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Sacrifice your mortgage to build wealth

All / 08.04.2021

Sacrifice your mortgage to build wealth

Back in the days of “normal” interest rates the simple answer to the question “what do I do with any surplus savings?” was “pay off debt”. That’s still a sound strategy for anyone paying high rates of interest on credit cards or personal loans.

But if your only debt is your mortgage, and if mortgage interest rates are at the lowest they’ve ever been, does paying it off more quickly provide a good bang for your buck? And if not, what are the alternatives?

Taking down the mortgage

Trish is a 55-year-old senior manager and following a pay rise she estimates that she will be able to commit $1,000 per month of her pre-tax income to building her wealth. She has a mortgage on her home that has 15 years to run. With an outstanding balance of $220,000, an interest rate of 2.25% p.a. and monthly payments of $1,441, Trish examines the outcome of following the traditional advice of adding her new savings capacity to her monthly home loan repayments.

But how much can she really save? Her marginal tax rate is 39%, including Medicare levy, so after the tax office takes its bit Trish is left with just $610 per month to add to her current mortgage repayments. Even so that’s enough to see her home loan paid off in 10 years, allowing her to retire debt-free at her preferred retirement age of 65. Knocking five years off her loan will save her a lot of interest, but is there a better alternative?

A super idea

Trish examines the option of letting the home loan take care of itself for a while and to exploit some of the wealth creation opportunities offered by superannuation.

Under a salary sacrifice arrangement Trish could contribute $1,000 of her pre-tax income to her super fund. The tax office will still take its cut, but at just 15% Trish will be left with $850 per month to actually invest. That’s a handy boost right there.

Then there’s the investment return. Paying down her mortgage provides Trish with an effective investment return on her after-tax savings of 2.25% p.a. With ten years to go until her preferred retirement date it’s appropriate for Trish to invest her super in a balanced or balanced-growth portfolio with good expectations of significantly higher returns. So let’s see how things turn out if Trish’s super fund achieves a net return of 6% p.a. after fees and tax.

First, the mortgage: after ticking along with minimum payments of principal and interest for ten years it still has an outstanding balance of $81,712 – hardly the debt-free status that Trish was aiming for. But what about the super savings strategy? Due to the combination of tax advantages, higher returns and the power of compounding interest, Trish’s super fund is worth $139,297 more than it would have been if she had opted for the pay down debt strategy. After withdrawing $81,712 tax free from the fund and paying out her mortgage, Trish is $57,585 better off under the super strategy.

Balancing risk

While delivering lower returns during times of low interest rates, paying down debt does provide an effectively risk free return equivalent to the interest rate. Trish’s super strategy comes with a higher level of pure investment risk, and it is important that she is comfortable with the ups and downs that balanced and growth funds are likely to experience.

It’s also important to recognise that our situations are all unique. The same strategy won’t suit everyone, so talk to your financial planner about designing a savings strategy that’s right for you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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How to make your term deposits work harder

All / 01.04.2021

How to make your term deposits work harder

In 2011, the average term deposit could earn you around 6% per annum. Since then, the times, they have a-changed – and so have the returns on term deposits.

Despite average one-year term deposit rates paying around 0.9%, they still take an important role in most financial portfolios for the capital security and diversification components they offer.

The Reserve Bank of Australia (RBA) sets the cash rate via its monetary policy. The aim is to stimulate the economy by making savings accounts and term deposits unattractive and make borrowing cheap to encourage consumers to spend.

Generally this kind of monetary policy only lasts a couple of years which is why so few economists foresaw the protracted period of low rates we are experiencing.

Term deposits pay slightly higher rates depending on the length of the term. For example, investment over one year may attract 0.9%, while over three years the same investment may attract up to 1.3%.

Bonus saver accounts offer investors more attractive rates but you must read the fine print or better still, seek independent professional advice before committing. You could find that the ‘bonus’ may only apply for a short introductory period then revert to the standard cash rate, potentially lower than term deposit rates.

In other cases, bonus rates are only paid if a regular monthly contribution is made to that savings account.

Many people find these features work in their favour, but there can be traps for the unwary.

So if you’ve done your homework, and term deposits remain the most appropriate fixed interest investment for you, there are a few things you can do to maximise their potential.

