Interest rates – accentuating the negative

So it’s just a normal day. You walk into the bank, deposit some money. And the teller asks you to pay them interest. Keeping your cool, you ask why. And the teller apologetically explains: “Oh we’ve got negative interest rates.”

Right now, we’re living in a world where some countries have ‘negative interest rates.’ That means, that instead of rewarding customers for depositing money, a bank (or a central bank) will charge them interest. In financial terms, that’s the world turned upside down.

So how did we get here?

The GFC hangover and COVID-19

Broadly speaking, negative interest rates are engineered by governments and central banks as a way of getting life into a chronically spluttering economy. If it costs you money to put your money in the banks (or it costs banks money to park their funds with the Government) there’s more incentive for individuals to spend it on housing, at the shops, or on holidays. And for banks to invest it in areas that also foster more economic activity and employment – like lending to business.

There’s no coincidence we’re talking about negative interest rates in 2021. They were part of a suite of measures used by some countries to try and get out of the economic slump caused by the Global Financial Crisis back in 2008/09. The economic shock administered by COVID-19 has brought them back into fashion – countries as advanced as Japan, Switzerland and Sweden have jumped on the negative interest rate train.

Australia stays positive

So what do negative rates mean for you? The good news is that they’re not really happening in Australia. At least not yet. And they probably won’t.

Back in November 2020, the Reserve Bank of Australia (RBA) Governor Dr Philip Lowe said: “There has been no change to the Board’s view that there is little to be gained from lowering the policy rate into negative territory.”

Given that the Australian economy has picked up sharply since then – house prices and employment numbers are on the upswing – there seems less need for negative interest rates in Australia than most other countries.

Different folks

But, while not negative, interest rates in Australia are still at historic lows – and could stay that way till around 2024 according to Dr Lowe and his team at the RBA. This has implications for everyone – but different implications depending on whether you’re a saver or a borrower.

• If you’re a saver or retired, low interest rates make it harder to earn the income you used to from products like Cash Management Trusts and Term Deposits. You might find you are considering investing in riskier assets, like shares, to try to make up that income.
• If you have large debts – like a mortgage – your interest payments are likely significantly lower. And if you’re looking to borrow, it’s possible you can borrow more money, because your repayments will likely to be much lower.

What goes down must come up

As mentioned earlier, these low interest rates are a symptom of a global economy trying to get itself going again.  They’re not normal (though they might feel like the new normal). That means it could make sense to get good advice about how to handle this economic trend – to look out a bit longer than the next three years.

Here’s how good advice could help:

• Savers: A financial planner can help you find sources of extra income without taking on too much risk to do it.
• Borrowers: Some expert advice could help you ensure you don’t overcommit when it comes to borrowing. As the popular US financial planning radio star Dave Ramsey puts it, “A lower interest rate doesn’t make a debt go away.”

Bottom line: look past today’s trend

Low and negative rates are likely to be with us for some time. But for Australian savers, borrowers and investors, it’s important to look beyond the obvious, front page economic headlines.

A good financial planner can ensure you aren’t carried away by the latest news and forget your long-term plans.

After all, the COVID crisis is just a year old – and already people are talking about a potential post-COVID boom. Things go down – and up again – and down again. Just like interest rates.

If you have questions and would like your financial situation to be evaluated, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source: https://www.mlc.com.au/personal/blog/2021/06/interest-rates-accentuating-the-negative

Key takeaways

• Start the conversation early so younger generations understand what they’re likely to inherit
• There are strategies that can help to ensure your wealth passes in a tax-efficient manner
• Testamentary trusts can be beneficial if you want your wealth to remain in your direct blood line.

We spend a lifetime generating wealth but few of us spend the time to ensure it’s passed on in the way we want it to.

Having a plan in place for how and when you want your wealth to be transferred, will help all parties understand your intentions and the process.

While there isn’t a one-size-fits-all approach, we’ve highlighted a few considerations to get you started.

Start the conversation early

Before any plan is implemented, it’s crucial that families have honest conversations about their wealth so younger generations understand what they’re likely to inherit.

This will help your beneficiaries prepare and have a planned purpose for how it should be used. It also means they have time to seek professional help if needed.

Another benefit of these conversations is they present an opportunity to talk about any long-term goals you may have. For instance, you may want your beneficiaries to set up a retirement account, allocate it to their kids’ education or support a cause you love.

Seek help from a professional

Before making a decision to relocate, it’s always important to consider the impact it will have on your lifestyle and financial situation.

A financial adviser can help by investigating different strategies for you so you can make a balanced and informed decision on whether a tree/sea change is your best option.

They can also assist with other aspects of your financial life—savings, insurance, tax, debt—while keeping you on track to achieve your goals.

More importantly, they can answer questions like:

• How can I pay off my mortgage faster and reduce my debt?
• What age can I stop working and retire?
• What strategies can I use to build my wealth?

If you value the experience of experts in other aspects of your life, don’t discount it when it comes to managing your life savings.

Tax implications

Depending on your circumstances, there are strategies that can help to ensure your wealth passes in a tax-efficient manner.

