As long as you’re an Australian resident, you will have some form of personal insurance through Government agencies and bodies such as Centrelink, TAC and WorkCover. Often when asked about personal insurance cover, most people would simply suggest they have automatic cover through Work and their superannuation funds. There are several main concerns here. Firstly there are many misconceptions about what types of covers are offered by government organisations. For instance workcover will only cover you if you get injured at work and not if you injure yourself during out of work hours. Secondly people misunderstand the conditions which needs to be met before the insurance companies accept the claim. Lastly the cover amount may not be sufficient. For example work cover will only cover death for up to the maximum amount of $611,430 per person, which wouldn’t be sufficient if that person happens to have $700,000 of debt.

Let’s firstly have a look at the disability pension through Centrelink. To be eligible you must firstly be between ages 16 to pension age, pass the residency requirements and meet the income / asset test. Once you’ve met all these conditions your disability will then be assessed. To meet the disability requirement, you must be either permanently blind or assessed to be physically / mentally impaired and unable to work for more than 15 hours or more per week for the next 2 years. Furthermore you may be required to participate in support programs going forward. In other words your disability or condition must be very severe and permanent for you to receive support from Centrelink. Then there’s the NDIS (National Disability Insurance Scheme), which again is run by the government for anyone who suffers permanent disability such as permanent blindness, Down syndrome and autism. The biggest misconception regarding what the NDIS offers is the fact that NDIS does not offer monetary support, but rather provides aids and equipment to anyone who is eligible.

Now let’s have a look at the covers offered through WorkCover and TAC. Workcover provides insurance cover for all working Victorians. Each state has their own body, which operate similarly. Both WorkCover and TAC operate on a no fault policy meaning you will be covered at work or on the roads, even if it’s your fault that led to your injury / disability. The main consideration here is that you have to be either at work or on the roads, at the time of the incident. Furthermore it’s important to note that there are limits on how much WorkCover and TAC will payout in the event of death, total disablement and income supplement.

The last type of insurance we will look at is the default cover offered by our superannuation companies. For those of us who have super accounts will also have personal insurance cover attached. There are generally 3 types of insurance offered by industry super funds. Death / TPD or Income Protection. Depending on your super fund you may either have all 3, just one of them or none. Although generally more cheaper to fund, it’s important to point out that default insurance through super funds are very general and will most likely be on reduced cover, meaning the amount insured will reduce over time. This is exactly what you don’t want considering as we get older the chances of us claiming on insurance increases, whilst on the other hand the default cover is reducing on an annual basis.

So here’s a question. If you suffered a heart attack or stroke and required large sums of money for treatment, which of the above insurance covers will pay? The answer is none of them. Overall most of us will have access to some form of default personal insurance. It’s important to understand that these default covers in most cases will not provide you with adequate cover. Having a personalised insurance policy is crucial as it will provide you with customised insurance cover to meet your specific needs.

If you are unsure about what insurance you currently have or would like to review your insurance, please get in touch with the team at JBS to ensure you have the right cover in place.

Most of us can only dream about leaving our work forever to do as we please. For those who are close to retirement however, this can be a time of excitement and relaxation. Spending countless days at the golf course or with our community groups, families and friends sounds like heaven on earth. The transition from full time work to full time play however may have some unforeseen pitfalls. Here are 5 facts about retirement that you should consider before retiring.

Time
One of the first things retirees quickly discover is that they have too much time on their hands with nothing to do. Playing a round of golf with mates or enjoying a drink at the bar will only fill up a certain amount of time in the day and you can’t go doing the same thing every day. Retired couples and singles alike will quickly become very unhappy once they run out of things to do.

Having ideas in your head about what to do in retirement is one thing; however actually doing them is another. Some experts are suggesting retirees have a day to day plan on what they want to do and even seek an adviser leading up to retirement. You will never be as busy as you were pre-retirement so it’s important to map out ongoing hobbies, part time work and social events before embarking on retirement.

Retired husband syndrome
Many couples get very excited about retiring together, travelling the world together and spending a lot of time together. If this is you then consider the fact that you and your other half may have been together for the past 30 years working full time. Aside from weekends and holidays, you never have to see each other for more than a couple of hours in the morning and night. Now all of a sudden you see each other 24 / 7 and may even start to discover that you can’t stand being together for a prolonged period of time. Determining your own hobbies, goals and friends will assist to avoid “retired husband syndrome’. Again, seeking help from an adviser may also assist in preparing you and your loving partner for retirement.