Loyalty may get you nowhere

We Australians are a loyal bunch usually letting our insurance policies automatically renew each year – same with term deposits. Each time yours approaches maturity, shop around and see what other term deposits are available that will work better for you.

Eggs and baskets

Consider spreading your allocated funds across a variety of institutions with a staggered range of maturity dates. This might enable you to take advantage of better rates as your investments mature.

Interest payments

Many term deposits offer the earnings as a regular income, sometimes resulting in a lower interest rate. Consider reinvesting the interest for a higher rate, or, if you need some income, set up separate term deposits.

Set and forget

Term deposits are not everyday transaction accounts. While it’s possible to access money before the end of the term, it’s not advisable as heavy penalties apply, including fees and reduced interest rates. As with any financial decision, it’s important to seek advice from a licensed adviser to ensure you’re getting the best product and the best deal for you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Low income earners: Six super hacks to retire richer

All / 25.03.2021

Low income earners: Six super hacks to retire richer

While it’s easy to be discouraged by superannuation and fear you will never have enough money saved to stop working, remember even a modest superannuation balance can make a big difference in retirement.

For every $100,000 saved in superannuation, you can expect these funds to generate a return of 6%, or $6,000, a year. When this is paid out as a pension, it equates to $500 a month tax-free. Of course, this is doubled if both you and your partner have $100,000 each in super. Depending on your overall financial situation, this can be paid in addition to you receiving a full age pension.

Here are six super hacks to help you maximise your super balance:

Hack 1. Consolidate your accounts

Consolidate all your superannuation accounts into one account best suited to your needs. The Australian Tax Office says some 6 million Australians have multiple super accounts, wasting millions of dollars in duplicated charges.

These unnecessary fees will needlessly erode your super balance. Consolidating multiple accounts is easy. Simply log on to the ATO’s website and with one click, choose one account to accept all your funds. This alone could save you thousands of dollars.

Hack 2. Review your super contributions.

Check your employer is contributing the right amount to superannuation from your wages each week. If you believe there is a shortfall, contact the ATO to investigate on your behalf.

Hack 3. Take advantage of co-contributions

If you earn less than $52,697 a year, consider making additional after-tax super contributions to take advantage of a matching contribution from the government, called a co-contribution. Under this scheme, you can contribute up to $1,000 of after-tax money and receive a maximum co-contribution of $500. This is a 50 % return on your investment.

The government will determine how much you are entitled to when you lodge your tax return, and if you are eligible, the government will then pay the co-contribution directly to your fund. You don’t need to do anything more than make the original contribution from after-tax savings.

Hack 4. Benefit from spouse contributions

Review whether you can benefit from making additional contributions to your partner’s super. If you do make contributions to your partner’s super and they are on a low income or not working, you may be able to claim a tax offset of up to $540 a year.

Hack 5. Contribute any long-term savings to super

There are rules concerning how much you can contribute to super, and when, but any savings put into superannuation will be held within a tax benign environment.

While your fund is in accumulation mode, these assets’ income and capital growth are taxed at 15%, rather than your marginal tax rate. Once you start receiving an income stream, these assets are held within a tax-free environment, making your superannuation your own personal tax haven.

And, if you are thinking of selling your family home to downsize to a smaller property, you can take advantage of the downsizer contribution rules, enabling you and your partner to contribute up to $300,000 each to superannuation. This one step can make a significant boost to your superannuation balance just when you need it, as you enter retirement.

Hack 6. Seek professional guidance

Of course, there are a raft of rules around superannuation that you must be aware of. To maximise your retirement nest egg, be sure to seek expert advice from a financial adviser or qualified accountant.

While it is never too early to start making additional contributions to super, it is also never too late. Even small steps towards the end of your working life can and will make a difference to the way you live in retirement.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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When an SMSF may be the wrong idea

All / 18.03.2021

When an SMSF may be the wrong idea

Since the Australian Government introduced compulsory employer contributions to people’s superannuation funds in 1992, Australia’s funds invested in super have grown to $3 trillion. In this time, self-managed super funds (SMSFs) have grown in popularity too. There are currently just over 1.1 million members with $733 billion in SMSFs across Australia.

