Autumn 2020

Autumn 2020

After an unprecedented summer of bushfires, we hope that Autumn brings cooler temperatures and soaking rain for all those who have been affected.

Data released in February give an early indication of how the Australian economy has been impacted by the bushfires and coronavirus, on top of the US-China trade war. The Reserve Bank of Australia lowered its near-term growth forecast for the year to June 2020 from 2.5% to 2.0%. New business investment fell 2.8% in the December quarter and 5.8% over 2019. Retail sales rose 0.5% in the normally super busy December quarter but were up just 0.3% over 2019, the slowest year on record. New vehicle sales were also sluggish, down 8.2% last year while the value of construction work done fell 7.4%. Consumers have perked up a bit since then, with the Westpac/Melbourne Institute consumer sentiment index up 2.3% in February.

Australian, US and European share markets all fell by more than 8% in February. Commodity prices also fell, although gold was up more than 5% due to its safe haven status. And the Aussie dollar dipped below US$66c, its lowest level since 2009.

Despite the economic challenges, the Australian corporate sector remains in good health. As the interim profit reporting season comes to an end, more than 90% of companies reported a first half profit (although a bare majority lifted profits), while record numbers issued dividends.

The low dollar, a rise in unemployment to 5.2% in January, annual wage growth stuck at 2.2% in the December quarter and sluggish economic growth make another cut in official interest rates more likely.

Hold on... bumpy markets ahead

Hold on… bumpy markets ahead

After period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19).

At times like these, it’s good to get some perspective.

Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years.i After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely.

The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.

Avoid knee-jerk reactions

At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a ‘safer’, more conservative option in your superannuation fund.

While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.

It’s near impossible to time the markets. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines during as the market recovers. As history tells us it always does.

In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to avoid emotionally driven reactions and focus on your investment horizon.

Have a plan

Investing is a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to be distracted by the latest market worries and short-term price fluctuations.

Think about your personal and financial goals and what you want to achieve in 1,5,10, 20 years’ time. Be specific, put a dollar figure on your goals and plan how to reach them.

Low risk comes with lower returns

Many people are wary of investing in shares because of the perceived risks. Growth assets such as shares and property do entail higher risk than cash in the bank, but they also deliver higher returns in the long run.

Perhaps the biggest risk of all is not earning the returns you need to achieve your goals. While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.

Spread your risk

Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.

A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t sink your ship.

The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance. You will need cash for emergencies and short-term goals, with enough money in growth assets to last you through your retirement.

Let your savings grow

The effect of compound interest is often referred to as magic, but there’s no trickery involved. Better still, it requires no work on your part, just the willpower to reinvest the income you earn on your investments, so you earn interest on your interest.

Rather than sell shares in quality companies in a panic, you could continue to collect your share dividends and reinvest them in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.

That’s the simple but powerful concept behind superannuation which locks away your savings and all investment earnings until you retire.

When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss your overall investment strategy, don’t hesitate to get in touch.

i https://www.chantwest.com.au/resources/2019-a-standout-year-for-super-funds

Women and money: Seize the day!

Women and money: Seize the day!

As the world celebrates International Women’s Day and all that women have achieved, it’s a good opportunity to take stock. Women have undoubtedly come a long way in terms of workplace participation, equal pay and financial independence, but there is still some way to go.

These days, women make up almost half the workforce although 43 per cent work part-time. Women also make up over half of university enrolments (58.4%), but on graduation they earn $5,000 less than similarly qualified men.i

By the time retirement comes around, women face a triple whammy. Not only are women likely to earn less than men and take time out of the workforce to care for children, they can also expect to live longer than men, so their retirement savings need to stretch further.

Watch the gap

The upshot is that women currently retire with an average superannuation balance of $213,140, compared with $292,000 for men. One in four women retire with no super at all and more than 80 per cent retire with inadequate savings to fund a comfortable lifestyle. ii

According to the Association of Superannuation Funds of Australia (ASFA), single retirees need an annual income of $43,787 to live comfortably, while couples need $61,786. This is considerably more than the Age Pension, which currently pays around $24,000 a year for singles and $36,000 for couples.

So how can women close the gap?

Practice money mindfulness

The single most important thing women, or men for that matter, can do to improve their financial wellbeing is to pay attention. Look online or for books about personal finance, investing and super. Also understand what your employer should be contributing to your super and how your money is invested.

People who have limited experience with investing often feel too embarrassed to ask questions, but there is no such thing as a stupid question. So talk to us about strategies such as the following to help you get ahead.

Start building your nest egg early

Even small amounts saved early in your working life can make a big difference in the long run, thanks to the magic of compound interest. When your budget allows or you receive a windfall, put some savings to work in super.

This is even more important if you are planning to take time out of the workforce to have children, study or travel. While you are working full time and have disposable income, consider making voluntary tax-deductible contributions up to $25,000 a year (including your employer’s Super Guarantee payments). You can also make after-tax contributions of up to $100,000 a year.

Individuals returning to the workforce after a break may also be able to make catch-up super contributions. If eligible, you could carry forward unused amounts of your annual $25,000 tax-deductible limit for up to five years.

A sacrifice that pays

If your salary and financial goals permit, you could talk to your employer about directing some of your pre-tax salary into super. These ‘salary sacrifice’ contributions are taxed at the concessional superannuation rate of 15 per cent instead of your marginal tax rate (30 per cent if you earn more than $250,000). Earnings on your savings inside super are taxed at 15 per cent, but remember to keep an eye on your $25,000 contribution cap which includes your employer’s Super Guarantee payments.