Not having enough money to fund retirement
Once retired you might have the goal to travel, see the world and complete your bucket list, unfortunately you might not have the funds to do so. Travelling can become very costly. A single international trip can set you back several thousand dollars if not more. By the time your second trip comes around you may find that your retirement funds are not adequate and you’ll need to start tightening the belt. Having a good financial planner early on can prepare you and set realistic goals for your retirement. This way you will have a clear expectation of what you can afford in retirement and prevent any nasty surprises once you’ve retired.

Entitlement to social security
At the moment the Australian pension age is age 65.5 and increasing with each year. During retirement some retirees aren’t aware of what social security benefits they’re entitled to. Even if you are receiving funds from your Superannuation benefits, you may still be entitled to a government age pension (subject to the income and asset tests). Having a good financial adviser by your side will ensure you’re kept up to date regarding any social security payments you’re entitled to.

Losing your identity from not being at work
For those of us who are passionate about our profession, this becomes our identity. Anytime your friends or family think of Engineer, Accountant or Doctor, they think of you. So it’s no surprise that once you retire you may feel like you’ve lost your identity, which may lead to discontent and even depression. Without the daily interaction of your work colleagues your mental and even physical health may start to deteriorate. Retirees who are not very active tend to decline rather quickly mentally and physically. Joining up to the local gym, taking up classes and just continuing to meet new people will have a longer lasting effect for you.

Financial independence gives you the freedom to make your own choices, speak to the team at JBS to start your retirement journey today.

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Over the next few years the age at which you can begin to start receiving the Age Pension will gradually increase from age 65 to age 67 (depending on your birthdate), with most people now having to be 65 and a half before they can access the Age Pension. Every time the Age Pension age increases or there’s talk of it increasing, you’ll hear all over the media people who now can’t retire because they have to wait a few more years before they can access the Age Pension.

Unfortunately for some, the Age Pension will be critical to fund their retirement, but the Age Pension age doesn’t need to be your Retirement Age. There’s a few things you can do to help reduce your reliance on the Age Pension and retire when you want to retire, our motto is that we’d rather you be working because you want to, not because you have to.

Super Contributions – Your employer pays 9.50% of your wage into Super as a Super Guarantee Contribution (SGC), but if your cash flow allows for it, you can top that up through a Salary Sacrifice arrangement or making Personal Concessional Contributions, up to an annual cap of $25,000 (which includes your SGC). This allows you to boost your Super Savings while at the same time helping you save tax personally.

You also have the opportunity to put up to $100,000 in as a Non-Concessional (After-Tax) Contribution and even up to $300,000 utilising the bring-forward rule in one year (if you haven’t made large contributions previously). Depending on your Super Fund, this can be a transfer of any cash you may have or even other assets such as shares. Remember that the new $1.6mil balance rules need to be taken into consideration.

Depending on your income, if you make a Non-Concessional Contribution the government may give you a Government Co-Contribution up to $500 on a $1,000 contribution (you can contribute more, but the co-contribution is based on a maximum $1,000). If your income is below $36,813 for FY18 you will receive the full $500 Co-Contribution, and you will receive a pro-rata amount if your income is above $36,813 but below $51,813.

Consolidate your Super – For some you may have multiple Super accounts, each time you start a new job your employer may start a new Super Fund for you if you haven’t given them the details of your existing Super Fund. If you’ve got multiple Super accounts it may be worth consolidating them into the one account which may help to reduce the total fees you’re paying on your Super accounts. However, you need to be careful that when you rollover any Super into another account you will lose any insurance you may hold.

Review your Insurance – Most Super accounts come with default insurance cover, and insurance is a very powerful tool to protect you and your family in case something happens to you. For those later in life, who are empty nesters, paid off the mortgage and are close to retirement, your need for cover may not be as important as someone who’s just starting a family and recently taken on a mortgage. Although insurance may be needed, it is always worth reviewing it on a regular basis to ensure your level of cover is appropriate and you’re paying for what you need, as the premiums come out of your Super balance. In some circumstances it may also be worthwhile holding some of your insurance cover outside Super.

JBS can help provide a full review of your Superannuation and Insurance and help you put strategies in place to ensure that you’re working because you want to, not because you have to. We’d rather you work towards your Retirement Age.

– Peter Folk –

The Global Financial Crisis (GFC) was for the majority of us, the worst financial crisis of our lifetime. What started in 2007 with a US Subprime Mortgage collapse, developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on 15th September 2008.

These 2 years between 1 January 2007 and 31 December 2008 resulted in the following returns:

The figures show that what started as a mortgage and property crisis, quickly spread and impacted all growth assets (shares) across the globe with double digit negative yearly returns across the 2 years. Only the high returns from the defensive fixed interest assets could have possibly saved you from disastrous returns across your entire portfolio. Diversification across all asset classes, and having a portion of your funds in defensive assets was crucial during this time period.