SMSFs can have between one and four members. While not yet legislated, the government has proposed allowing up to six members in an SMSF. Most SMSFs in Australia have two members (70%), with most other SMSFs having a single member (23%). According to the ATO, the average value of assets in people’s SMSFs is $662,000. The general recommendation is to have a minimum balance of $200,000 in your SMSF. While it can be tempting to see the potential of being in complete control over your super balance, it may not always be a good idea to set up an SMSF.

Why set up an SMSF?

Many people opt to set up an SMSF to have more flexibility in where they invest their money. Along with more investment options such as residential property and rare asset classes such as art, valuable collectables and physical gold, your SMSF income is taxed at a lower rate of 15%. Compared to the marginal income tax rate for average and high-income earners (usually between 30% to 45%), establishing an SMSF can be an attractive option. However, as with any other type of investing, there are potential downsides and SMSFs can carry significant risks and costs.

What are the risks associated with having an SMSF?

There are several risks associated with having an SMSF. To establish an SMSF, you are legally required to have an investment strategy. When you have an SMSF, you also need to ensure you get tailored advice from your financial adviser to mitigate the risk of making poor investment and financial decisions. Many SMSFs also choose to invest in one asset, such as residential property. This leaves your super balance overexposed to risk, compared to if you had a balanced portfolio in a super fund.

Unlike a traditional super fund, an SMSF has time-consuming administrative tasks and costs. Some of the costs you may incur when you have an SMSF include annual compliance, audit and management costs, investment fees, brokerage fees, wholesale managed fund fees and advisory fees charged by your accountant and financial adviser. If you have an SMSF, it’s important that these fees don’t equate to more than 2% of your super balance. On a balance of $200,000 in an SMSF, the fees would ideally need to be below $4,000 per year.

When you have an SMSF, you are in complete control of your investing, which means you are also solely responsible for keeping up to date with your compliance requirements. The legislation around SMSFs is constantly changing. If you don’t have a genuine interest in continually staying updated on these changes, or the fees to seek regular advice are going to push your annual costs over 2% of your balance, you need to rethink whether an SMSF is the right option for you.

To summarise

While establishing an SMSF can offer you flexibility in how you manage your retirement funds, there’s a raft of risks and costs associated with having an SMSF. Further, an SMSF can be a lot of work, so it may not be the right option for you if you’re unsure whether you want to commit to the ongoing financial, legal and administrative requirements associated with having an SMSF.

If you’re considering establishing an SMSF or deciding whether an SMSF is suitable for you, make sure you get a second opinion from a qualified financial adviser.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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The fast way to a life supported by passive income

All / 11.03.2021

The fast way to a life supported by passive income

Imagine that, without any effort on your part, enough money regularly pours into your bank account to meet (or exceed) all your living expenses. Suddenly, work becomes optional and a world of opportunities opens up. That’s the ultimate in passive income – all your financial needs met without lifting a finger.

The fast way to a life supported by passive income is to win the lottery or receive a large inheritance. Invested wisely, large lump sums can generate rental income, interest, share dividends and capital growth, all of which can replace an earned income but without the hard work.

Other forms of passive income include royalties on book sales, licensing fees on patents and, increasingly, income associated with creation of Internet content, such as YouTube videos. However, while these passive income streams may become geese that lay golden eggs, it takes a lot of effort to write a book, develop an invention, or create popular Internet content.

And the unfortunate reality is that we can’t all be lottery winners or best-selling authors, genius inventors or Internet sensations. We can, however, start to build a passive income stream that will grow over time, replacing an increasing proportion of our active income. In fact, if you’re working and receiving employer superannuation contributions, you’re already on the path to generating a passive income. You may just have to wait awhile until you can enjoy it.

With its generous tax breaks superannuation is likely to play a leading role in most passive income strategies. However, with its restrictions on access, if you are some years away from retirement age you may want to pursue a more flexible approach to developing a passive income stream. How? It all begins with a savings plan.

This simply involves making regular contributions to a suitable investment vehicle. To begin with this might be an interest-paying bank account, but as your nest egg grows you can diversify into potentially higher performing investments such as managed funds, direct shares and eventually direct property.

Importantly, by reinvesting the income produced by your savings plan you’ll tap into the power of compound interest. Over the long term, compounding is the powerhouse that will contribute the most to your future passive income stream. As the income produced by your portfolio increases, so do your options. For example, you might want to cut back to working part time.

