Financial Strategy for the New Year

As the new financial year has just begun, it’s a good time to consider your financial strategy for the rest of the year.

Important actions to consider

  • Salary sacrificing into super, while saving on tax, can help you build for retirement
  • If you receive any extra cash during the year, you can add it to your super as well
  • Monitor your claimable expenses so you can take advantage of your tax deductions from one year to the next

For many of us, the start of a new year is a time when we make resolutions for the coming year — whether it’s committing to an exercise plan or learning a new language, or even just resolving to spend more time with family.

But when it comes to making resolutions about your finances, there’s no better time than the start of a new financial year. So if you’re looking to boost your super or reduce your tax bill, here are three resolutions you can make now to start next financial year on the right foot.

Resolution 1: I will start salary sacrificing

Salary sacrificing into super is a great way boost your retirement savings and also save on tax. If your employer agrees, you can ask them to take a fixed amount out of your pre-tax salary and pay it directly into your super. Since this strategy essentially lowers your income, it may reduce your tax liability.

In a single financial year, you can put up to $30,000 of your pre-tax earnings into super (or $35,000 a year if you are aged 50 or more at any point during the financial year). This $30,000 cap includes compulsory contributions from your employer plus any extra amount that you salary sacrifice. And now is a great time to make the most of your cap ― as of 1 July 2017, the Government has proposed a reduced cap of $25,000 a year.

The beginning of the financial year is the perfect time to get started. Work out how much you can afford to salary sacrifice each week or month, then ask your boss to contribute this amount to your super from each pay cheque.

If you’re already salary sacrificing, be sure to keep track of how much you’re putting into super overall. For example, if your salary has increased during the year, then your employer’s contributions will have gone up too. That means you might need to reduce the amount you’re salary sacrificing, so the total amount doesn’t exceed the relevant cap.

Resolution 2: I will invest any extra cash

In the last 12 months, did you receive any extra money on top of your regular salary ― maybe a bonus, an inheritance or a gift? When extra cash comes your way, it’s easy to let it flow straight back out again, so it’s worth planning ahead in case you get a windfall next financial year.

A great way to make this extra cash work for you is to invest it straight into your super as an after-tax or ‘non-concessional’ contribution. Remember, a boost to your super now will make a big difference when the time comes for you to retire.

But be careful how much you put in ― an annual non-concessional contribution cap of $180,000 exists to limit the amount of after-tax contributions that can be made (the current three year cap is $540,000). One of this year’s Federal Budget announcements was the introduction of a $500,000 lifetime cap on non-concessional contributions to replace the current annual cap of $180,000. So if you’ve already made more than $500,000 worth of after-tax contributions from 1 July 2007 to now, you won’t be able to put in any more.

Resolution 3: I will keep track of my tax deductions

It’s tempting to leave it to the last minute to sort out your tax deductions ― but as you may know, this can result in a big headache when tax time rolls around. So to relieve some of the stress, it’s worth keeping track of your deductions right from the get-go.

Make sure you understand what you can claim for. Depending on your situation, this could include business or home office costs, repairs on your investment property, professional development expenses, financial advice fees or income protection insurance premiums.

Even before the financial year starts, it’s worth considering how to make your deductions work may benefit you. This may mean paying some of next year’s expenses before 30 June — or if you’re expecting a tax increase in the next financial year, holding off some payments until then.

Keep in mind that for some expenses, like income protection premiums or investment fees, you can prepay up to 12 months’ and claim a deduction in the financial year you make the payments. So it’s a great idea to work out a payment plan now for the year ahead.

Speak to a BlueRocke financial adviser

As we all know, making resolutions is just the first step ― sticking to them is the real challenge. At BlueRocke we can give you expert guidance and advice, with solutions tailored for your unique needs and goals.


Cashed Up

When cash is king, choose the best option for you.

Hoarding your dollars under the mattress probably won’t have much appeal for many of us. But is it possible you may be doing the modern day equivalent with your current cash investments.

The reason the mattress isn’t such an attractive idea is that, apart from the obvious security issues, the value of your stash falls over time. You earn no interest and there’s no capital growth.

There could be a similar result if you don’t think through the options available for cash investments. It may mean lost opportunities and fail to maximise the returns from your most liquid assets.

