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Presenting ‘Financial Planning 101’

I’ve been a financial adviser for about twenty years now. I still get a ‘buzz’ out of making a positive difference in people’s lives by helping them achieve what’s important to them. The foundation blocks of my own understanding of financial planning were taught to me by my parents. They didn’t call it financial planning of course. It was just about how they conducted their own lives and the advice they would give to my siblings and I. Advice that was underscored by their own actions. They worked hard, they never spent more than they earned and they invested for the longer term in ‘real assets’ that they understood. Perhaps not all that ‘sexy’, but it worked for them. I assumed all parents were like mine, teaching their kids the basics of financial planning. Of course, many parents were like that. But not all. And if kids weren’t learning it from their parents, they certainly weren’t learning it at school.

Last year I had the opportunity to revisit my old secondary school, Mazenod College in Mulgrave, Melbourne. It had been decades since I was last there and the facilities the current students body enjoys are far and away better than in my day. Instead of a footy field that turned into a quagmire during winter, the boys make use of a ‘synthetic’ footy field. There’s state of the art cooking facilities to rival the MasterChef set to teach the boys how to cook. However, what doesn’t seem to have changed much is the curriculum. Financial planning 101 still doesn’t get taught.

I think this is a material shortcoming in the education we’re providing to our children. We teach them a trade or a professional, but we provide them with virtually no tools to help them manage their own money and achieve financial independence.

So, in the last few months I started doing my little bit to remedy this situation.  I’ve started seeking out opportunities to present my version of ‘Financial Planning 101’ to secondary school students. To date I’ve presented to students at Huntingtower School and St Michael’s Grammar, both in Melbourne. My version of ‘Financial Planning 101’ includes the financial process as we deliver it here at the Investment Collective; a consideration of what really drives residential property prices; basic investment principles, as well as ‘4 easy steps to becoming a millionaire’. This last topic garnered particular attention.

I reckon that if one or two kids comes away with a heightened curiosity and an interest in their own financial planning, I’ve achieved something!  I get a lot of personal satisfaction out of it, and am keen to continue, so if you’d like me to present to your school, please drop me a line at

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The Global Financial Crisis?

Just over 10 years ago we were in the midst of what is now known as the Global Financial Crisis (GFC). I recall at the time a flurry of job losses from the financial services industry, Australian banks and the collapse of the American investment bank Lehman Brothers. Our country just avoided a technical recession but it felt like one for many people.

The GFC referred to a period of severe stress in the global financial markets and banking systems between mid-2007 and early 2009 as the US housing boom ended and defaults increased. Banks’ access to short-term borrowing evaporated and funding account holders withdrawals were problematic.

Why did the US housing boom impact the world economy?  For many years prior to the GFC, house prices in the US grew strongly as banks and other lenders were willing to make highly profitable increasingly large volumes of risky loans to buyers. The loans were risky as the lender did not closely assess the borrower’s ability to make loan repayments. You might recall the nickname NINJA (no income, no job, no assets) loans, symbolising the lack of documentation the banks and other lenders had to provide to secure funding.

Financial innovation allowed banks and other lenders to reduce their lending risk by packaging these risky loans into mortgage-backed securities (MBS) and collateralised debt obligations (CDO). In the US, over $500 billion USD in CDOs were issued in both 2006 and 2007 (source). Credit rating agencies provided these financial products with a high credit rating signalling to investors that they were low risk. The high rating allowed pension funds, governments, US and global banks to invest. Many investors borrowed large sums to purchase high yielding ‘low risk’ MBS and CDOs without understanding the complex and illiquid nature of the underlying investment.

When the US housing boom ended and defaults increased the demand and liquidity for MBS and CDOs evaporated and prices dived. MBS and CDOs could only be sold at a large loss of up to 95 percent (source).

The systematic problems started in the United States and rapidly spread across the globe. Banks and other financial institutions stopped lending as they were unable to easily assess how badly a potential borrower was impacted by the toxic debt. This credit freeze spread globally, many companies were unable to access funds and those that could, found there was a substantial increase in the cost of debt making the venture unprofitable.