One other form of passive income worth mentioning is the age pension. If you’re over age pension age it may be a good idea to investigate strategies to maximise your pension entitlement. Just make sure the overall result is positive.

Ready to pursue the potential of passive income? Your financial adviser will be happy to help you take that first step.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

 

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Separation Planning: An adviser’s perspective

All / 04.03.2021

Separation Planning: An adviser’s perspective

Few client meetings have been as challenging. After years of being happily married, Sarah and her husband decided to separate, and the story of her acrimonious divorce was certainly distressing.

It started with a chance meeting, where in passing, Sarah mentioned the divorce. She assured me she’d had enough of advisers for a while and just wanted some time out. I insisted we meet as quickly as possible.

The first step was to sort out her will. Again, Sarah said she never wanted to speak to another solicitor again, but this quickly changed when I explained that if something happened to her today, all her assets would go to her ex-husband.

We also needed to update her superannuation. The binding nomination she had put in place, again leaving everything to her ex, needed to be changed to stop this flow of money, which would otherwise bypass her will and go directly to her husband.

I suggested Sarah think about putting in place a power of attorney so someone could step in and handle her affairs if she could suddenly no longer do this herself as well as think about appointing a medical power of attorney.

She needed to make provisions for her three children. While her ex-husband insisted, he’d continue in their lives, this could easily change in the future, particularly if he were to meet someone new.

Sarah had retained the family home but needed to re-mortgage it to buy out her ex-husband. As a successful professional in her own right, she could afford to do this but only just. A new family budget was needed, and she would have to stick to it, at least for the next few years.

So far, Sarah had been agreeable to my suggestions, but then I turned the conversation to two other key areas. To retain the family home, Sarah had agreed to give part of her superannuation to her ex-husband.

This was a disappointing outcome, and it was too late to mention that as her financial adviser, I should have been involved with these discussions about the settlement before she had agreed to it. But it was too late now to go back.

While the next few years would be tough living on one income, it was important that Sarah focused on her superannuation and did not let it lapse. I urged her to remember that in a few short years, she would be thinking of retirement.

She needed, more than ever, to ensure her superannuation was on track and would be sufficient to provide for her when she stopped working.

Our final conversation was the most difficult, but I thought, the most important. Sarah needed to do a stocktake of the insurances she held on her house, her car and her health, but most importantly, she needed to review her risk insurance.

No, she said. She had never understood risk insurance and particularly now when money was tight, she wanted to let these lapse. She thought she could boost her superannuation savings by stopping the life insurance within it.

I understood Sarah’s concerns, but explained now was when it was most important for her to keep, and probably increase her personal insurance.

We arranged a second meeting, and this gave me time to source the best policies that would provide Sarah with the peace of mind she needed while keeping within her already tight budget.

We agreed to increase her life insurance and total and permanent disability insurance, which were both held within superannuation. We decided if something happened to her, there should be enough money to re-pay the mortgage and support her children, at least until they turned 18.

While it all took time, Sarah left the second meeting happy. She was well prepared to face her new future, and I was pleased she could now take some well-deserved time to herself.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Beat the scammers at their own game

All / 25.02.2021

Beat the scammers at their own game

We’ve all seen media reports about ordinary Australians losing their entire savings after responding to a phone, email or mail offer that was impossible to resist. While some people may be naïve, scammers are also getting smarter.

Financial stings have become a serious threat to Australian consumers and businesses. According to the ACCC’s Scamwatch website, there were 167,796 reports of scam in 2019, for a total loss of more than $140 million!

All shapes and sizes

Identity theft scams involve someone stealing another person’s identity and can do anything with it from cleaning out bank accounts to taking out fake mortgages. But scams can come in many guises, including, but not limited to:

  • Online account and money transfer scams;
  • Health and medical scams;
  • Superannuation scams;
  • Get-rich-quick scams;
  • Lottery and competition scams.

If it sounds too good to be true…

Let’s look at the most damaging of all – investment scams.

Scammers know and use all sorts of tricks to entice the vulnerable but there are steps you can take to protect yourself.