Super

One of the most common methods of wealth transfer is through super. But when a family member dies and their super is passed to beneficiaries—such as their children who are financially independent—death benefit taxes on some or all of the benefit may apply¹.

The payment of super benefits to beneficiaries on death may also be challenged by those who felt they didn’t receive the share they were entitled to.

One option that may help to avoid these outcomes is to withdraw super after you’re retired, rather than on death. This can also reduce death benefit taxes too.

Gifting

Transferring wealth via gifting can be a good option as you won’t have to pay tax on the money you give. It can however, affect you financially if you’re receiving social security benefits and you exceed the gift limits.

You’re entitled to gift up to $10,000 in cash gifts and assets each financial year and up to $30,000 over five consecutive years². If you exceed this limit it may reduce your social security benefit.

An alternative to gifting that you may prefer is loaning wealth to family members. A loan to a family member will not affect your social security benefit and can usually be recalled if, for example, the family member’s marriage or de facto relationship breaks down.

Capital Gains Tax

If you choose to transfer the ownership of assets while you’re still alive, a capital gains tax (CGT) event may occur. By contrast, CGT will generally not apply at the time ownership of assets is transferred to beneficiaries via a deceased estate.

Consider setting up a trust

Some people choose to pass their wealth to their intended beneficiaries via a testamentary trust rather than leave all their assets directly to them.

One of the main benefits of testamentary trusts is they can enable your wealth to remain in your bloodline (ie pass to your lineal descendants). It also enables wealth to pass in a manner that protects beneficiaries who may be vulnerable due to marriage or a relationship breakdown, or due to their profession or a business they operate.

In other cases, testamentary trusts can simply preserve wealth by ensuring it is not misspent by beneficiaries on poor lifestyle choices or investment decisions.

These trusts, which are written into the will when planning your estate affairs can have significant tax benefits too.

For example, if a beneficiary receives their inheritance under their personal name, they may be liable to pay additional tax on investment earnings or capital gains at their personal marginal tax rate. However, if they take the inheritance through a testamentary trust, particularly where the beneficiary has a high personal marginal tax rate, they may not be liable for as much tax as income can be generally be split with the beneficiary’s other family members, including young children.

Depending on your circumstances, you may even choose to set up separate trusts for each beneficiary. This will enable them to invest the way they want and manage their finances independently over the long-term.

Write a will and update it

One of the simplest things that people often overlook is writing a will. This document is the bones to any successful wealth transfer plan and must be updated regularly to ensure any major life changes are accounted for. This can include anything from getting married or having children, to selling the family home.

If you would like competent advice in this area,  please email us at ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Article source: https://www.mlc.com.au/personal/blog/2021/04/transferring-your-wealth

Once you hit your 50s and 60s, retirement is no longer something happening far off into the future. In fact, it’s at your doorstep.

Now is the time to really figure out where you stand financially, reassess your long-term goals, and focus on planning your future.

Here are five smart financial moves that may make the next few decades the best years of your life.

1. Decide on your retirement lifestyle

With a clear idea of the type of retirement lifestyle you’re after, you can start implementing a plan to turn your retirement dreams into reality.

Some things to consider are:

• How often you would like to travel – and the types of holidays you’d like to take Your travel plans might have gone out the window for now, but that doesn’t stop you planning for the future
• Whether a sea change or tree change is part of your plan?
• Downsizing – or upsizing. What are your accommodation plans in the future?
• Do you want to provide financial assistance to your family?
• In your later years, what options would you like to have in relation to help and support at home, or perhaps in a retirement village or aged care facility?

Sometimes talking to a financial adviser can help you clarify your wants and needs as, in order to make an assessment of your financial situation, they’ll first need to understand your life goals and what your mainpriorities are. Often, they’re most valuable in helping you conceive a plan for your future, before they build a plan for your investments.

Once you’ve thought through the above, you or your adviser can calculate an estimate of your expenses. That gives you something to work with when it comes to thinking about where your retirement income will come from and whether you’ll have what you need. There are a widerange of sophisticated retirement calculators available to help you with this.

2. Increase your retirement savings

One way to ensure you can enjoy your desired retirement lifestyle is to add more into your super on a regular basis.

You can do this using your before or after-tax income. If you make a personal contribution, you may be eligible to claim a tax deduction too. This means you’ll reduce your taxable income and potentially pay less tax, while adding to your super balance. It’s a win-win!

Be mindful of contribution caps though. They limit the amount of super contributions you’re able to make each year if you want to avoid paying tax at your marginal tax rate rather than the concessional rate of 15%.

3. Pay off your debt

The lower your expenses in retirement, the longer your savings will last.

So, if you have significant debt, you should also have a plan to proactively clear that debt, such as mortgage repayments or personal loans. This will strengthen your financial position when you retire.

Speaking to a financial adviser can help determine the best way to reduce your debt as you move into retirement, while also making sure your saving towards retirement is on track.

4. Diversify your investment portfolio

At this stage in your life, you don’t want your investments to be derailed by external market factors which are out of your control.