In the wake of the turmoil, central banks globally lowered interest rates rapidly (in many cases to near zero) and lent large amounts of money to banks and other financial institutions that could not borrow in financial markets. Central banks also purchased financial securities to support markets.

Governments increased their spending on infrastructure to support employment throughout the economy, Australia handed taxpayers $1,000 relief money and guaranteed deposits and bank bonds. Governments also increased their oversight of financial firms that must assess more closely the risk of the loans.

The severity of the Global Financial Crisis caused a global economic slowdown that led to unprecedented government bailouts and economic stimulus globally. The support from governments and central banks paved the way to an economic recovery.

Please note, this article provides general information and advice only. If you would like tailored financial advice, please contact us today.

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What To Know When You Start Investing

Generally speaking, there are two ways to make more money in life: by working day in, day out, or by letting your money and assets work for you.  Now I can only speak for myself, but letting my assets work for me sounds much better than grinding away at the office for the rest of my life (not that I don’t love my job!).

It may sound like prudent practice, but leaving your entire life savings under a mattress will not give you any return or increase in capital (in fact, after inflation your buying power has actually decreased).  Even leaving your money in a bank account will only generate a minimal return.  On the other hand, investors can earn additional money through dividends and distributions from their investments or by purchasing assets that increase in value.

The purpose of this article is to introduce you to the world of investing and provide clarity on key concepts that we are often asked about by our clients.

When should I start investing?

If we ignore transaction costs and the cyclicality (ups and downs) of markets, the answer to this question would be an easy one: RIGHT NOW! The power of compounding interest means that you are better off investing as soon as possible so your future returns are off a higher base.  This concept is best conveyed in the chart below.  Chart 1 shows that an individual who invests $100,000 today (Blue) for 20 years at an 8% return will earn $96,000 more than an individual that invests the same amount, earning the same return, only 3 years later (Orange).  In the fourth year, Blue would earn 8% on $126,000 ($10,000) whereas Orange would earn 8% on the initial $100,000 ($8,000).  Therefore, it seems the early bird gets the worm after all!

How much should I start investing with?

Unfortunately, for us investors, we do live in a world with transaction costs such as brokerage so it can be unwise to invest small amounts of money where your returns will be “eaten up” by these costs.  A common brokerage fee structure for a number of retail stockbroking firms (including our own) is:

  • $55.00 for trades up to $10,000
  • 55% for trades over $10,000

As an example, if I buy $15,000 worth of shares and sell them a year later for $16,500, I would earn $1,500 in capital gains minus $173 in brokerage (buying and selling) to have a net capital gain of $1,327.   This example shows that a reasonable capital return of 10% has been reduced to 8.8% after fees.  Now, imagine if I only invested $1,000 and sold my shares for $1,100.  My $100 (10%) capital return would reduce by $110, leaving me with a measly -1% return – which isn’t very sexy at all.

So, what does this all mean? If you are an individual that wishes to purchase some Australian shares, I would recommend building up cash to a level that minimises the ratio between brokerage/investment.  If you are interested in creating a portfolio with a number of assets, I would recommend coming into one of our offices for a consultation (if you are good at something, you don’t do it for free).

How much risk should I take?

This is an extremely important question and one that can be the difference between living comfortably in retirement or couch surfing at your grandkid’s place.  The amount of risk you take on is also dependent on your investment goals.  For example, an 85 year old trying to provide for their retirement would have a much more conservative approach to investing than a 28 year old who is trying to build wealth to purchase their first home.

In addition to understanding your goals, at our firm, and in the advising community as a whole, we require our clients to complete a risk profile questionnaire, which provides a clearer picture of exactly how to risk averse they are.  The results of this questionnaire then distinguishes which risk profile our clients fall into and how their money should be invested.  The financial advisory industry uses five risk profiles:

  1. Conservative
  2. Moderately conservative
  3. Balanced
  4. Growth
  5. High growth

What should I invest in?

