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Archives for November 2021

Considerations when planning your retirement

Considerations when planning your retirement

Retirement is something that most people look forward to but not everyone plans and prepares for. Often it is not good enough to be emotionally ready to retire but it is crucial to ensure that you are financially ready too. Before you walk away from a career that you have been immersed in for years and run off into the sunset, it is important to consider your goals and objectives.

  • Do you still enjoy work and how much longer can you go on for?
  • Do your retirement goals fall in line with your partner?
  • How is your physical and mental health?
  • Do you have a healthy financial situation (dependants and debts)?

If you can tick all these boxes then you should be ready to plan for retirement. Key areas to consider include;

  1. How much money will you need? If you run a household budget, consider how that is likely to change when you retire.
  2. What lifestyle aspirations do you have for retirement? You may wish to partake in international holidays once each year or caravan around Australia. Factoring in your lifestyle goals will help answer the question of whether you have enough.
  3. What legacy aspirations do you have? Some may be comfortable for the kids to receive whatever is left, others may have a preference of leaving something behind as part of their legacy or even providing assistance in the near future.

The Australian Financial Security Authority (AFSA) has deemed the following incomes as adequate for a ‘comfortable’ or a ‘modest’ lifestyle in retirement.

AFSA's retirment statistics

As part of your retirement plan, it is also important to be mindful of common risks as you approach or enter retirement.

  • Sequencing risk – this is the risk of the market facing a severe and unexpected downturn just before you retire. As a pre-retiree, you may not have the time horizon to wait out a recovery. An example would be a retirement nest egg of $1,000,000 falling to $750,000 just as you are about to retire. At a drawdown of 5%, this is a reduction of annual income from $50,000 pa to $37,500 pa and a big hit to anyone’s retirement.
  • Lower than expected returns – retirement portfolios are not designed to shoot the lights out but to generate a sustainable level of return with a focus on capital preservation. However, if returns do not stack up for whatever reason, it will lead to a rapid deterioration of your capital and your retirement savings may not last as long as you designed them to.
  • Longevity risk – this is the risk of retirees living beyond their retirement savings. With improved health care and higher standards of living, life expectancy is higher than ever. Hence, with all else equal, you are more likely to outlive your retirement savings.

If you wish to seek assistance on your retirement plan, please reach out to one of our friendly financial advisers.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Person completing their taxes

Who is the typical Australian taxpayer?

Remember the heady days of 2019? They were pre-COVID with fewer restrictions on our movement and a greater ability to get together.

Reminiscing about those pre-COVID days took me back to a large group dinner at a restaurant in which 100 people came together to celebrate. It was a day of freedom, fun and frivolity. The drinks flowed, whether one drank water or wine, the food was plentiful, the jokes – some a little risqué, some corny – added to the convivial atmosphere.  Then came the bill, with a side order of complication.  While some had lived large, others had supped on salad. This large group, in various states of sobriety, needed to decide how to split the bill. The fair thing might be for each to pay for their own consumption but even that was complicated. Some couldn’t really afford to pay.

Now, you may wonder why people came to dinner if they couldn’t afford to pay but what if the restaurant was Scotty’s Famous Restaurant (aka our Federal Government) and the diners were taxpayers paying for government services via taxation. How does Scotty do it?

Each year, the ATO distils tax information from 14.7 million people into a profile of 100 Australian taxpayers.  It’s a nice way of making information more digestible by converting a percentage to real numbers.

So, let’s take a closer look at the merry 100 diners in Scotty’s Famous Restaurant. But, before we do, as with pre-COVID days, the numbers are from 2018/2019 because:

(a)  We can’t have 100 diners together in a restaurant anymore (at least, not in Victoria) and some state borders remain closed.

(b)  The bill is paid after the meal or, to put in in tax terms, we pay tax after the end of the financial year; and

(c)  Some people reach for their wallets a little slower than others, submitting their tax returns late.

As you can see from the illustration below, Scotty’s Famous Restaurant has drawn people from all over Australia.

