After spending their working life building retirement savings, many retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given that we are living longer than previous generations and may need to pay for aged care and health costs later in life.

But this cautious approach also means many retirees are living more frugally than they need to. This was one of the key messages from the Government’s Retirement Income Review, which found most people die with the bulk of the wealth they had at retirement intact.[1]

One of the benefits of advice is that we can help you plan your retirement income so you know how much you can afford to spend today, secure in the knowledge that your future needs are covered.

Making the most of super

According to the Review: “It appears (most people) see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement.”

The figures back this up. The average super account balance on the death of a member in the year to June 2020 was $102,660.[2] While not a huge amount, it is an indication that retirees may be able to withdraw more than the minimum amount from their super to live more comfortably without breaking the bank.

Minimum super pension withdrawals

Under superannuation legislation, once you retire and transfer your super into a pension account you must withdraw a minimum amount each year. This amount increases from 4 per cent of your account balance for retirees aged under 65 to 14 per cent for those aged 95 and over. (These rates have been halved temporarily for the 2020 and 2021 financial years due to COVID-19.)

One of the common misconceptions about our retirement system, according to the Retirement Income Review, is that these minimum drawdowns are what the Government recommends. Instead, they are there to ensure retirees use their super to fund their retirement, rather than as a store of tax-advantaged wealth to pass down the generations.

In practice, super is unlikely to be your only source of retirement income.

The three pillars

Australia’s retirement income system is built around three potential sources of income, known as the three pillars:

• A means-tested Age Pension
• Compulsory super, and
• Voluntary savings both in and out of super.

The Retirement Income Review, and the government, argue that the family home should be included with voluntary savings or as a fourth pillar, but more on that later.

Most retirees live on a combination of Age Pension topped up with income from super and other investments. Despite compulsory super being around for almost 30 years, over 70 per cent of people aged 66 and over still receive a full or part-Age Pension.

While the Retirement Income Review found most of today’s retirees have adequate retirement income, it argued they could do better. Not by saving more, but by using what they have more efficiently.

Withdrawing more of your super nest egg is one way of improving retirement outcomes, but for those who could still do with extra income the answer could lie in the nest itself.

Unlocking housing wealth

Australian retirees are some of the wealthiest in the world, with median household wealth of around $1.4 million. Yet close to $1 million of this wealth is tied up in the family home.

Studies have also shown that most people use a form of mental accounting which sets aside super for income, other financial assets for emergencies and the family home for future bequests.[3]

That’s a lot of money to leave to the kids, especially when many retirees end up living in homes that are too large while they struggle to afford the retirement lifestyle they had hoped for.

For these reasons there is growing interest in ways that allow retirees to tap into their home equity (see box). Of course, not everyone will want or need to take advantage of these options, but they are available if you would like some extra income.

Here are some options to use your home to generate retirement income:

• Downsizer contributions to your super. If you are aged 65 or older and sell your home, perhaps to buy something smaller, you may be able to put up to $300,000 of the proceeds into super (up to $600,000 for couples). Strict rules apply, so speak to us for more details.
• The Pension Loans Scheme(PLS). Offered by the government via Centrelink, the PLS allows older Australians to receive tax-free fortnightly income by taking out a loan against the equity in their home. The loan plus interest (currently 4.5 per cent per year) is repaid when you sell or after your death.
• Reverse Mortgages (also called equity release or home equity schemes). Similar to the PLS but offered by commercial providers. Unlike the PLS, drawdowns can be taken as a lump sum, income stream or line of credit but this flexibility comes at the cost of higher interest rates.

The big picture

Discussions about retirement in the media and around the kitchen table often focus on how much super you have and whether it’s enough. Super is important, but it’s not the only source of retirement income.

If you would like to discuss your retirement income needs and how to make the most of your assets, give us a call.

Notes

[1] Retirement Income Review, https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf

[2] APRA  data spreadsheet, https://www.apra.gov.au/sites/default/files/2021-01/Annual%20superannuation%20bulletin%20-%20June%202015%20to%20June%202020%20-%20superannuation%20entities_1.xlsx

[3] https://householdcapital.com.au/third-pillar-forum/retirement-insights/prof-hazel-bateman/

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If you are surprised at how prices in cities and regional areas have risen even in the face of the social and economic havoc caused by COVID-19, you’re not alone. If you are thinking of buying property, you may even be a little concerned about what the current property market means for your buying decisions.