Investing your money across multiple different asset classes—shares, property, bonds, cash—will help to lower your investment risk. This strategy—diversification—works because different investment types perform well at different times so if one area of your portfolio falls, another may be rising. Having a variety of investments helps balance out your overall risk.

You may also want to consider speaking to a financial adviser as they can review your investments to assess where you currently stand and determine if your investment portfolio needs adjusting.

5. Set up an estate plan or a will

An estate plan is a collection of legal documents that outlines how you want your assets distributed when you die. Crucially, it also includes how you want your health and financial decisions handled (and by who) if you’re unable to make them yourself.

Most estate plans have a will which names an executor to manage the distribution of your assets as you intend. A solicitor (or the Public Trustee) can help you with this.

In essence, having an estate plan in place can help you feel more confident about the future, knowing your loved ones will be taken care of, and that the legacy you leave behind is the one you want – we recommend you speak with a financial adviser. You can also visit the retirement section on our website, which includes a range of tools and resources to help kick-start your retirement planning.

If you would like to receive competent advice at reasonable costs, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

Source: https://www.mlc.com.au/personal/blog/2020/12/5_financial_moves_to_make_in_your_50s_and_60s

To all the thirty-somethings out there, now’s your time to shine! These are the years that will shape the rest of your life.

If you’re looking for a bright future—that’s not held back by financial worry—here’s five simple tips to start building wealth now so you can chill later.

As Warren Buffett once said: “Beware the investment activity that produces applause; the great moves are  usually greeted by yawns.”

1. Consider long-term investing 

Having time on your side—one of the great benefits of being in your 30s—can mean a great deal in the investing world.

Why? If you invest with a long-term plan, you’re less likely to be affected by short-term volatility.

With growth assets like shares and property, your chance of a negative return gets lower the longer you invest. In your 30s you’re in a better position to use that pattern to your advantage – to take on more risk to generate higher returns, if you choose to.

Shares

Generally speaking, shares outperform many other investments over the long term.¹

There’s also the benefit of dividends. If you invest in companies that pay dividends, you’ll benefit from part of the company’s profits paid to shareholders (generally twice a year). That can be handy income – or reinvested to keep growing your capital.

Property

Owning an investment property may be another way to generate a good income stream – with tenants paying you rent. This income may also help to pay off your mortgage so you can capitalise on another investment later in life.

Like shares, Australian residential property has delivered strong long-term returns.² While less volatile than shares, it’s important to note property values do change depending on supply and demand in the market.

2. Gain control of your debt

Debt management is a crucial skill when it comes to managing money, saving and planning for the future.

Whether it’s a credit card, personal loan or a mortgage you’re paying off, setting priorities and keeping track of your expenses/income to identify potential savings may help to pay off debts sooner. And the sooner you pay off your debts, the more money you can invest for a better lifestyle in future.

Set priorities

If you have more than one outstanding debt, consider working out how much you can repay on each, based on the minimum repayment owing.

Alternatively, if you’re able to repay more than the minimum, look at prioritising your debts. You’ll need to think about the type of debt you have—an investment loan or personal debt—and how much is owing. If you only have personal debt, you could prioritise repaying debts with the highest interest rate first, given these will be costing you the most.

Keep track of expenses and income

Having a clear picture about what you earn versus what you spend can highlight areas where you could save more. Whatever income you’re able to save can then be allocated towards your debt.

There are budget planners and phone apps you can use to track your spending. Alternatively, you can simply download your bank statements and keep a record of your receipts.

3. Add more to your super

Super is one way to generate wealth over the long-term due to compounding returns. Compound returns is the way your balance increases if you give your investment time for the growth you got this year to grow again next year – and the year after that and the year after that.

In your 30s you’ve got time to get compound returns on your side. One way to maximise this benefit is to contribute more into your super on a regular basis. You can do this using your before or after-tax income and there may be tax benefits that come with this too.

For example, if you contribute some of your after-tax income or savings into super, you may be eligible to claim a tax deduction.

Be mindful of contribution caps though. They limit the amount of super contributions you’re able to make each year if you want to avoid paying tax at your marginal tax rate rather than the concessional rate of
15%.

4. Seek professional help

Getting independent advice from a financial adviser can help you design a financial plan to achieve the goals you want in the future whether that’s investing long-term, cutting debt, or putting away cash now to make life easier later on.

If you would like to receive competent advice at reasonable costs, please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.

¹Livewire: Australian sharemarket wins
gold – 5 March 2019 https://www.livewiremarkets.com/wires/australian-sharemarket-wins-gold

²ASX: 2018 Russell Investments/ASX Long Term Investing Report- June 2018 https://www.asx.com.au/documents/research/russell-asx-long-term-investing-report-2018.pdf

Source: https://www.mlc.com.au/personal/blog/2020/12/how_to_build_wealth_in_your_30s

Retirement is a time of unemployment. So retiring at 65 while living to 95 (as many do), will mean living for 30 years in unemployment.

Would your savings and super last that long?

If you are unsure and would like to discuss this , please email us on ds@bluerocke.com with your contacts, for an exploratory meeting, at our cost, not yours.