The answer to this question is a direct result of what risk profile you are aligned with.  There are five main asset classes that we invest in at our firm.  They are, in ascending order of riskiness:

  • Cash
  • Fixed interest: corporate, government or semi-government debt
  • Property and infrastructure: shares or holdings in property and infrastructure assets
  • Australian shares: shares listed on the ASX
  • International shares: shares listed on foreign stock exchanges

The proportion of your wealth that you should invest in each asset class is dependent on your risk profile.  For example, a balanced portfolio at our firm invests 5% in cash, 35% in fixed interest, 20% property, 30% Australian shares and 10% international shares.  The holdings in cash and fixed interest will ensure that 40% of your portfolio is invested in assets that will preserve your capital while paying some income.  The 20% of property holdings provides investors with the potential for capital gains while maintaining some level of capital preservation and income.  The 40% held in Australian and international shares provides exposure to riskier assets that can provide greater capital gains and income in the form of dividends.

Another benefit of investing in different asset classes is to diversify your portfolio and take advantage of the low, or even negative, correlation between some investments.  Correlation is a mutual relationship between two variables (assets).  By way of example, Chart 2 shows how the defensive fixed interest asset class increased by 2% from October to December 2018 as investors fled the riskier Australian shares asset class that decreased by 8% over the same period.  If you were invested entirely in Australian shares, you would have lost 8% of your capital whereas you have only lost 3% if you were invested 50/50 across the asset classes.

If you have been going to sleep on a mattress full of your life savings every night, or if you are interested in learning more about investing, please feel free to come into one of our offices to have a chat.  Our investment team relishes any opportunity to educate people on the benefits and techniques of investing and there is nothing more satisfying than helping others unlock the power of sitting back, and letting your money work for you.

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

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Why You Should Salary Sacrifice To Super

For many of us, we are able to contribute to superannuation for our entire working lives. Thanks to the superannuation guarantee arrangement, employers are obliged to contribute a minimum percentage (currently 9.5%) of your earnings to your nominated super fund. While this might seem like a lot, depending on your ideal cost of living in retirement, you may wish to contribute additional money to boost your savings. One way of doing this is through salary sacrificing.

Salary sacrificing is where you establish an arrangement with your employer to pay a portion of your pre-tax salary to your super account as a concessional contribution. There are a few benefits to this:

  • Boost to your overall contributions to your super fund
  • Reduce your taxable income, therefore, paying less tax
  • Works as a forced saving so you don’t need to worry about putting money away to contribute later

To show you how this could work for you, here’s an example for someone earning $90,000 p.a.:

The above example shows how your after-tax pay would be affected if you salary sacrificed $10,000 in one year, the difference is $6,550 per year or $126 per week. If this looks too much for your circumstance, perhaps consider reducing your super contributions to $5,000. Now your take-home pay is $64,658, therefore an after-tax reduction of $3,275 per year or $63 per week.

Salary sacrificing is a great tool to help boost your super savings, however, there can be some traps for young players. Be sure to speak with your financial adviser to establish how salary sacrificing can best work for you.

Please note this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored superannuation or financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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PAYG Tax: What Is It & Why Am I Paying It?

During our lifetime we all pay tax on our income at some point.  This is called Pay As You Go tax (PAYG).  In Australia, our PAYG is a progressive tax, which means the more you earn the more you pay.  This and all other taxes are defined as the contribution to the government revenue compulsorily levied on individuals, property, businesses, goods etc.  This money is used to provide those services we expect in our society, roads, hospitals, schools etc.

PAYG tax can be confusing, especially if you have a varied income.  Some weeks you will only earn a small amount and so may not pay tax at all but the next you will work extra hours perhaps even on a weekend and suddenly you lose a lot in tax.  In Australia, our rate of PAYG is based on our annual income but this is calculated based on each pay event.  Below is a table from the Australian Taxation Office (ATO) showing the individual resident rates of tax for the 2018-2019 financial year.

