factors that affect how much retirees spend from a portfolio include their expected time horizon (an anticipated long retirement may mean a lower withdrawal rate from savings), portfolio asset allocation (a more conservative portfolio may also mean a lower withdrawal rate) and degree of flexibility in your spending (this depends on the split between non-discretionary and discretionary spending).

Asset allocation

Repeated studies over the past three decades confirm that an investment portfolio's long-term performance largely depends on its long-term, strategic asset allocation. In turn, this means that having an appropriately-diversified portfolio is a vital consideration when assessing your retirement financial resources.

 

By Robin Bowerman
Head of Corporate Affairs at Vanguard Australia
08 May 2018 
www.vanguardinvestments.com.au

Federal Budget 2018 – Overview

       

 

The Australian economy in its 27th year of consecutive growth.

Business conditions are at the highest level since the global financial crisis.

1,000 jobs a day on average over the past year.

Global growth at fastest pace in six years.

The budget focuses on 5 main areas:

  1. Tax relief to encourage and reward working Australians
  2. Keep backing business to invest and create more jobs
  3. Guaranteeing the essential services that Australians rely on
  4. Keeping Australians Safe
  5. Ensuring that the Government lives within its means

Read more ……..

 

Australian Federal Government

 

Determine your retirement goals

Determining retirement goals is undoubtedly at the core of most personal financial plans.

           

 

Ideally, the setting of at least broad retirement goals should begin early in our working lives – and then continue to be refined as we age and gain a better impression of our likely future retirement finances.

The rapid ageing of the population should act as one of the numerous prompts to determine and periodically review our retirement goals.

As Smart Investing discussed earlier this month, the recently-published report Vanguard’s roadmap to financial security: A framework for decision-making in retirement proposes a retirement plan that best aligns with retirees’ achieving their goals while mitigating their risks.

This plan has four parts: Determine your retirement goals, understand your risks, assess your financial resources and, finally develop a plan to achieve your goals and mitigate your risks. Over coming weeks, Smart Investing will take a closer look at each of these elements, beginning with determining your retirement goals.

“To achieve financial security,” the report comments, “investors must first establish and prioritise their unique goals for retirement. This provides them with a starting point for the planning process, from which they can then determine the appropriate allocation of resources toward meeting these goals and the potential risks that can derail them.”

Common goals of retirees include:

  • Paying for basic living expenses: This includes creating a fundamental and sustainable retirement income to pay such nondiscretionary, reoccurring living expenses such as food, housing (including home maintenance, rates and home insurance), electricity and gas, and transport. Other basic nondiscretionary expenses include recurring medical expenses (such as hospital insurance and prescription drugs), communications (phone and broadband) and clothing.
  • Having a contingency reserve: This goal is to have a readily-accessible reserve for unexpected costs including extraordinary health care needs, sudden aged-care needs and large, unavoidable home repairs.
  • Having enough income for discretionary spending: This is to finance your preferred lifestyle with spending above basic living expenses. Such discretionary spending typically includes taking local and possibly overseas holidays, regularly eating out going to the cinema, buying a new car and updating your kitchen or bathroom.
  • Leaving an inheritance to your children and gifts to charities: Achieving this goal much depends, of course, on personal financial circumstances and preferences. The intention to leave an inheritance underlines the need for adequate estate planning.

When setting your goals, consider reading the ASFA retirement standard report, published by the Association of Superannuation Funds of Australia. It provides a guide to the income needed for retirees to have what are termed as “adequate” or “comfortable” lifestyles. And an accompanying retirement budget report lists the types of expenses that retirees are likely to face.

Once your goals are listed, you can then decide which matter most to you. The setting of goals could be described as the backbone of sound retirement planning.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
26 April 2018
www.vanguardinvestments.com.au

Australia by numbers – Update

Armed with this information you'll be a conversation magnet at any party.

         

 

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

tradingeconomics.com

How to plan for a better retirement

Many investors concentrate on accumulating wealth during their working lives to pay or help pay for their retirement, yet don't give enough attention to planning for a retirement that may last 25 years or longer.

       

 

A lack of retirement planning makes retirees more financially vulnerable than necessary in numerous ways.

The possibility of outliving retirement savings, overreacting to higher market volatility (as we are now experiencing), holding inappropriately-diversified portfolios and having insufficient savings set aside for unexpected costs, are a few of their potential financial vulnerabilities.

Some retirees who have not properly planned for retirement may have underestimated the amount required to finance their anticipated lifestyles, yet others may be living too frugally given their financial needs.

A recently-published research paper, Vanguard's roadmap to financial security: A framework for decision-making in retirement*, suggests a practical approach for creating a retirement plan that aligns with retirees' often-unique goals while mitigating their risks.