Breakdown of 100 Australian Taxpayers

The split of diners is fairly representative of the population split in Australia.

But, the number of diners at the table only represents bums on seats. It doesn’t tell us what each has paid or consumed. Some will pay more than others and Scotty’s Famous Restaurant isn’t just famous for its food. It’s famous for its payment method. High income earners pay more than low or no income earners. Why? Because our tax system is predicated on the same principle as our health system, the healthy subsidise the sick, and the high income earners subsidise the lower income earners.

So, how did our diners pay? Nine people paid 48% of the bill while 25 paid no tax.  Some felt that was unfair until the discussion at the table turned to the broader contribution each diner makes to society. Why should a nurse, a teacher, an ambulance driver or a police officer earn less than an engineer, architect or top footy player? 25 of our diners were happy to be earning income while out dining, ten of these operate a business in their own name, while the remaining 15 earn rental income (only 6 enjoy a rental profit).

Scotty knows that paying the bill can spoil a good dinner so he plans in advance and asks for money upfront. Eighty of our diners paid too much and received refunds, while 13 people didn’t pay enough and, not willing to do the dishes, they had to pay more. The remaining seven of our diners, we can call them Goldilocks, paid exactly the right amount.

So, who paid what exactly?  Nine of our diners paid 48% of the bill. Yes, that’s right. Ending the restaurant parable for a moment and returning to real life, 48% of income tax is paid by 9% of taxpayers. The next 31% of taxpayers paid 40% of all net tax while 25% of 14.7 million taxpayers paid no net tax.

We hope you enjoyed this visit to Scotty’s Famous Restaurant. While the restaurant itself is a fantasy, the numbers are a reality and perhaps remind us of the contributions we make, whether monetary or otherwise, are also investments both for our own future and the future strength of Scotty’s Famous Restaurant, aka the great fertile food and cultural bowl we know as Australia.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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Man holding first home keys

Thinking about buying your first home?

Buying your first home is a dream many Australians think is out of reach and saving for a deposit in an increasing property market only deflates one’s saving momentum.

The bank of mum and dad or an unexpected inheritance from that great aunt can assist, however, it is not often a bankable deposit.

The federal government has a saving scheme that helps first homebuyers make every dollar saved work that little bit harder.

I guarantee that many of you reading this have never heard of the First Home Super Saver Scheme.

So why are so few Australians saving for their first home through the First Home Super Saver Scheme? It is complicated, let me explain.

What is the First Home Super Saver Scheme (FHSSS)?

It is an interesting savings option that allows savings to be deposited and withdrawn from your superannuation account.

The deposit earns a set rate of return of 3% above the 90-day Bank Bill rate (0.12% p.a. as of 29/10/2021).

Investment earnings are taxed internally within superannuation at a maximum of 15%.

The voluntary super contributions that can be made are:

What are the FHSSS contribution limits?

  • Annual limit – $15,000 of voluntary contributions
  • Total limit – $30,000 on all voluntary contributions (may increase to $50,000 once legislated).

What are the eligibility requirements?

The applicant must:

  • be over 18 at the time the determination is requested
  • have no previous FHSSS release authority
  • have never previously owned an interest in Australian real property (with some exceptions involving financial hardship provisions)
  • occupy or intend to occupy the property as soon as practicable
  • intend to occupy the property for at least 6 of the first 12 months that it is practicable to occupy the property.

The property must:

  • be located in Australia
  • a real property
  • capable of being occupied as a residence
  • not a mobile home or houseboat.

What is the maximum release amount?

To sum it up, the FHSSS maximum release amount is:

  • the total eligible contributions subject to the above limits, plus
  • proportioned earnings (the set rate of return) on the voluntary contributions, less
  • any applicable contributions tax.

To release the savings from super you need to apply to The Australian Tax Office (ATO) who will calculate the maximum amount that can be withdrawn upon a determination request.

A valid request must be made to the ATO within 14 days of entering a contract. If a release request is made first, you have 12 months to purchase a home and sign a contract. You must notify the ATO within 28 days of signing the contract.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

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