Is timing everything, or is time in the market more important? Whether you’re a first home buyer, upgrader, or investor, let’s look at what a property cycle is and how important it may, or may not be to your buying decision.

What is a property cycle?

Generally, home prices follow a four-phase cycle of Stabilisation, Growth, Boom and Decline. Over the last 40 years, property prices boomed in Australia in 1981, 1987, 1994, 2003, 2010 and 2017. This is why many people work on the assumption that property cycles last roughly seven years. But remember, this is an assumption, not a fact.

The longest phase in the property cycle is usually Stabilisation. This is when buyers and sellers have enough confidence to enter the market in relatively equal numbers, keeping prices fairly stable.

Many factors contribute to a rising market, but a Boom tends to end as more sellers enter the market, causing an over-supply as prices tumble and the market moves into a Decline phase.

What factors influence the property cycle?

Low interest rates contribute to market increases, as does strong economic performance and consumer confidence.

The supply of property on the market also plays a big part in contributing to rising (or falling) prices and rents, as does shifting demographics including the number, age and incomes of people in households and where people are living. A good example of the impact of shifting demographics is the recent spike in regional home prices as younger people leave cities for the regions.

How many property cycles are there at any time?

Although we talk about the property ‘market’ there are as many property markets as there are suburbs around Australia. While we have seen unusual consistency in increases across the board in Australia recently, different states, cities and suburbs can be at varying stages of their property cycles.

Aligning your property goal to the current cycle

The recent price surge could be what’s known as a mid-cycle ‘second wind’ caused by buyers cashed up with government incentives and lockdown savings, taking the property plunge or making a lifestyle change. It could also be viewed as a correction, as people who put off buying at the start of the pandemic, enter the market. Or, as it is in most cases, it can be a combination of factors.

Either way, the fear of missing out, is a contributing factor to the growth phases of property cycles and it’s what makes many people anxious about when they should enter the market. That’s why it’s important to take a step back and remind ourselves that over the long-term, property prices have historically risen.

What this means, is your property goals will dictate how much attention you should pay to where the market is currently in the cycle. Are you looking for your forever home, a long-term investment or a do-er upper you can quickly sell for a profit? Your answer will tell you how important your entry point in the cycle is. For many, it’s not what should be driving your buying decision.

Keep in mind that market forecasting is difficult. Rather than trying to time the market for short-term gain, many buyers prefer to look further into the future and aim for longer-term property growth.

The important thing is to buy according to your goals and means. Ensure you are comfortable with your purchase including the area you are buying into and the amount you are borrowing.

We’re always happy to discuss your property plans and current market movements with you. So please get in touch.

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For many people, there’s much more to choosing investments than focusing exclusively on financial returns. Returns are important, but a growing number of people also want their investments to align with their values.

Everyone’s values are different but given the choice most people would wish to make a positive difference to their community and/or the planet. Or at least to do no harm.

Indeed, four out of five Australians believe environmental issues are important when it comes to their investment decisions. [1]

As a result, there has been a surge in what is called responsible investing. Also known as ethical or sustainable investing, responsible investing includes investments that support and benefit the environment and society, rather than those whose products or ways of conducting business have a negative impact on the world.

Millennials driving growth in sustainability

The trend toward responsible investment is growing rapidly. According to the Responsible Investment Association of Australasia (RIAA), Australians invested $1.2 trillion in responsible assets in 2020.[2] While money flowing into Australian sustainable investment funds was up an estimated 66% in the year to June 2021.[3]

Responsible investing is particularly popular among millennials, now in their late 20s and 30s and beginning to get serious about building wealth. Many in this group are getting a foot on the investment ladder via exchange-traded funds (ETFs). A recent survey of the Australian ETF market found 28% of younger investors had requested more ethical investments.[4]

More sustainable investment options

As awareness of responsible investing grows, so does the availability of sustainable investment options, beginning with your super fund.