It’s important to remember however that just before the GFC, growth markets had been booming for years and by having a lot of funds in defensive assets during this time would have resulted in lower returns. If you were to base your investments on the recent past performance, when the GFC hit you would have been overweight in growth assets and suffered the full effect of the GFC.

In the ten years since the GFC it’s been quite a different story

The figures show that no matter the asset class, by staying invested throughout the GFC, you would have not only recovered your losses, you would have a positive return on all asset classes.

If we look at the returns based from the end of December 2008, growth assets have grown substantially once again showing that relying on the recent short term past performance would have resulted in poor returns as you would have allocated less money towards the growth assets due to their disastrous GFC performance and more towards the defensive assets.

The GFC was not the first big market downturn that we’ve had and it won’t be the last. It’s often hard during these times to ignore emotions and stay the course with your investments. When things are going well we tend to become overconfident and take on more risk (increased growth assets) than what we should. In contrast, when things are going badly, we tend to become pessimistic and be too cautious (not investing enough in growth assets).

Having a financial adviser by your side during these times can help guide you through the tough times. They can help you keep your emotions out of investing, have you stick to the plan, and ensure that you reach your financial goals. Remaining disciplined is the key.

To speak to a financial adviser to help you avoid making wrong decisions during emotional times, call JBS Financial Strategists on 03 8677 0688.

– Liam Rutty –

An article on moneymag.com.au cited that “retirees with modest savings can be better off than those with more than twice as much”. The argument was that due to the new age pension rules introduced in January 2017, there was a ‘sweet spot’ where the income from the age pension and the return from your pension savings would be equal to the income received by someone with more savings who would not qualify for the age pension.

The below table sets out the results.

The assumption was that you would take the minimum amount from your pension account and combine it with your age pension entitlement. As you can see a couple with $1,050,000 will have the same amount of income as a couple with $400,000. What the analysis conveniently doesn’t include however is the capital value. It also only looked at 1 year and did not take into account what would happen in future years.

From a very simplistic view, lets assume that no capital is being drawn in either scenario and hence the capital values remain the same. This means that when the retirees die, they will have $605,000 more money available to pass onto their beneficiaries than in the scenario where the couple only has $400,000. Yes, the income is the same but the actual wealth is way different.

A second and more complicated scenario outlining how the person with more money is in fact way better off is if the capital is drawn down. Let’s assume an extra $10,000 per year, with an earnings rate within the pension account of a modest 5%.

The below table sets out the results.

In the above example, the person with $1,050,000 has a significantly higher regular income over time due to the higher amount of capital available to them and the requirement to draw down an increased minimum amount from their pension accounts as they get older.

The above graph also shows that even with the increased withdrawals, in this particular scenario you will still have considerably more assets throughout your life that you can also draw down on if you need to. Not only that but you need to remember that even if you do not qualify for any age pension at the start of your retirement, as your assets decrease over time you may end up qualifying for the age pension later on in retirement.

In fairness to the author of the original article, it was probably designed to indicate that in order to have a ‘comfortable’ retirement, due to the age pension, you can get by on a smaller pension savings balance. To suggest however that “retirees with modest savings can be better off than those with more than twice as much” is just plain wrong and doesn’t take into account all the pieces of the puzzle.

To speak to someone about growing your retirement wealth so you can have a better lifestyle in retirement speak to one of our advisers at JBS Financial Strategists.

– Liam Rutty –

Employees, you can now get a tax deduction for Lump Sum Super Contributions Prior to the 30th of June.

Previously, as an employee you could only make tax deductible contributions into Super via Salary Sacrifice Contributions. The nature of Salary Sacrifice Contributions are that they must be pre-scriptive, therefore in the event that you have a windfall, sell some assets or decide late in the financial year that you have the capacity to make extra  superannuation contributions, historically it has been difficult or you haven’t been able to.

Since July 1 2017, the ten percent employment rule regarding tax-deductible super contributions has been replaced. The rule meant that a person could not claim a tax deduction on personal Super Contributions if more than ten percent of their assessable income was obtained as an employee. The new rule is now any person under age 65 now may be able to claim a tax deduction on their contributions regardless of their employment arrangement, whilst those aged between 65 and 74 need to satisfy the Work Test in order to be eligible to make a contribution, and subsequently claim a tax deduction.

The following example shows how John was able to save $3,300 in tax by taking advantage of the New Rules:

John works as an employee. He has a salary of $100,000 plus Super Guarantee Contributions of $9,500. He is focusing on reducing his mortgage and at the moment doesn’t have the cash flow to do any additional Salary Sacrifice Contributions. He has however recently decided to take a profit on some shares that he has held for a long period of time. This sale has caused a Capital Gain of $15,000 (after 50% discount).