Which account?
While the everyday bank account will always score highly as a convenient place to park your cash, it comes at a price.

A better option for your cash reserves could be a high-interest savings account. Here, your cash can be earning more than a typical transaction account.

A slightly higher rate of interest again can be earned in a term deposit. In return for agreeing to tie up your cash for a set period of time, usually between a month and five years, you’ll earn more. The longer the period, the higher the interest. Term deposit accounts often require a minimum amount of around $1,000 to $5,000.

You’ll need to be certain that you won’t need the money for the fixed term because withdrawing funds early can attract penalties. Also, don’t forget to keep track of when the term expires so that you can plan what to do next. Unwittingly allowing the term deposit to rollover into another term might not be best for your circumstances at the time.

Of course, there are many other ways to hold cash investments, such as managed funds that either focus purely on cash investments, or include a large holding of cash investments as part of their portfolio.

What suits you?
Another way to take advantage of the security and performance of cash and fixed interest is to change the asset allocation in your superannuation or pension fund.

You can manipulate your investments inside your fund to create a portfolio that suits the market conditions and your own goals.


Passive Vs Active Investing

Thoughtful people who are long-term investors must first decide on their investment objectives when deciding between active or passive managed funds.

Investing in equities is an increasingly popular method of assisting people to achieve their long-term financial goals. An investment in equities can generate promising returns over time as companies grow and become more profitable.

Further, dividends paid by listed companies also provide a good income stream for investors. In Australia the benefit of franking credits enhance the attractiveness of equities as an asset class.

However, there are also risks associated with investing in shares. Companies that struggle are likely to see their share prices fall and stock markets as a whole can be affected by periods of economic weakness or unexpected events, as illustrated by the chart on the next page.

In order to minimise risk many investors maintain exposure to shares in professionally managed funds. These funds are usually well diversified, spreading investment risk across a wide range of companies. There are two distinct types of funds that are available to investors – active funds and passive funds. In this paper, we will take a closer look at both types of funds and highlight the key differences between the two.

 What is active investing?

Most actively managed funds aim to outperform a particular index, for example the S&P/ASX 300 Accumulation Index (ASX 300).

To achieve this, the fund managers actively research companies that are constituents of the index. Professional managers typically have the resources required to complete detailed analysis on companies and skilled investors can identify those likely to perform better than the market average over time. These qualified investors have access to information, research and robust investment processes that are not readily available to individuals.

Following this analysis, active fund managers buy and sell shares in an effort to maximise returns for investors. They will buy stocks that are expected to perform better than the broader market, sell winning stocks following a period of favourable performance, and avoid those that are expected to underperform.

The intention is that the combined portfolio of shares will perform better than a comparable index, normally referred to as the ‘benchmark’. Of course there is also a risk that active funds will perform less well than the benchmark index if the selected stocks do not perform as well as the manager anticipates.

The performance of active managers is typically measured against these benchmark indices, which they try to outperform by a given margin. The extent to which returns vary from those of the benchmark index is a fair indication of the manager’s skill.

Chart 1: Volatility in sharemarkets is constant

Graph 1

Source: Colonial First State. S&P/ASX 300 Accumulation Index Jan 1995 – May 2014. Chart is for illustrative purposes only.

What is passive investing?

A passive investment manager tries to replicate a sharemarket index, such as the ASX 300, by owning shares in each constituent of the index. The quantity of each stock held is determined by the stock’s weight in the index. If BHP Billiton accounts for 8.6% of the ASX 300, for example, a passive fund manager will invest 8.6% of the fund’s assets in that stock, and so on, for every stock in the index. The investor should expect returns to be close to that of the market index.

 Which type of fund is right for you?

In deciding on the style of investment, investors must first decide on their investment objectives, in particular return targets. Most investors would expect to generate returns that are above that of a market index and would prefer investing in an actively managed fund. In this case, the selection of the active manager is crucially important and the consideration for investors is their confidence in an active manager to achieve their investment objectives. While past performance is not necessarily an indication of future performance, most investors will consider a manager’s long-term performance track record before making an investment.