Most large super funds these days offer a sustainable option on their investment menu. While relatively rare even 10 years ago, the availability and performance of sustainable options has grown strongly over the past three to five years.

According to independent research group, SuperRatings, the top performing sustainable options now surpass their typical balanced style counterparts in some cases.[5]

If you run your own self-managed super fund (SMSF) or wish to invest outside super, there is a growing number of managed funds that actively select sustainable investments or ETFs that passively track an index or sector.

There were 135 sustainable funds in Australia and New Zealand in 2021, so there is plenty of choice.[3]

How to screen

So how do you find the ethical investments that best suit your values?

There are several methods used with the most common being negative screening. This is where you exclude investments in companies engaged in unwelcomed activities such as gambling, tobacco, firearms, animal cruelty, human rights abuses, or fossil fuels.

Positive screening is the opposite, where you actively seek out investments in companies making a positive contribution. Some examples might be companies involved in renewable energy, health care, or education.

Another criterion is to look at companies that monitor their environmental, social and governance risks. This cuts across all industries and is more about the way the company conducts its business.

Environmentally they may monitor their carbon emissions or pursue clean technology, socially they may be active in ensuring a safe workplace and on the governance front they may pursue board diversity or anti-corruption policies.

Greenwashing on the rise

As the popularity of responsible investing grows, so do concerns about the practice of so-called greenwashing. This is where a company or fund overrepresents the extent to which its practices live up to its promises. The Australian Securities and Investments Commission (ASIC) recently announced a review into the use of greenwashing in Australia, prompted in part by the demand for such funds.[3]

Another trend is impact investing in companies or organisations helping to finance solutions to some of society’s biggest challenges. This might include investments in areas such as affordable housing or sustainable agriculture.

Solid returns

While some investors are driven by their values alone, many more want value for their money. The good news is that it’s possible to have it both ways.

The RIAA survey found super funds that engage in responsible investments outperformed their peers over one, three and five years. Clearly, responsible investing is a trend that is gaining momentum, with the financial performance of sustainable investments attracting a wider following.

If you would like to discuss your investment options and how they might fit within your overall portfolio

Notes –

[1] https://www.canstar.com.au/investor-hub/ethical-investing/

[2] https://responsibleinvestment.org/resources/benchmark-report/

[3] https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505

[4] https://www.betashares.com.au/insights/millennials-on-top-betashares-investment-trends-etf-report-2020/

[5] https://www.lonsec.com.au/2021/07/21/media-release-stellar-fy21-returns-as-super-funds-deliver-for-their-members/

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For many people, debt is a dirty word. But not all debt is created equal. There’s good debt and there’s bad debt, and then there’s the good debt that can get pretty ugly if it’s not managed properly. Learning to use debt intelligently could make all the difference to your personal bottom line.

Good debt

Debt is considered good when it helps you buy wealth building assets. That can be an asset that grows in value over time and /or provides you with income.

Borrowing is often referred to as leverage because it helps you get more for your money.

Shares and property are regarded as growth assets because, when chosen well, they should grow in value over time. Shares can also offer regular dividend income while investment property provides rental income. In both cases, the income you receive can be used to help meet your loan repayments.

In many instances you can also claim a tax deduction on the interest paid on your investment loan.

Bad debt

Debt is bad for your wealth when you borrow to buy assets that fall in value, don’t provide any income and are not tax deductible.

Using a credit card or a personal loan to pay for holidays or expensive toys is an example of bad debt.

The trouble with bad debt is that you can often be paying for it long after the holiday has worn off or that new car has halved in value. If your bad debt is on a credit card, then it can be all too easy to let the debt roll over each month.

When bad debt turns good

Used well, bad debt can be put to good use. If you are disciplined and pay off your credit card in full each month this can help you manage your cash flow. It might also allow you to leave money sitting longer in a high interest savings account.

Credit card debt turns ugly when you buy things you can’t afford and pay only the minimum repayment each month. Because of the high interest rates that apply to credit cards, your initial debt can balloon and take many years to clear.