Taxable Income Tax on this income
0 – $18,200 Nil
$18,201 – $37,000 19c for each $1 over $18,200
$37,001 – $90,000 $3,572 plus 32.5c for each $1 over $37,000
$90,000 – $180,000 $20,797 plus $37c for each $1 over $90,000
$180,000 and over $54,097 plus 45c for each $1 over $180,000

**These rates do not include the Medicare levy.

For a lot of people where the confusion will come in is when they are changing tax brackets because of their variable earnings.  If you are a part-time or casual worker but perhaps do some extra work during holidays or peak work periods you could see your weekly income move from the second tax bracket to the third, which means a significant increase in your tax for the week.  It doesn’t necessarily mean you are going to earn over $37,001 for the year but because our tax is calculated on each pay event you will be taxed that period as if you are.

For a working example, we have someone who works casually and this week earns $519 before tax.  They would pay $41 that week in tax.  The next week is busy and they work extra shifts and earn $769 for the week, the amount of tax is $102.  When we look at the weeks individually the employee has jumped up in tax brackets.  Come to the end of the financial year they have only earnt $30,000 for the year.  They will be issued with a PAYG statement showing this and also the amount of tax they are have paid throughout the year.  This is when the ATO will look at those amounts and a refund would be issued for the overpaid tax.

For many Australians they find this confusing and unfair, however, the alternatives can be even more confusing and can result in people having large tax bills at the end of the financial period to pay resulting in hardship and meaning that the Government doesn’t get the income it is expecting.  This can have serious flow-on effects for all of the economy.

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

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How Does A Mortgage Work?

The word mortgage originated in England during the middle ages from the old French “death pledge.”   This pledge refers to a contract which ends (dies) when the debt is repaid, or possession of the property is taken by the lender in the event that the borrower cannot repay.

In more recent times, a mortgage involves a loan contract offered by a credit provider at interest, secured against the borrower’s property, with scheduled repayments over an agreed term.

Whilst there are many lenders, and there is an abundance of products and features available with a mortgage, the following may assist newcomers to clarify how a mortgage works:


Most lenders will require you to save at least 20% of the value of the property as a deposit.  There are some providers who will offer a loan to borrowers with a reduced deposit, but traditionally, lenders will offer funds up to a maximum Loan to Valuation Ratio (LVR) of 80%.

Lenders Mortgage Insurance

In the event that your deposit is below the minimum required by the lender, you will be required to purchase Lenders’ Mortgage Insurance (LMI).  LMI is an insurance policy which protects the lender in the event that you are unable to repay the loan.  The cost of cover is paid by the borrower via a one off premium.  The LMI premium can be financed (up to limits) via the loan, which means it will be added to the interest you pay over the life of the mortgage.

Using your property as collateral

Banks love security and seek to minimise the risk in lending funds to a home buyer.  The security property can be used as protection by the lender in the event that you default on your mortgage.  If you cannot repay, or if you suffer from financial difficulties, the lender can take possession of the property (foreclose).  The lender will then sell the security property to clear the debt.

Types of loans available

When obtaining a loan there are several options to consider.

Variable Rate:  The interest rate and therefore the minimum repayments on a variable rate loan will move up or down with the rates set by the lender.  This may be due to movement in the official cash rate set by the Reserve Bank of Australia (RBA), or at the discretion of the lender.  Variable rate loans allow more flexibility in repayments and usually do not incur penalties for early repayment.

Fixed Rate:  The interest rate and minimum repayments will remain the same during the fixed rate term of your loan.  A fixed rate loan will provide certainty in your repayments over the period, however, there are often restrictions in repaying above the minimum, and penalties may apply for early repayment of the debt.  If interest rates fall, you are locked into the fixed rate.  If interest rates rise, your repayments and rate will remain the same.