The retirement roadmap is based on the overall objective of obtaining financial security in retirement if possible. The report defines this financial security in the broad sense of gaining “peace of mind”: the point where retirees are confident that they have reached their financial goals and can continue to meet these goals in the future.

This is more than simply having a specific amount of income each month and/or having their portfolios continuing to grow in value. It has a strong emphasis on a retiree's personal circumstances.

The research paper's framework for moving towards financial security or financial peace of mind in retirement has four main elements:

Determine your retirement goals: These goals typically include having enough income to pay for basic living expenses, a contingency reserve (such as for medical treatment, home repairs and aged care) and discretionary spending (such as eating out and holidays). And you may plan to leave an inheritance. Once your goals are listed, retirees can then prioritise their importance.
Understand your risks: These include market risk, health risk, longevity and mortality risk, event risk (again such as medical treatment, home repairs and aged care), and tax and policy risk (changes to government policies and health care coverage). The research suggests that these risks should be addressed in the context of their impact on achieving their retirement goals.
Assess your available financial resources: This will help ensure that your capital is used as efficiently as possible. Financial resources include superannuation and non-superannuation savings, age pension if eligible, annuities, insurance, housing wealth, insurance, and any additional income if planning to work in retirement.
Develop a plan to achieve your goals and mitigate your risks: This is a matter of bringing together the various elements of your retirement planning. As the report comments: “The right mix of resources should be tailored each household or individual. It should take into account the relative importance of competing goals and the risks that a retiree may be susceptible or sensitive to.”
Few financial retirement goals matter more than obtaining peace of mind, keeping in mind that retirement could last at least a quarter of our lives.

*Vanguard's roadmap to financial security: A framework for decision-making in retirement by Colleen Jaconetti, Jonathan Kahler, Kelly McShane and Nathan Zahm.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
17 April 2018
www.vanguardinvestments.com.au

99 pct of SMSFs missing global opportunities

On most days there are more dollars traded in Apple stock in the United States than on the entire Australian stock market. 

       

 

It’s no wonder then that over 85 per cent of overseas shares bought by Australians are US purchases. A figure this high would indicate a keen appetite for overseas investing. But when it comes to SMSFs, in my opinion, the numbers are worryingly low.

Just 0.6 per cent of self-managed super assets are invested in overseas shares, compared to 26.7 percent of industry super funds. As a global trader, these statistics are concerning. Limiting investment to Australian shores alone means SMSFs are simply limiting their opportunities for returns and leaving themselves vulnerable and exposed for the future.

What's even more staggering is trustees continue to allocate too little overseas when the costs of investing globally are significantly lower than trading locally. At the same time, the potential opportunities overseas dwarf those at home. When you have control of your investments, wouldn’t you want to lower your costs and give yourself the best chance of success? It’s just better business. 

Australian SMSFs vulnerable

Such low uptake in overseas investment opportunities wouldn’t be such a concern if SMSFs were thriving. Yet ATO SMSF statistics for 2017 showed almost half of them did not make any money. In fact, the 10 per cent of SMSFs with balances of less than $100,000 have lost money year-on-year since 2008.

SMSFs are failing to make gains and there’s little investment in overseas shares – it’s hard to see why the link between the two isn’t being made. Australians need to be investing where the rest of the world is. Failure to do so and keeping their investments on home turf will trap them in a cycle of loss.

Diversity redefined: looking beyond borders

Diversity is a much-used buzzword drilled into all client conversations (as well as being something you discuss with friends and family for that matter). Diversity is the key to minimise year-on-year investment loss. But as access to the global stock market rapidly becomes easier, the meaning of diversity is being redefined.

Diversity means investing beyond borders; exploring the emerging markets and beyond ‘traditional’ industries on the Australian Securities Exchange (ASX), such as healthcare, banking and mining. In a world where innovation is running the news agenda and the start-up industry has been given a new lease of life through rapid advancements in technology, diversity is taking on a whole new meaning.

Access to diverse opportunities

Let’s look at the most glaringly obvious reasons to invest in the US: emerging industries such as technology, robotics and semiconductors. Right now it is almost impossible to trade any of these industries on the ASX; there are just no major company listing in these areas. 

Similarly, being able to access exchange-traded funds (ETF) that cover asset classes unavailable in Australia means investors can generate returns in any market conditions. Accessing ETFs over bonds, soft commodities, oil and volatility, and the ability to get simple inverse exposure to the market in the US mean those SMSFs that make the jump early to the US markets are light years ahead of their peers. The rest stay entrenched in our local market. 

Previously, barriers to overseas markets, including high trading fees, significant paperwork and complex platforms, meant local investors couldn’t access these opportunities simply and affordably.