Scammers usually make contact “out of the blue” with a blanket offer and use tactics to pressure you into the deal. These “professionals” try to make their offer look as genuine as possible and most will have any or all of the following features:

  • Quick, high returns and sometimes tax-free;
  • No risk for the investor;
  • Mention well-known companies or people (that are actually not involved);
  • Discounts for “early-bird” investors or special allocations not available through anyone else.

Investment scams can appear very professional on the surface. By the time the victim realises the offer was too good to be true, the scammer has disappeared with their money.

What should you do?

If you receive a call or email always check the validity of the offer and provider, by asking:

  1. What is your name and what company do you represent?
  2. Does your company have an Australian Financial Services licence and what is the licence number?
  3. What is your physical address?

If the caller can’t or won’t provide these details, it will be a scam. If they do answer, take down the details and check the Australian Securities and Investment Commission list on its MoneySmart website (www.moneysmart.gov.au) or the Australian Competition and Consumer Commission (ACCC) ‘Scamwatch’ site (www.scamwatch.gov.au).

Be proactive

Some scams aren’t as obvious so always protect your personal information. Never give out bank details or transfer money to anyone you don’t know or trust.

Always check your statements and report any suspicious transactions to your financial institutions. Make sure your computer and mobile devices are protected with strong passwords, anti-virus software and firewalls.

And beat the scammers at their own game – if you are contacted by one of these fraudsters, immediately report it to the ACCC via www.scamwatch.gov.au or phone 1300 795 995. Hopefully the scammer will end up the victim instead.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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The tips, traps and costs of retirement villages

All / 18.02.2021

The tips, traps and costs of retirement villages

With an aging population, an increasing number of Australians are opting to live in retirement villages. While pitched at the ‘over-55s’, the average age of entry is 75, and average age of residents is 81. Depending on the retirement villages, attractions include having home maintenance issues taken care of, more social contact, access to recreational facilities and on call assistance in case of medical emergency. Moving to a retirement village can also free up capital to support living costs in retirement.

These benefits all come at a cost, of course, and the type and amount of fees can vary enormously from village to village. There are also several different types of ownership or occupation rights or ‘tenure’. Most commonly, residents pay the market price of a unit in exchange for a long-term lease, or pay an upfront fee for a licence to occupy. Straight rental arrangements, often for serviced apartment-style accommodation, are also available in some villages.

Lots of fees

While there are many ways in which retirement villages structure their fees, the most commonly encountered include:

  • Waiting list fees.
  • Ingoing contribution. This may be referred to as a refundable deposit, purchase price or a loan, and will be the largest upfront payment.
  • A regular (e.g. monthly) maintenance fee to cover upkeep of facilities, pay staff and cover a range of services.
  • Personal services fees for things like meals, laundry and personal care.
  • Utilities.
  • Deferred management fee, or departure or exit fee, on leaving the village.
  • A refurbishment fee.
  • Share of any capital gain.

On the other hand, when you leave the village you will receive the proceeds of selling your unit less any exit fees. However, depending on the prevailing market it can be many months before the final payment is received.

Some of these fees can better understood by way of an example.

John and Wendy’s experience

John and Wendy are in their late 70s when they decide to downsize from the family home. They are attracted to the retirement village lifestyle by the recreational facilities and social opportunities, plus the availability of personal care should they require it in the future.

  • They pay $400,000 for the right to occupy a unit. The monthly maintenance fee is $600. Eight years later they both need to move to aged care so need to sell their unit. It is now worth $600,000.
  • Their exit fee (deferred management fee) is 4% of their purchase price for each year of occupancy (capped at 40%). In this case it amounts to 32% of the purchase price, or $128,000.
  • In their village the resident’s share of any capital gains is 50%, so the village operator takes a further $100,000.
  • John and Wendy therefore come away with a total of $372,000 ($600,000 – $128,000 – $100,000).

This is just one simplified example, and even slightly different circumstances can lead to a very different result.

While it may seem a poor result for John and Wendy to pocket less than the purchase price after eight years, the decision to enter a retirement village is more about lifestyle and services rather than just about financial returns.

Centrelink considerations

If your entry contribution is more than the extra allowable amount (the difference between non-home owner and home owner assets test threshold) Centrelink will classify you as a home owner. This applies to most people. Anyone assessed as a non-home owner may be eligible for rent assistance, with the amount based on the ongoing fees.