Split loans:  A split loan allows you to lock in a fixed rate amount, and a variable rate amount.  You may wish to reduce the risk of future interest rate increases, and ensure your repayments are set over the fixed rate period by obtaining a portion of your loan at a fixed rate.  The remainder of the loan balance can be held at a variable rate so you can make unlimited repayments.  A split loan will allow you to ‘hedge your bets!’

Principal and Interest:  A Principal and Interest (P & I) loan is divided into two portions.  The principal owing is the amount you borrowed, less repayments.  Interest is the amount charged in addition to the principal, and is based on the interest rate and the principal balance.  The lender has worked out how much you will need to repay at each instalment to pay your loan off in the loan term you have elected.  This is known as the amortisation schedule and shows how much of your repayment goes towards interest and the amount that goes towards paying off the principal.  With a P & I loan, most of your repayment will go towards paying interest at the beginning.  As the loan progresses, the amount paid off the principal will increase.

Interest only:  As the name suggests, an interest only loan provides a facility whereby the borrower only pays the lender the interest component owing.  These loans are available with various interest only period options and will revert to a P & I loan at the end of the interest only term.  Interest only loans have been a popular choice for investors and for home owners looking to reduce the repayments on their property.


Lenders will usually offer the option to make repayments on a weekly, fortnightly or monthly basis.  Loan terms are usually 25 or 30 years.

Redraw facility

If you make loan repayments in addition to the minimum payable, you can access these surplus funds at a later date.  A redraw facility allows you to withdraw money that you’ve already contributed on your home loan.  A redraw provides the benefit of paying more off your home loan, and not locking away the extra repayments.

The interest rate on your home loan will be higher than the interest rate offered in a typical cash management account.  The interest saved on your home loan by making additional repayments over the term of the loan will be substantial, and the redraw may come in handy in the event of needing to access funds in an emergency.

NB. A redraw facility may include fees and restrictions on the amount and frequency of withdrawals you can make each year.

Offset account(s)

An offset account is a savings or transaction account which is linked to your home loan balance.  The balance held in your offset account will reduce the amount you owe on your mortgage, and can be up to 100% depending on the loan product.  With an offset facility, the interest payable on your home loan is reduced by the difference between your loan balance and the offset account balance.

Please contact us today for a confidential, cost and obligation free discussion about your lending needs. Please note that this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored mortgage broking or financial advice, please contact us today.

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What You Need To Know About Health Insurance

Health Insurance, it’s a divisive subject. Some people swear by it, others refuse to even consider it.  The reality is, it is an individual choice and needs to be treated like any other insurance. It’s important to review it regularly to ensure you are getting what you pay for and what you need.

Most children will be removed from the family policy when they turn 22. This age could differ, as each fund is different. Once removed from the family policy, they can usually elect to stay on extra premium or they can arrange their own policy.  It is important to discuss with them the advantages and disadvantages of having health insurance, what their financial commitments are and if it is worth them having a policy.

Taking out health insurance after the age you have turned 31 carries a financial penalty called the Lifetime Health Cover (LHC) loading.  For each year after your 31st birthday that you don’t have private hospital cover, it adds 2% to the base premium.  This will eventually be reduced when the hospital portion of your cover is held continuously for 10 years.  There are other circumstances that can affect the reduction of LHC loading on a premium and you can review these on the Government website for private health.

Many young families start out needing cover for a variety of services including pregnancy and obstetrics but as their family grows up it is important to review the policy and check for any services that can be removed from the policy, perhaps offering a reduction on the policy premium.  As your family grows your needs will change and the policy will need to change to reflect these new circumstances.

The other important thing to remember is private health insurance is not compulsory in Australia.  We are very lucky in this country that we have a public health system that supports all Australian citizens.  In an emergency situation, you will always end up in the nearest Public hospital being treated with the highest care possible regardless of if you have private health insurance or not.  For families, it is important to compare the cost of the policy with the extra tax you may be paying by not having a policy.  And when speaking with your children coming off your policy it is important to remember this too.  The lifetime health cover loading will not be passed on until after they turn 31.

