As 2020 gets under way and holidaymakers return to work, we wish everyone a happy and prosperous New Year. Our thoughts are also with our fellow Australians caught up in the catastrophic bushfires around the country; we wish you all a safe and speedy recovery.
December provided a busy end to an eventful 2019. Federal Treasurer, Josh Frydenberg announced a downgrade to near-term forecasts of economic growth, inflation, wages and business investment in the Mid-Year Economic and Fiscal Outlook (MYEFO). The Government now expects growth to return to the long-term average of around 3 per cent by 2021/22. Despite a small deficit in the year to October, the Budget is still on track to deliver Australia’s first surplus in 12 years this financial year. Lower government spending, higher export income, low Aussie dollar and solid Chinese demand for our iron ore are all supporting the nation’s bottom line.
The Australian dollar finished the year close to where it started against the greenback, at US70c after fluctuating between US67.08c and US72.68c over the year. This is supporting our trade surplus which stood at $4.5 billion in October, slightly down on the previous month.
Business and consumer confidence faltered before Christmas, as tax cuts and rate cuts failed to boost spending. For example, new vehicle sales fell 9.8 per cent in the year to November. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.5 points in December (below 100 denotes pessimism). While the NAB business confidence index fell from +2 in October to +0.1 in November (long-term average +5.8).
After its December meeting, the Reserve Bank said it would reassess the economic outlook in February 2020 and provide additional stimulus if needed.
Our retirement system: great, but room for improvement
You could be forgiven for thinking Australia’s superannuation system is a mess. Depending who you talk to, fees are too high, super funds lack transparency and Governments of all political persuasions should stop tinkering.
Yet according to the latest global assessment, Australia’s overall retirement system is not just super, it’s top class.
According to the 11th annual 2019 Melbourne Mercer Global Pension Index, Australia’s retirement system ranks third in the world from a field of 37 countries representing 63 per cent of the world’s population. Only the Netherlands and Denmark rate higher.i
What we’re getting right
While super is an important part of our retirement system, it’s just one of three pillars. The other two pillars being the Age Pension and private savings outside super.
Writing recently in The Australian, Mercer senior partner, David Knox said one of the reasons Australia rates so highly is our relatively generous Age Pension. “Expressed as a percentage of the average wage, it is higher than that of France, Germany, the Netherlands, the UK and the US.”ii
As for super, we have a comparatively high level of coverage thanks to compulsory Superannuation Guarantee payments by employers which reduces reliance on the Age Pension. In fact, Knox says Australia is likely to have the lowest Government expenditure on pensions of any OECD country within the next 20 years.
Superannuation assets have skyrocketed over the last 20 years from 40 per cent of our gross domestic product (GDP) to 140 per cent. “A strong result as funds are being set aside for the future retirement benefits of Aussies,” says Knox. Even so, on this count we lag Canada, Denmark, the Netherlands and the US.
Room for improvement
For all we are getting right, the global report cites five areas where Australia could improve:
- Reducing the Age Pension asset test to increase payments for average income earners
- Raising the level of household saving and reducing household debt
- Require retirees to take part of their super benefit as an income stream
- Increase the participation rate of older workers as life expectancies rise
- Increase Age Pension age as life expectancies rise.
Retiree advocates have been asking for a reduction in the assets test taper rate since it was doubled almost three years ago.
Since 1 January 2017, the amount of Age Pension a person receives reduces by $3 a fortnight for every $1,000 in assets they own above a certain threshold (singles and couples combined).iii
Other suggested improvements, such as increasing the age at which retirees can access the Age Pension, present challenges as they would be deeply unpopular.
The Retirement Income Review
One roadblock standing in the way of ongoing improvements to our retirement system is reform fatigue.
In recent years we have had the Productivity Commission review of superannuation, the banking Royal Commission which included scrutiny of super funds, and currently the Retirement Income Review.
The Retirement Income Review will focus on the current state of the system and how it will perform as we live longer. It will also consider incentives for people to self-fund their retirement, the role of the three pillars, the sustainability of the system and the level of support given to different groups in society.
The fourth pillar
One issue that the Government has ruled out of the Review is the inclusion of the family home in the Age Pension assets test.
Australia’s retirement income system is built around the assumption that most people enter retirement with a home fully paid for, making it a de facto fourth pillar of our retirement system.
With house prices on the rise again in Sydney and Melbourne and falling levels of home ownership, there are growing calls for more assistance for retirees in the private rental market.
The big picture
Despite the challenge of ensuring a comfortable and dignified retirement for all Australians, it’s worth pausing to reflect on the big picture. The Global Pension Index is a reminder of how far we have come even as we hammer out ways to make our retirement system even better.
If you would like to discuss your retirement income plan, give us a call.
Turn your resolutions into strategies for success
If breaking New Year’s resolutions is as much a tradition as the act of making them, you’re not alone – about one third of New Year’s resolutions don’t even make it past the first month.i So why not try something different this year?
The main reason resolutions fail is because they’re often formed without a strategy. A strategy has clear directions, timelines and consideration of resources needed, which is why they are much more likely to be acted upon.
If you’ve already set resolutions for 2020, it’s time to develop a strategy to achieve them. Equally, if you’ve avoided making resolutions, now is a great time to think about what you want to achieve over the coming months and develop a road map.
Reflect on your goals
Think about what you want to achieve this year. Really want to achieve. Not only does this strengthen your vision, your chance of success becomes much more likely.