Cost is another differentiator of the two styles. Actively managed funds typically charge a higher management fee to cover research costs and to pay for the large teams of experienced analysts that are typically employed in the management of the fund. In contrast, because no attempt is made to outperform a benchmark index through research or stock selection, management fees for passive funds tend to be much lower than for actively managed funds. Cost should not be the main factor in picking a fund as contrary to the belief of many investors, selecting an active fund based solely on a low fee can be a mistake.

Here is a summary of some of the key advantages and disadvantages of active and passive funds:

 

Management style Advantages Disadvantages
Active ·       Opportunity for the fund manager to research and select stocks that are expected to outperform the market average over time

·       Potential to outperform a benchmark index and maximise returns for investors

·       Potential to underperform the benchmark if the selected stocks do not perform as well as expected

·       Higher fees

Passive ·       Very low risk of the fund underperforming a benchmark index by more than cost of fees

·       Lower fees

·       No opportunity for fund managers to actively select stocks that are expected to outperform

·       Typically unable to outperform a benchmark index

 

One approach is not necessarily better than the other. Before making an investment, it’s always best to speak to a financial adviser, who can help you select a fund – whether active or passive – that can help you achieve your investment goals.


What To Do With A Windfall

Four tips on what to do with a windfall

If you were lucky enough to land a windfall, before you rush off on that long dreamed of holiday, here are four practical considerations:

  1. Reduce your debt

The most financially sensible thing you could do, is pay off debt. Before doing anything else with you cash, it would be wise to pay off loans which charge you the highest rates of interest, such as credit cards, car or personal loans, store cards or short term loans.

Only then should you consider paying off your mortgage, in full or in part, because your mortgage is likely to be charging you the lowest interest rates. Apart from the savings you’ll make from lower interest payments, getting rid of debt could also eliminate financial stress and allow you to focus on smarter financial decisions for your future.

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need

  1. Plan for retirement and build up your super balance

You should consider taking advantage of non-concessional contributions and build more of your wealth within super, rather than having it all invested in your own name in the bank. Non-concessional contributions refer to after-tax amounts which are indexed each year.

Under current rules, you could contribute $180,000 in non-concessional contributions. Further, and subject to regulatory compliance, if you are 64 years old or less anytime in the financial year and you make a non-concessional contribution, it would trigger a ‘bring-forward’ provision, and you could contribute up to $540,000. This would result in a significant tax saving on your investment earnings, but it would depend on your personal income levels. Keep in mind, though, that the downside of building up your super is that you cannot access the money until you stop working or retire (subject to meeting a condition of release).

  1. Diversify your investments

Keeping large sums of money in the bank at current term deposit interest rates may not be the best investment in the long term. You could work out what large capital expenses you may have over the next three years and leave this sum in the bank, but the remainder could be invested in a more growth-oriented manner, depending on your appetite for risk.

If you have already purchased an investment property, you could consider building up investments in Australian shares, international shares and other asset classes to diversify your investment portfolio.

You could also look at a managed fund that is appropriately diversified across a number of asset classes, but a good portion could be in Australian shares which aim to deliver the growth that can be achieved over the long term with this asset class.

  1. Find a financial adviser

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need, it could be beneficial for you to sit down with a financial adviser and work out your short and long term financial goals and aspirations. For more on how you could benefit from financial advice, see The right advice can make all the difference.


Mortgage Paid?

Mortgage paid? Save for the future

Now that you’ve paid your mortgage off, here are three ways to start thinking about building wealth for tomorrow: 

  1. Invest regularly in managed funds

Paying off a mortgage teaches you the healthy financial habit of saving a certain amount of your pay check each month. Why not keep up that discipline with a regular investment into a managed fund?

Managed funds can help you gain exposure to a diverse range of assets, even for a relatively small investment. You’ll also get the benefit of the expertise of the fund manager who selects and manages the investments — so there’s no need to research and choose stocks yourself.

By regularly investing the same amount of money over time, you’ll be employing a strategy known as ’dollar cost averaging’. Dollar cost averaging is an investment technique where money is invested at regular intervals, rather than in a single transaction. By investing on a regular basis, you don’t need to rely on ‘timing strategies’ which aim to pick when a market has peaked or reached the bottom of a cycle.