Key points to remember; like any insurance policy review it regularly, check for inclusions and, more importantly, the exclusions to make sure they fit your family.  It is also worth looking at your income versus the extra you would pay in Medicare Levy Surcharge if you didn’t have a health insurance policy.

Please note, the above provides general advice and has not taken into account your personal or financial circumstances. If you would like more tailored insurance or financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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What Is Life Insurance? When Do I Need It?

Life insurance has a special part to play at various points in your life. But first, what is life insurance?

There are 4 types of insurance; there’s Life (or death), Total and Permanent Disablement (TPD), Trauma and Income Protection (IP).

Life insurance pays a lump sum amount in the event of death or terminal illness.  The purpose of life cover is to pay down any debts, provide an income to your surviving spouse or children, contribute to future education expenses if you have children, and assist with funeral expenses.

TPD is payable in the event you become totally and permanently incapacitated due to sickness or injury, and it is unlikely that you will ever be able to return to work.  Again, this cover will provide a lump sum to reduce or extinguish debts, and provide an income to you and your family.  It may also help with home and car modifications following your disability and can assist with ongoing medical bills.

Trauma cover pays a lump sum should you be diagnosed with a serious medical condition, or if you suffer from an event covered under the contract. Trauma insurance covers a wide range of conditions such as heart attack, heart surgery, cancer, stroke and other neurological conditions, organ failure and various blood disorders. Benefits can assist with the costs of specialist treatment and medication which are not covered via Medicare or private health cover.

IP covers you if you suffer an injury or illness that leaves you unable to work for longer than your waiting period.  Income Protection typically provides a monthly payment whilst you are unable to work.  Your claim will continue until you are able to return to work, or you have reached the end of your benefit period.  IP ensures up to 75% of your taxable income and you may also be able to cover ongoing superannuation contributions under some contracts.

In your 20s

When you’re in your 20s you have your whole life at your feet. You may or may not be debt free, and may or may not have children. Regardless of these last two points, you have your whole life ahead of you! If something was to happen to you that left you unable to work for the rest of your life and you didn’t have insurance, you would be left having to rely on family or government support. TPD and IP are a must have for people in their 20s.

In your 30s

Your 30s is when the real ‘adulting’ starts. You may start to take on some more debt like a mortgage and may start to have children. Both of which are joyous life events, however, if your partner or family are not protected should something happen to you, they could be left in a very difficult position. Life, TPD, IP and Trauma are essential in protecting your family against the unexpected.

In your 40s

Once you’ve reached your 40s the kids could be in school and taking up all your spare time with after-school activities and you’re still working towards paying off your mortgage or perhaps looking at purchasing an investment property. Again you want to make sure your family is protected. Life, TPD, IP and Trauma are essential in making sure the family home is safe and the kids are able to continue their schooling in the way you intended.

In your 50s

In your 50s the kids are becoming more independent as they start entering the workforce, your mortgage is slowly decreasing and you can start focusing on your retirement. However, all of the hard work you’ve put in over the years to build up your retirement savings could come crashing down in an instant if you were to fall ill or suffer an injury. Whilst you may not need the levels of cover you required in your 30s and 40s, you should still have Life, TPD, IP and Trauma in your suite of protection.

In your 60s

By the time you’re in your 60s, you’d expect the kids to be self-sufficient and mortgage all but paid off. You’re looking into the future to a sunny and relaxing retirement within the next few years. This is when you can start tapering off all of your insurance. It is best to seek advice at this stage (and at all stages) to see what your needs are.

Regardless of where you fall in the above categories, everyone is different therefore having a trusty Risk Adviser to step you through the process will make a world of difference.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial or insurance advice, please contact us today. One of our advisers would be delighted to speak with you.