Prior to the 1st of July 2017, as his income from employment was more than 10% of his total assessable income for the financial year, he wasn’t eligible to do anything about this gain and would simply have to add the $15,000 to his assessable income and pay approximately $5,550 in tax (plus Medicare).

Because of the changes on the 1 July 2017, he is now eligible to make a Lump Sum Tax Deductible Contribution into Super to offset the Capital Gain and reduce his taxable income by $15,000.

By contributing $15,000 into his super as a Lump Sum Tax Deductible Contribution, John is able to save $3,300 in net tax and move his wealth into the concessionally taxed super environment for future investment.

Like all strategies, your own personal circumstances need to be considered as factors such as your level of superannuation contributions (including employer contributions and the contributions caps), can trip you up and cause issues. However, when implemented correctly the new changes do open up a number of opportunities previously unavailable.

If you would like to discuss how these changes could benefit you, please contact the team at JBS.

– Warren Hanna –

Towards the end of each year we always focus a lot on celebrating Christmas and New Years, however there’s something else we could also celebrate post-Christmas. We’re talking about celebrating your family’s financial security by having personal insurance in place. Having personal insurance cover in place means you and your family won’t have to deal with financial stress in the event of you being unable to earn an income or even passing away. Ideally all your personal insurance covers should be in place prior to the “Silly Season”, however if you haven’t done so already the new year is a perfect time to review your insurance needs.

With all the festivities and celebrations over and done with, for most of us it’s now time to pick up the pieces and start the New Year a fresh, which is a perfect time to review your personal insurance needs. Research from one of Australia’s largest personal insurance companies have found that only 37% of Aussies aged between 18-69 actually have life insurance and even more disturbingly only 18% have disability cover and income protection insurance. Further findings include how Australians are grossly underinsured. It’s estimated that the underinsurance gap in Australia is approximately $1.8 Billion, meaning there are a lot of Aussies out there who believe they have sufficient insurance cover, but in fact don’t. For most of us, we don’t like to think about insurance and when asked about how much we have, the first response is usually “I don’t know”.

So we come to a point where you should ask yourself, do you need personal insurance? The main reason you would put in place insurance cover, is to secure your family’s financial wellbeing. So if you have a mortgage, loans, kids etc… chances are you will need personal insurance. The question you have to ask yourself is, “if I’m unable to earn an income tomorrow, what would happen”? Then for those of you that already have some form of insurance cover in place, the question you should ask is “how do I know the level of insurance I already have in place now is adequate?” The short answer is to seek professional advice.

Whether you don’t have any insurance at all or looking to review your insurance needs, the best thing to do is see someone who is a professional in the area. Financial Planning firms such as JBS Financial Strategists will be able to determine what your insurance needs are and then formulate a strategy to ensure you have the correct and adequate cover in place. So as a new year’s resolution, do yourself a favour by ensuring you have adequate cover in place so you’ve got something else to celebrate about (your family’s financial security).

– Andy Lay –

Rule changes occur regularly with the Government in power tweaking legislation to make it fairer for all and ensure that the Government isn’t relied upon to fund everyone’s retirement through the Age Pension. This balancing act means that the strategy you implemented last year may no longer be beneficial for you or worse, not allowed. One change that is due to take effect from 1 July 2017 is the change of the tax treatment for Transition to Retirement pensions.

Transition to Retirement (TTR) pensions were introduced back in 2005 to allow those people that were easing into retirement by dropping their working hours to supplement their wages with an income from their super balance. However, while this was very useful for those in retirement transition, it also proved to be a powerful financial planning strategy, recycling funds through the super system to achieve the same take home pay however a reduced tax liability, meaning more funds are held in your superannuation account building for your eventual retirement. The Government and ATO knew of this strategy however as it was within the bounds of the laws in place, it has been accepted for use.

It does seem, however, that the Government now understands the additional tax that could be found and has implemented changes to take effect 1 July 2017 to make a TTR pension lose its tax-free status. This means that a TTR pension will have the same tax treatment as if it was in a superannuation account (15% tax rate). For those in the retirement transition space, it probably won’t change much as they need to subsidise their income and if the money wasn’t held in pension, it would be subject to the 15% super tax rate anyway. For those who have employed a TTR strategy to reduce tax, the tax savings will be reduced.

The strategy may still be beneficial, especially if you are able to achieve a significant salary sacrifice contribution from a higher income, however the tax savings will drop as the pension fund will now be subject to the 15% tax rate also.