You make regular contributions regardless of what the market is doing, which means sometimes you pay more, sometimes less for your investments. The differences in price even out over time.

Dollar cost averaging imposes investment discipline. It is useful to slowly build exposure to markets and smooth out the risks associated with market fluctuations.

It’s like buying $100 worth of apples every week — you get more when they’re cheap, so you end up with more cheap apples than expensive ones. Then, if apples go up in price, you’re investment should be worth more than you paid for it. However, the cost of apples will go up and down.

  1. Salary sacrifice into super 

Another good place to invest some of your income is into your super, through a salary sacrifice arrangement.

It’s easy to do — simply arrange for your employer (if this option is available) to pay part of your pre-tax salary into your super, along with the compulsory superannuation guarantee super payments they already make. There are limits to the amount you can contribute so ensure you seek financial advice.

Salary sacrifice may also be a very tax-effective strategy. That’s because it comes out of your pre-tax earnings, which means it may lower your assessable income. As a result, you could pay less income tax each year, while building your retirement savings.

What’s more, the money you salary sacrifice to your fund is taxed at just 15% within super. So if you’re in a higher tax bracket — for example, if you’re paying a marginal rate of 46.5% tax — this could reduce the tax you pay on this money by 31.5%.

  1. Diversify into other types of investment

Many Australians like to put money into investment properties. And there’s no question that this could be a great investment, with potential capital growth and rental income. But don’t forget the importance of diversification, spreading your investments across a range of assets, markets and industries — including overseas.

For example, international shares can give you exposure to rapidly growing emerging markets, such as China, Russia and India. You can also enjoy access to the developed markets, and some of the world’s most successful companies.

You may also want to consider investing in fixed interest assets, like term deposits or bonds, for more predictable returns.

Or if you are keen to stay in property, indirect investment property is another option. By pooling your money with other investors into a property fund, you can gain exposure to commercial or overseas property, at a lower cost than investing directly.

If that all sounds too hard, there are plenty of managed funds to choose from, that can provide instant diversification — without having to do the legwork yourself.

Making your money work for you

Investing can be complex, and everyone’s financial situation is different. So it’s important to get the right financial advice. A financial adviser can work with you to determine the most tax-effective investment to make the most of your surplus cash.


Get The Right Advice

It’s never too late to get the right advice

Receiving financial advice from an expert could change your life and give you the peace of mind only a well-constructed plan can bring. A financial adviser may assist in maximising your retirement income and plan a better retirement lifestyle for you.

Australians are living longer than ever. A man finishing work at 65 in 2011-2013 could expect to be retired for more than 19 years, rising to 22 years for women[1]. It’s important to have enough saved up to last the distance.  Yet quite often not until our 50s or later that we start seriously saving for retirement.

It is never too late to improve your financial situation and make much better use of what you already have.

With advice, you can find out about strategies that you can put in place in the final years before retirement. So your financial situation can improve.

Planning ahead

The ideal situation is where your wealth continues to grow in retirement, but not all of us can be in that situation. This is where a financial adviser comes in.

One of the most important things a financial adviser can do is to help you understand how much income you’ll need in retirement and the total amount to provide for that income.

While people retire from paid employment, they don’t retire from life.  And a longer healthier life means people will be doing more things and thus need greater financial resources.

Maximising retirement savings

Investors in their 50s and 60s have a number of ways to build their retirement wealth but super in a high tax country like Australia, is often the most tax effective way.

By using a transition to retirement strategy, where salary sacrificing of before-tax income into the super account and then using income from the super pension to live on, investors can reduce the tax they pay and direct more money back to their super fund.

Recovering from the GFC

It is often that the lead up to retirement is an important and most crucial time to see a financial adviser— especially in the wake of the GFC.

Advice after retirement

With 20 years or more in retirement, getting ready to leave the workforce is only the first step it is also essential to receive ongoing advice after you’ve left work for good.

Constant changes to super rules can also be dangerously confusing without the right advice.
The ongoing changes and regulatory proposals may have a significant impact on your wealth and thus it is even more crucial to consider meeting a financial adviser.

[1] http://www.aihw.gov.au/deaths/life-expectancy/