Major event

Moving house is a major and stressful life event at the best of times. With their varying fees and ownership structures, a move into a retirement village may be even more complicated. That’s no reason to dismiss the idea – many retirement village residents report an increase in their happiness as a result of making the move. However, entering a village has major financial consequences, so talk to your financial advisor about they assistance they may be able to offer you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Retirees cash flow drought

All / 11.02.2021

Retirees cash flow drought

While cuts in interest rates are greeted with glee by homebuyers and other borrowers, for the millions of retirees and others who depend on interest payments for their income, falling interest rates can be a disaster. For them, a drop in interest rates from 4% to 3% equates to a 25% drop in income. If rates fall from 2% to 1%, income falls by a massive 50%. Add in even a modest level of inflation, and many retirees are going backwards financially. And while the RBA has indicated it doesn’t want to go down the strange path of negative interest rates, this has happened in several European countries and Japan. Imagine: depositors pay banks a fee to store their money, and borrowers receive interest payments rather than make them.

The idea behind negative interest rates is to encourage lending for productive purposes, and to head off deflation. If prices of goods start to fall, consumers delay spending in anticipation of lower prices in the future, further weakening economic activity. However, negative interest rates carry the risk that depositors will withdraw cash and hide it under the bed or in safes. Aside from the risks of fire and theft, which could lead to a total loss of funds, withdrawal of cash on a large scale could lead to liquidity issues for the banks and less economic stimulus.

What are the alternatives?

Aside from the term deposits favoured by many retirees, annuities are worth considering. An annuity effectively exchanges an up-front lump sum for regular income payments. They are generally considered to be low risk. However, as an interest-producing investment, returns are low when interest rates are down.

High dividend yielding shares have also been a traditional source of income for retirees, offering not just income but also the prospect of capital growth. However, shares can also fall in value, and the economic uncertainty precipitated by COVID-19 saw many companies cut or cancel their dividends as their profits fell.

Hybrids such as converting shares, preference shares and capital notes have elements of debt and equity investments. Their pricing is usually more stable than ordinary shares, and they pay either a fixed or floating rate of interest, often as a fully-franked dividend, above a particular benchmark, usually the Bank Bill Swap Rate.

For retirees with a less hands-on approach to managing their portfolios, a vast range of managed funds are available that suit all risk tolerance levels, and that can provide regular income.

With interest rates at unprecedented lows, many retirees will have no choice but to dip into their capital to meet their cash flow needs. If the portfolio contains a reasonable allocation to growth assets and depending on market conditions, then capital growth may be sufficient to cover cash withdrawals.

A long-term perspective

In abnormal economic times it’s important to keep some perspective. Economic upheavals are often short term. Retirement, on the other hand, can last for decades.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
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Traps to avoid in retirement – ignoring estate planning

All / 04.02.2021

Traps to avoid in retirement – ignoring estate planning

Don’t have a Will? You’re in good company. Less than half of Australian adults do. Even then, many Wills are out of date or invalid. The upshot is that hard earned wealth may be fought over by family or distributed by government formula, and not end up with the preferred beneficiaries.

It’s also important to remember that Wills are just one component of estate planning, so here’s a quick checklist to help you get your estate planning on the right track.

  • If you don’t have a Will, make one. Consult a specialist estate planning lawyer.
  • If you do have a Will, ensure it is up to date and reflects your current wishes. Is your executor willing to take on the role and likely to outlive you?
  • Have enduring and medical powers of attorney drawn up so someone you trust can act on your behalf and make decisions if you are no longer able to do so.
  • Review your superannuation death benefit nomination. Super death benefits can be directed to your estate and distributed under your Will, or they can be paid directly to nominated beneficiaries.
  • Look into pre-paid funerals or funeral bonds. Aside from relieving your family of one burden at a time of great stress, you may see an increase in your age pension payments.

Depending on business and financial structures, family dynamics, pension rules and legal requirements, estate planning can be complex. Your financial adviser can help you identify the estate planning issues you need to address, and the professionals you may need to consult, to ensure your assets are distributed according to your wishes and to provide the best outcome for your beneficiaries.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.
Read More >>