Many of us share similar goals. According to the website Envision Experience, the most common self-improvement goals people strive for are to improve their health and fitness, find their life purpose, acquire more skills for success, strengthen relationships, challenge themselves and improve their self-esteem and positivity.ii
While these goals may resonate for you, you need to set goals that are meaningful to you, not simply reflect what others want to change in their lives. Simply writing down “earn more money” or “lose weight” will make your goals more like resolutions, grandiose statements that have little direction and no intent. How will you see your goals through or even attempt to be accountable when you haven’t created a finish line?
Think of the ‘why’
Before creating your plan, think about why you want to achieve these goals. Your why will be the reason you get up early in the morning for the gym, or the late nights you’ll spend studying. It is the core motivation that will you to keep focused while working towards your goals.
Creating your strategy
Once you have a clear idea of what you’d like to achieve and more importantly why, it’s time to develop your strategy to succeed. Start by transforming your new year’s goals into SMART goals – Specific, Measurable, Assignable, Realistic and Time-related. SMART goals were introduced in 1981 via a paper by George T. Doran in the Management Review journal and they have become a popular approach to goal setting, be it small or life changing.iii
The SMART criteria will help you define and strengthen your goals and form a framework for your strategy, recognising the resources you need and any potential challenges.
Say for instance you want to improve your fitness. By thinking ‘Specifically’, you narrow down the focus to committing to a running routine. To make the goal ‘Measurable’, you decide you want to be able to run 5km by mid-year. The person ‘Assignable’ is you. By being ‘Realistic’, you plan for what results can be realistically achieved – for instance, using the Couch to 5k app three times a week to build up your cardiovascular endurance. The ‘Time’-related aspect of the goal is the date you have set yourself to achieve this (in this example, mid-year).
Once you’re off and running, don’t forget to set aside time to check in, to review your progress and reassess your initial strategy, so that you continue working towards success.
Managing multiple goals
As with resolutions, we can overextend ourselves with our goals. This doesn’t mean you have to pick just one goal, but be realistic about how many you can manage. Someone who knows all about goals is Warren Buffett, who recommends writing a list of goals and narrowing it down to five.iv His theory is that all other goals are in fact distractions that will prevent you from achieving what matters to you most.
If you’re striving towards more than one goal, it’s a good idea to stagger them. You don’t want to plan to train for a marathon, take on that big project at work and agree to volunteer for an event only to create competing pressures on your resources and time required to achieve them. Consider how your goals fit together or if they take time away from the other, and plan accordingly.
All strategies benefit from having a mentor or a coach to keep you focussed and accountable to the goals you have set for yourself. We can work with you to help you achieve your version of success this year with a clear financial plan for your future.
2020 vision for financial fitness
What better year to have your financial health in tip top shape than the one requiring 20/20 vision!
The start of any year is always a good time to assess your financial situation and make sure you are on track to achieving your dreams, but the start of a decade is even more significant.
So where do you start?
Firstly, look at your current position. After all, if you don’t know where you are, how can you know what you need to do to achieve your financial goals?
Assess your income and outgoings and see how you can create a budget, to increase your savings and reduce your debt.
Don’t be afraid to haggle
It’s not just about cutting back on spending. You can also make savings without feeling any pain. For instance, instead of foregoing small pleasures, instead look at negotiating a better deal on your household bills.
So shop around for a better priced insurance policy; check your current internet provider’s offering; and seek a cheaper deal with your electricity and gas provider or on your mortgage.
Has your variable home loan come down in line with the general fall in interest rates and others on the market? See if your bank can match that better rate. If not, you may wish to consider changing lenders but make sure the costs of switching don’t negate the benefits.
Boost your super
On the other side of the ledger, you should also consider strategies to help build your wealth. For example, why not put a little extra into your super for your retirement? You can make concessional contributions of up to $25,000 a year. If your employer’s compulsory Superannuation Guarantee contributions fall below this level, consider salary sacrificing or making a personal deductible contribution to top up your super balance. Concessional contributions only attract 15 per cent tax on your pre-tax income versus your personal tax rate. That means you keep $85 of every $100 invested.
If you didn’t reach your concessional contributions cap last year, and your super balance was less than $500,000 at 30 June 2019, you can contribute that shortfall this year or carry it forward for up to five subsequent years.i
And if you are aged 65 to 74 and no longer working full time, you may still be able to make a voluntary contribution to super this year, provided you pass the work test. You need to have worked at least 40 hours over 30 consecutive days in the year you make the contribution.ii An exemption may apply for 12 months if you satisfied the work test in the previous financial year and your super balance is less than $300,000.
Revise your investments
On the subject of super, why not take a look at your investment mix. Make sure it’s working for you in the current interest rate and investment environment while still meeting your risk profile.
And most importantly, consolidate your super. While some people have more than one fund to access better insurance or other benefits, for others, having multiple accounts means you could be paying extra fees without any added benefits. You might find this has been done for you, as since July 2019 the Australian Taxation Office has acquired inactive low balance super accounts with the intention of consolidating them into another existing account. But this only occurs if the balance is less than $6000.iii
You might also look at other avenues to save money. Perhaps consider depositing a percentage of your salary into a savings account to provide a buffer should some emergency occur.
Protect your family
The start of a new year is also a good time to check your Will is in order. Have your circumstances changed in the last 12 months? If so, you really need to update your Will to reflect your new lifestyle.
The new year, whether financial or calendar, always offers a good opportunity to assess where you are in building your financial wealth and making sure you are financially fit.
Why not call us to discuss how you can make the 2020s a decade with a perfect vision.
Falconer Advisers Pty Ltd ABN 48 068 857 741, trading as Falconer Advisers, is a Corporate Authorised Representative of Hillross Financial Services Limited ABN 77 003 323 055, AFSL No. 232705. General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.