Work as a team

If you are on a low income or not working, perhaps your partner could give your super a boost. If your income is $37,000 or less, your other half may be eligible to contribute up to $3,000 to your super and receive an 18 per cent tax offset of up to $540. The offset gradually reduces and phases out completely once your income reaches $40,000.iii

Choose your super with care

It’s generally preferable to have just one super fund because multiple accounts can be difficult to keep track of and cost you unnecessary fees. So consider consolidating your super accounts after researching the market to see which fund, and which investment mix, best suits your needs.

There’s no doubt that women have some extra challenges when it comes to building retirement savings. If you would like to discuss ways to create a financially secure future, don’t hesitate to call.

i Women in super, https://www.womeninsuper.com.au/content/the-facts-about-women-and-super/gjumzs

ii ASFA, http://www.superguru.com.au/about-super/women-and-super

iii http://www.superguru.com.au/grow-your-super/contributions/spousal-contributions

Hatching your nest egg early

Hatching your nest egg early

The summer bushfires have touched the lives of all Australians. For individuals who lost homes, businesses or livelihoods, the financial hardship lingers, prompting many to ask whether they can dip into their super to tide them over.

The short answer is generally no. According to the Australian Taxation Office (ATO), there are very limited circumstances where you can access your super early, mostly related to specific medical conditions or severe financial hardship.

Before we discuss these special circumstances, let’s look at when you can legally access your super under normal conditions.

Accessing super before age 60

Under superannuation law, there are strict rules around when you can start withdrawing your super.

The first hurdle is reaching what is referred to as your preservation age. Once you reach your preservation age – between age 55 and 60 depending on the year you were born – and retire, you can access your super in a lump sum or as a pension. But as a disincentive to early retirement, there may be tax to pay.

Even if you keep working, once you reach preservation age you can access a portion of your super by starting a transition to retirement pension. This can be an effective way to scale back your working hours while supplementing your reduced wages with income from super.

However, you can only access 10 per cent of your pension account each year. You pay tax on the taxable portion of pension income at your marginal rate less a 15 per cent offset. Earnings on assets supporting your pension are taxed at the normal super rate of 15 per cent.

Accessing super from age 60

From age 60, you can access your super tax free provided you are no longer working. And once you turn 65 you can access your super tax free even if you haven’t retired.

Anyone who has suffered financial hardship as a result of the bushfires and has already reached their preservation age could dip into their super under the normal rules, provided they retire or start a transition to retirement pension.

But what about people who don’t qualify under the normal rules? That’s where the early access rules governing severe financial hardship or compassionate grounds come in.

Severe financial hardship

There’s no question the recent bushfires have caused severe financial hardship for many people in the community. But for superannuation purposes, the definition of hardship will mean few people can use it to gain early access to their super.

You can gain access to at least part of your super as a lump sum if:

  • You have been receiving certain government income support payments continuously for at least 26 weeks, and
  • You are unable to meet your reasonable and immediate family living expenses.

Even then, you can only receive a maximum payment of $10,000 a year before tax.

If you have reached your preservation age plus 39 weeks, you may be able to access your entire super balance as a lump sum or pension (as opposed to 10 per cent of your balance each year with a transition to retirement pension) if:

  • You are employed for less than 10 hours a week, and
  • You have received government income support payments for at least 39 weeks since reaching preservation age.

Access on compassionate grounds

You may be able to take some money out of super early on compassionate grounds but, once again, strict rules apply. The money can only be taken as a lump sum and used to cover unpaid expenses including:

  • Medical treatment or transport for you or one of your dependents, but only for a chronic or life-threatening illness not available through the public health system,
  • Modifications to your home or vehicle to accommodate a severe disability,
  • To prevent foreclosure on your mortgage if your lender threatens to repossess or sell your home.

Unfortunately, the rules governing early access make it extremely difficult to qualify. That’s because super is meant to be used for the sole purpose of providing retirement income.

If you would like to discuss when and how you can access your super, under the normal rules or due to special circumstances, please give us a call.

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.

Falconer Advisers Newsletter January 2020

Falconer Advisers Newsletter January 2020

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

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.

i https://info.mercer.com/rs/521-DEV-513/images/MMGPI%202019%20Full%20Report.pdf

ii https://www.theaustralian.com.au/commentary/our-retirement-system-is-far-from-perfect-but-its-still-better-than-most/news-story/d3db43e68b3b93d8c6d6e8a8c17a491d?btr=4ff6fe5e96c92f060a779127475fa258

iii https://guides.dss.gov.au/guide-social-security-law/4/2/3

Turn your resolutions into strategies for success

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.

i https://philadelphia.cbslocal.com/2016/02/09/new-study-reveals-how-long-new-years-resolutions-usually-last/

ii https://www.envisionexperience.com/blog/the-6-most-common-self-improvement-goals-and-how-to-achieve-them

iii https://www.projectsmart.co.uk/brief-history-of-smart-goals.php

iv https://www.cnbc.com/2017/06/23/berkshire-hathaways-warren-buffett-shares-his-top-rule-for-success.html

2020 vision for financial fitness

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.

i https://www.ato.gov.au/Rates/Key-superannuation-rates-and-thresholds/?page=3

ii https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Super-contributions—too-much-can-mean-extra-tax/?page=3

iii https://www.ato.gov.au/Individuals/Super/Growing-your-super/Keeping-track-of-your-super/

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.