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Superannuation Through Your Life

Superannuation is something you simply cannot ignore. It is important that you engage with it throughout your working life, monitor how much you have and how it is invested.  So, let’s take a look at how superannuation impacts you as it progresses through various life stages.  From your first paycheck to the last, the contributions to your superannuation are building to finance your retirement.

First job

When you begin your first job, your employer is likely to direct your compulsory superannuation guarantee contributions into the fund that they use as a default (typically an industry superannuation fund).  It is important to note you have the choice of the superannuation fund that is used and you do not need to accept the default, but if another choice is made, you will require providing detail of the fund to your employer.

Employers MUST pay superannuation to an employee at a rate no less than 10.5% of the ordinary time earnings if you are over 18 or if you are under 18, but working more than 30 hours in a week.

The superannuation guarantee is for employees irrespective of work conditions, whether they are full-time, part-time or casual.

Superannuation guarantees are typically paid from each pay cycle, however, employers may choose to pay at least every 3 months.

Early work years/young family

It is a long time before you can access this money by meeting a typical condition of release, but remember that it is accumulating for your retirement and you should stay on top of what is happening.

Make sure that you have all your contributions going into one fund. When you commence a new job, you need to advise your employer of the fund details so that contributions continue to go into said fund.  In most cases, you will have a choice as to where your contributions are paid but possibly not if you are a government or university employee.  If you think a job has paid to a different fund, search for lost superannuation and roll them into one. Fewer admin fees mean more returns for you.

Check your statement each year:

  • How much have you paid in administration and other fees?
  • What has the performance been and can you compare it to another fund to see if it is keeping up?
  • Is the chosen investment option still the right one for you?
  • Are you paying premiums for insurance?
  • Is the insurance sufficient or should you obtain other insurance possibly outside superannuation?
  • Do you have a current beneficiary nominated?

This period in your life is likely to be the most financially challenging – marriage, children, mortgages and your career. For women, there may be a period out of the workforce while raising children and it is worth exploring paid parental leave with your employer to ensure you continue to build your superannuation for retirement through this period.

All of these issues mean that you may not be able to add to your superannuation from your resources and paying down your mortgage will be the highest priority, but you should attempt to allocate an extra amount to superannuation from your salary each pay period.  Settle on a small amount you will not miss, even if it is $10 each week.  As you age, try to increase this amount (i.e. if you get a pay rise, add extra to your superannuation contributions).  The most tax-effective way to contribute is via salary sacrifice – pre-tax salary, but you can also add from your resources.

You might consider seeing a qualified professional to review your financial situation and help you reach your future goals. If an industry fund is in use, does it meet your requirements? Do you want more say in your investments? Does the industry insurance meet your requirements?

In your 50’s and 60’s – approaching retirement

By now, your financial situation should be a little easier. Perhaps the kids have finished university/have jobs and left home and your mortgage is well under control (provided the interest rates do not stay up). Your superannuation balance will look healthy, and guess what, retirement isn’t so far away any more.

If you have not consulted a qualified professional, now is a good time to set some financial strategies in place so that your future needs can be met.

You might be thinking of some things you would like to do when you have more time and travel may be on top of the list.

Now is the time when you need to contribute as much as you can spare and that you will not need before you reach ‘preservation age’ – the age at which you can begin to draw from superannuation. For most people that is age 60.

Using salary sacrifice now will be a strategy that will work well for you. Part of your pre-tax salary is contributed to superannuation, and your take-home pay and the tax you pay personally will be reduced by maximising this amount if your budget permits. There are other strategies for higher-income earners, perhaps with a non-working spouse.  These include spouse contributions and contribution splitting.

In retirement

Now you have retired and are living off a pension drawn from superannuation. Once commenced, you must draw a minimum percentage from superannuation each year. At 65, this is 5% of your balance, but you may need to draw a greater amount (note the minimum in 2022/23 was reduced by the government to half of this amount due to the COVID-19 pandemic but it is to increase back to 5% from 1 July 2023).