When good debt goes sour

Using good debt to pay off bad debt could also cost you dearly. Say you consolidate your debts by increasing your mortgage. The end result could be that you spread the cost of that debt over 20 years or more, dramatically increasing your total interest payments into the bargain.

The family home

Buying a home to live in will not provide you with income but it can still be regarded as good debt. Not only is it a form of enforced saving but in time it may also be used as leverage to fast track your wealth creation.

Once you build up equity in your home you can use this as security to take out an investment loan. Any income you earn from your investments— your good debt — can be used to make extra repayments on your mortgage. This can accelerate paying off your home loan and free up cash for more investments.

A power of good

Whether debt is good or bad, it’s generally wise to clear it as quickly as possible. Pay off your bad debts first – beginning with the debt that has the highest interest rate – as you should be able to take advantage of the tax concessions that may be available on your good debt.

In years gone by it was common to wait until you had saved up for what you wanted. Nowadays the ease of obtaining credit can lead to reckless behaviour. But there’s still an important place for good debt.

Given most of us will spend many years in retirement and would like to be self-funded, borrowing to accelerate wealth can be a very successful investment strategy. It’s just important to remember to keep bad debt to a minimum and make sure you use good debt wisely — otherwise it can all turn a little ugly.

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Telephone: 03 9723 0522

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Just like the property it allowed you to buy, your mortgage benefits from regular maintenance. Spring is the perfect time to look at your current mortgage and make any adjustments that are needed.

Here are four tips to assist you in reviewing your current mortgage, to set you up for the year ahead.

Is your interest rate as good as it could be?

Australia’s mortgage rates have remained at historic lows for a long time now. No one knows what will happen in the future but it’s a good idea to know what your current interest rate is and whether you can find a better deal elsewhere. At the moment, it’s still possible to find rates under 2 % fixed for one year. However, there has been a very slight rise this year[1].

Working out whether to go for the lowest rate for a shorter term or lock in a slightly higher one for longer is only part of your decision. You also have to consider whether fixed, variable or a mix of the two is better for your circumstances. You will also need to factor in the costs associated with leaving your current loan and entering a new one too.

When you’re reviewing your loan, it’s important to be aware of how rates vary across different loan structures. Offset and drawdown loans normally don’t have the lowest rates, for example, but if you can pay extra against your loan, they may be financially worthwhile.

We can help you sort through not only your loan options but also the rates available and discuss what is best suited to your financial situation. It may mean approaching your current lender to ask for a more competitive rate.

Does the type and length of your loan still suit you?

Deciding how long you want to fix a rate will depend on your own risk tolerance as well as thinking about what may happen in the future. Some people prefer to know exactly what their mortgage payments will be for a set time. Others are more comfortable with the risk of a variable rate that might go up or down at any time. And of course, as COVID-19 has shown us, our risk appetite can change in relation to what’s happening in our lives.

If your circumstances have changed or you would like to discuss whether your current loan set up still suits your lifestyle and future goals, please don’t hesitate to give us a call.

Could you consolidate debts into your mortgage?

If you’re paying off debts with higher interest rates than your mortgage, it may be possible to use your mortgage to pay them off. This will increase the size of your mortgage but the interest you pay will be lower than the current rate for your debt.

Paying off debt may be more straightforward if you already have a drawdown or offset mortgage with funds available, or you’re switching mortgages anyway. Other common ways to add debts to mortgages include negotiating an increase in your mortgage to include the debt.

How much equity do you now have and are you making the most of it?

Check how much equity you now have in your property by getting a valuation from your lender or a real estate agent. You also need to check your mortgage statement, so you know how much is paid off.

Once you know how much equity you have, you can think about whether there are other things you would like to do with that money. Many people use equity in one property to help fund another. It might pay for a renovation that could increase your equity even more.

As you can see, opening up your mortgage for a good spring clean can raise some exciting possibilities. The easiest way to act on these is to contact us for a review and action plan.

[1] https://mozo.com.au/home-loan-statistics

Fixed rate home loans

Average 2 year fixed rate for owner occupiers – June 2021

Average Fixed Home Loan Rates at a $400,000 loan amount, 80% loan-to-value ratio, owner-occupier, principal and interest, from the mozo.com.au database. Source: Mozo

If you’d like help or more information give us call.