Example:

* For the purposes of this simplistic calculation, ‘Tax on Pension Investment’ is the 15% tax on investment income earned (4%) while money is held in a TTR pension. If assets were sold during the year, CGT would also be payable, making it again less tax effective. As this individual is under age 60, pension income is taxable.

Some clients situations allow them to maintain a tax-free pension or become eligible to establish one in the future. For this reason it is critical that all TTR strategies are reviewed prior to 30th of June 2017 as the new rules may not be applicable to you.

While you need to be making an appointment with your Financial Adviser to discuss the changes and determine if there’s still a benefit for you to continue with your TTR, more than anything this should highlight the need to have an ongoing relationship with a financial planner. Make sure you take up every opportunity to have a regular review of your financial plan, your objectives, determine if you are on track to reaching your goals and determine if the strategies in place are still appropriate. Your situation may not have changed but legislation may have.

What if you only invested at market peaks?

Have you ever noticed that as soon as you buy an investment it tends to drop in value? Whilst this doesn’t really always happen, it just tends to be the investments we remember, what if it did happen? Even worse, what if it dropped by epic proportions?

Meet Tim who is the worst market timer that has ever existed. What follows is Tim’s tale of terrible timing of his stock purchases.

Tim, fresh out of school, begins his career in 1970 at age 18. He understands the importance of investing and saving for the future and therefore decides to start allocating $2,000 per year into a savings account. It’s now the end of 1972 and he has saved up $6,000. Into the stock market it goes. Unfortunately for Tim, after watching the stock market go up and up over the last two years, over the next two years it drops 48%. Tim loses a bit of confidence in the market and while he doesn’t sell, he continues to save up his money in a bank account waiting for things to improve.

15 years later and Tim decides that now is the right time to put more money into the market. It has been going up for years and he sees no reason why it won’t continue. He invests his entire $46,000 into the market. After a small decrease the market then drops suddenly on the 19th of October dropping a whopping 27% in one day. Tim’s had enough, no more putting money into the market. He leaves what is already in there as what’s the point in selling now and goes back to saving in his bank account.

After ignoring the market for 12 more years Tim can’t avoid people talking about the internet. Everyone is making money from the internet. Unfortunately Tim knows very little about the internet but the media informs him that there are plenty of companies on the stock market that do. He takes his $68,000 that he has in the bank and jumps in but this time decides to not even look at the market for the next two years. 2 years later he checks his investment and it have once again decreased by 50%.

It’s 2007 and Tim is now 55. He’s looking to retire in 2013 and decides he’s going to have one last dig at this share market thing. He’s managed to save up $64,000 and into the market it goes. Little does Tim know that once again he’s picked a terrible time to invest, the GFC is about to commence with losses of over 50%.

That’s it, no more investing for Tim…..ever! Once again he leaves the funds in the market but saves up another $40,000 in cash before he retires. So what did he end up with at retirement?

Over his working life Tim has managed to invest $184,000 saving an additional $40,000 over the last few years in cash giving a total investment amount of $224,000. Sure he picked the absolute worst times to invest including the bear market in the early 70’s, the infamous one day crash in 87, the technology bust in 2000 and the GFC in 2007. But he never went back on his investment decisions; he never sold any investments.

Tim ended up with a total retirement balance of $1.1 million. While Tim was a terrible market timer, he was a good investor. He saved a regular amount on a regular basis no matter what. He didn’t panic when the market went down and sold his investment. Instead he maintained his investments until he needed the money. Finally, he invested for the long term and even though he pretty much picked the top of the market each time to put the money in, over time the market continued to go up in value, even if he had to wait a little while after the big falls for it to recover, it always did recover and then go on to meet a new high.

We are not recommending anyone follow Tim’s strategy. He didn’t include diversification in his investment product options and if he would have implemented a dollar cost averaging strategy where he contributed his savings amount each year no matter what, he would have ended up with over twice as much.

This is based on a study in the US, given US market investments however Australian markets felt the same crashes and still illustrates the importance of standing strong with your investment decisions. Time in the market is more important than timing the market.

So what can we take out of Tim’s fictional experience?

1.    Losses happen and are part of the deal when investing in the share market. It’s how you react to those losses that will determine your investment performance over time.
2.    Invest for the long term and let compound interest work for you.
3.    The biggest factors when determining growing your wealth are time, and savings amount. The effect of the actual returns the investments generate on your portfolio pale in comparison to how much money you contribute and how long you invest. Get these two things right, and the rest will follow.

If you are thinking about investing or want to learn more about how you can start your investment portfolio, contact one of the advisers at JBS.