This loophole is being closed with fintech start-ups disrupting the market and opening up access to overseas stock markets. We’re seeing this at Stake.com.au with over $30 million transacted on-site. This is just the start.

Reduce vulnerability

The 99.04 per cent of Australians with SMSFs who are not investing in the world beyond Australia are limiting their potential for returns and leaving themselves vulnerable to an uncertain future. To be truly diverse, SMSFs should follow the growing trend of Australian investors using new tools to take their investment out of their backyard and onto the global market.

 

By Matthew Leibowitz (co-founder of Stake)
​11 Apr 2018
www.smsmagazine.com.au

Beware residency rules if moving overseas

SMSF trustees are often unaware that if they move overseas for an extended period of time, their SMSF may fall foul of the ATO’s residency rules and they may face a heavy tax bill.

         

In order to satisfy the residency rules, SMSFs must meet three conditions:

  1. It was established in Australia, or at least one of its assets is located in Australia.
  2. The central management and control of the fund is ordinarily in Australia.
  3. It either has no active members or it has active members who are Australian residents and who hold at least 50 per cent of:

 

  • the total market value of the fund’s assets attributable to super assets, or
  • the amounts that would be payable to active members if they leave the fund.

Generally speaking, the first condition is readily satisfied, but the other two can cause problems if members move overseas for a period of time, usually defined as over two years.

If these conditions aren’t met, then the fund can lose its complying status, which has significant tax implications. They include:

  • taxing assessable income of the SMSF at 47 per cent (or 45 per cent for income years before 2014/15), and
  • a one-off additional tax bill in the year that it becomes non-complying that would result in the fund losing almost half its assets.

So what are the options for SMSF trustees and members who are considering moving overseas temporarily or taking an extended trip?

If trustees know they will be away for more than two years, or even if they are planning a shorter trip but it may end up being permanent, they should take steps to protect their superannuation before heading off.

This could involve transferring their benefits to a public offer fund and winding up their SMSF.

Alternatively, if they want to keep their SMSF running, but do not currently have at least 50 per cent of trustees living in Australia to manage and control the fund, they should appoint additional resident trustees/members to the SMSF, for instance adult children.

They could also appoint a resident enduring power of attorney to act as SMSF trustee on their behalf while they are away. Or, if they have a corporate trustee, they could appoint an alternate director to act as trustee director in their absence.

The main difference between an alternate director and an enduring power of attorney is that the power of attorney can continue acting on behalf of the member in the event of their incapacity. However, the role of alternate director will cease if the trustee is incapacitated, that is, the role of director ceases.

They should also take steps to ensure the ‘active member’ condition is satisfied. Active members are those who are making contributions or rollovers to the SMSF. Therefore, even if the central management and control test is met, if an overseas SMSF member contributes to the fund, then the SMSF will become non-complying if the overseas members combined hold more than 50 per cent of the SMSF’s assets.

Contributions or rollovers for these overseas members can instead be made to a local public offer, retail or industry fund while overseas and then they can choose to transfer these benefits into their SMSF when they return to Australia. 

In most cases, the best approach is for all members, local and overseas, to avoid making contributions or benefit rollovers to the fund while a fund member is overseas for an extended period. 

While these steps are relatively straightforward, they need to be put in place before moving overseas. Therefore, SMSF trustees and members should ensure they talk with their advisers before undertaking any overseas moves.

Andrew Yee is director of superannuation and SMSF specialist at HLB Mann Judd Sydney.

 

 

By Andrew Yee
12 Apr 2018
www.smsmagazine.com.au

 

Common EOFY slip-ups flagged for SMSFs

In a bid to avoid common basic errors in the lead up to June 30, BDO has released a checklist for SMSF professionals to be wary of.

           

 

The SMSF sector regularly averages a compliance standard of above 90 per cent with the ATO, but niggling and basic issues are often the downfall of even the most well-meaning trustees.

Partner at BDO, Paul Rafton, finds recurring themes each year in the lead up to June 30, which are often easily avoided.

These include:

  1. Failing to pay the minimum pension before 30 June
  2. Not ensuring that contributions have been received into the SMSF’s bank account by close of business on 30 June (i.e. failing to allow bank/clearinghouse processing time)
  3. Not rectifying any prior-year breaches of SISA (Superannuation Industry Supervision Act)
  4. Making contributions in excess of their caps, because they either failed to properly track earlier contributions or did not take into account the reduced contribution caps that apply from 1 July 2017

Moving into the new financial year, the SMSF sector can expect the recurring priority item of non-lodgement to be at the top of the ATO’s agenda.

Late last year, the ATO flagged that about 40,000 SMSFs could be on the chopping block, due to persistent non-lodgement issues.

 

By: Katarina Taurian
​12 APRIL 2018
www.smsfadviser.com

 

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