[1] https://www.news.com.au/finance/economy/australian-economy/how-interest-rate-increase-would-impact-aussie-house-prices/news-story/e90dcf416558b4938884d8c3fd1b6abc

[1] https://www.smartline.com.au/mortgage-news/interest-rates/borrowers-rush-to-fix-loans-as-lenders-lift-longer-term-rates/

[2] https://www.savings.com.au/home-loans/term-funding-facility-ending-june

[3] https://mozo.com.au/home-loans/articles/more-lenders-hike-up-home-loan-fixed-rates-will-variable-rates-follow

[4] https://www.savings.com.au/home-loans/the-potential-35-000-cost-of-breaking-a-fixed-home-loan

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When it comes time to investigate residential aged care for yourself, your partner, parent or relative, the search for a facility and how to pay for it can seem daunting. The system is complex, and decisions are often made in the midst of a health crisis.

Factors such as location to family and friends, reputation for care or general appeal are just as important as the sometimes-high price of a room and other fees in residential aged care.

Even so, costs can’t be ignored *

Accommodation charges

The first thing to be aware of when researching your residential aged care options is that there are separate costs for the accommodation and the care provided by the facility.

The accommodation payment essentially covers your right to occupy a room. You can pay this accommodation fee as a lump sum called the Refundable Accommodation Deposit (RAD), or a daily rate similar to rent, or a combination of both.

The daily rate is known as the Daily Accommodation Payment or DAP and is effectively a daily interest rate set by the government. The current daily rate is 4.04 %*. If the RAD is $550,000 then the equivalent DAP is $60.87 a day ($550,000 x 4.04%, divided by 365 days).

A resident can pay as much or as little towards the RAD as they choose, but any outstanding amount is charged as a DAP.

The RAD is fully refundable to the estate unless it is used to pay any of the aged care costs such as the DAP.

Daily fees

As well as an accommodation cost there are daily resident fees that cover living and care costs. There is a basic daily fee which everyone pays and is set at 85% of the basic single Age Pension. The current rate* is $52.71 a day and covers the essentials such as food, laundry, utilities and basic care.

Then there is a means tested care fee which is determined by Services Australia or Veteran’s Affairs. This figure can range from $0 to about $256 a day depending on a person’s income and assets. The figure has an indexed annual and a lifetime cap – currently* set at $28,339 a year or $68,013 over a lifetime.

Some facilities offer extra services, where a compulsory extra services fee is paid. It has nothing to do with care but may include extras like special outings, a choice of meals, wine with meals and daily newspaper delivery. It can range from $20-$100 a day.

A means assessment determines if you need to pay the means-tested care fee and if the government will contribute to your accommodation costs. Everyone who moves into an aged care home is quoted a room price before moving in. The means assessment then determines if you will have to pay the agreed room price, or RAD, or contribute towards it.

How means testing works

A means-tested amount above a certain threshold is used to determine whether you pay the quoted RAD and how much the government will contribute towards the means-tested care fee.

A person on the full Age Pension and with property and assets below $37,155* would have all their costs met by the government, except the $52.71* a day basic daily fee.

A person on the full Age Pension with a home and a protected person, such as their spouse, living in it and assets between $37,155* and $173,075* may be asked to contribute towards their accommodation and care.

To be classified as a low means resident there would be assessable assets below $173,075.20* (indexed). It is also subject to an income test.

A low means resident may pay a Daily Accommodation Contribution (DAC) instead of a DAP which can then be converted to a Refundable Accommodation Contribution (RAC). They may also pay a small means-tested care fee.

Payment strategies

The fees you may pay for residential care and how you pay them requires careful consideration. For example, selling assets such as the former home to pay for your residential care can affect your aged care fees and Age Pension entitlements.

If you would like to discuss aged care payment options and how to ensure you find the right residential care at a cost you or your loved one can afford, give us a call.

* All costs quoted in this article are current at the time of writing & are subject to change during the course of the year. The most current rates are available here: www.health.gov.au &  www.myagedcare.gov.au

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