It is vital that you manage your superannuation, or have it managed by a qualified professional so that what you have will last you for at least your life expectancy.  A male at age 65 can expect another 18.5 years based on typical life expectancy, so you need to watch and plan your spending.  At the time of writing, a couple wanting to live a comfortable lifestyle will need about $68,000 per year between the ages of 65 to 84.  This means that you will need to have accumulated nearly $640,000 to meet this need, along with receiving Centrelink age pension and that takes you to your life expectancy (Source – Association of Superannuation Funds of Australia – ASFA).

What happens if you live longer than your life expectancy? What happens if you need aged care?

These things mean that you will need to accumulate a greater amount of savings through your working life so that these needs in later life can be met comfortably and without placing stress on yourself or your family. The alternative is to reduce your expenses below the comfortable expenses target to something more in line with a moderate standard according to ASFA requiring around $44,000 per year for a couple.  Taking care of your superannuation through your working life will benefit you at the time that it is most needed.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

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All About Superannuation

Introduced in 1991, superannuation is money paid into a long-term savings and investment account to provide for your retirement. Employers are required to pay 10.5% of your salary into superannuation. This was increased on July 1 2022 and will continue to increase by 0.5% each financial year until it reaches 12%.

While working, your superannuation is in the accumulation phase. During this period, your superannuation is inaccessible and continues to grow to fund your retirement. During the accumulation stage of superannuation, all contributions and investment earnings are taxed at 15%. Your superannuation will remain in accumulation phase until you reach the preservation age between 55 and 60 (depending on your date of birth). When you reach preservation age, you can access your superannuation.

Employees mostly have a choice as to which fund their contributions are paid. Some government employees do not have this choice as their contributions will be paid to a government fund. When starting a new job, provide your superannuation account details to your employer with a request to have contributions paid into that fund. If you do not nominate a fund, the employer will pay it to the default fund. Over time and with job changes, you may end up with multiple accounts. This is not a good idea as you may be paying extra fees and insurance premiums in each of the funds. This may lead to reduced benefits or a reduced superannuation balance.

When you join a fund, you can select life, total and permanent disablement and/or income protection insurance as part of your membership. The fund will disclose the premiums you will pay from the balance of your account. Depending on your age and stage of life, having insurance inside your superannuation is important. However, this is not always the most suitable option, and you should seek advice from a qualified professional to ensure your insurance cover is appropriate.

While your superannuation benefits are accumulating, your chosen fund manages the investment of your benefit, which is pooled with the benefits of many others if you have a retail or industry superannuation fund. Your fund will give you a few different investment options, which include a blend of shares, property and fixed interest. These investment options all hold varying levels of risk and produce different returns. All investments are subject to market volatility, you must be comfortable with the risk level of your investments throughout points of market weakness.

It is a good idea to make additional contributions to your accumulation account when you are in a position to do so. Contributions can be made using your pre-tax or after-tax salary. Contributing pre-tax salary to superannuation is called ‘salary sacrifice’ or ‘personal deductible contributions’. These pre-tax contributions are also known as concessional contributions which are capped at $27,500p.a.

Pre-tax and after-tax superannuation contributions are effective for high-income earners to reduce their income tax. These contributions may not be as effective for those in lower tax brackets. After-tax contributions do not lower your personal tax. These contributions must be made from money that you do not need as you typically cannot access it before reaching preservation age and a condition of release.

Even though your superannuation is not available to you for many years, you should always take an interest and monitor your balance.  It is real money and will matter when you enter retirement. When you enter retirement, you can convert your accumulation account into ‘pension phase’ and draw a pension or withdraw your superannuation as a lump sum. Once you get to this stage, you will be pleased that you have nurtured your account throughout your working life.

To learn more about how we can help you plan for retirement and manage your superannuation, please visit our Self-Managed Superannuation Fund (SMSF) page.

Please note, this article provides general advice and has not taken your personal or financial circumstances into consideration. If you would like more tailored financial advice, please contact us today. One of our advisers would be delighted to speak with you.

Read more