Newsletter – Summer

Mentor Newsletter Summer
How to make a financial plan
How to make a financial plan

A financial plan can help you build wealth over time, aiding the protection of your financial future. If that sounds like a good idea, it could be good to find a trusted financial adviser who can help you on this journey.

Australians are increasingly recognising the value of financial advice with 27 per cent having received financial advice and 41 per cent of us intending to seek the expertise of a financial adviser in the future.

But that’s not all.

According to research by the Australian Securities and Investments Commission (ASIC), Australians are seeking financial advice for a multitude of reasons, including expertise in areas they might not have, their access to investments that are hard to find, as well as their assistance in helping to create a financial plan to build and protect wealth.

A financial plan helps to set out your future goals and outlines strategies to help achieve them. It’s a way to map your financial path to important events such as planning for a wedding, having a family, saving for a house or having a comfortable retirement – to name a few. Regardless of why you’re in need of one, a financial plan will be different for everyone, depending on life stage, priorities or financial goals.

Financial planning building blocks

The first part of the financial planning process is to find a financial adviser you’re comfortable with. A good place to start is the Financial Planning Association of Australia’s (FPA’s) Find a Planner web site, which hosts a range of different options in your local area, along with their specialisation to help you choose what’s right for you.

When choosing which financial adviser you’d like to work with, it’s a good idea to factor in their expertise and costs, as well as references from other clients or testimonials on their website.

Starting the journey

Once you’ve found a financial adviser you’d like to build a relationship with, sit down and discuss your goals, aspirations and attitude to money. This important fact-finding exercise will give your adviser information to help build out your financial plan.

During the financial planning journey, your adviser may give you advice on potential investments, as well as ways to increase your super balance when planning for retirement. They may also help pull together a budget or recommend insurance policies to suit you, and your family’s, needs.

Since that’s a lot to get through, for your initial meeting, it’s good to come prepared with basic information such as details about your salary, the superannuation you have already accumulated, as well as any debts or assets you have. If you can, also bring along your monthly budget and expenses so they have more visibility of your comings and goings.

It’s important this meeting is also a two-way flow of information, so you can ask questions such as:

  1. The adviser’s own philosophy on wealth creation
  2. How they will communicate with you, and, give you information about how your investments are performing
  3. How and when they will review your plan
  4. Any fees or charges

After this initial meeting, the adviser may prepare a statement of advice, which will include a strategy for how you may be able to meet your personal goals and objectives. This will include:

  1. A summary of your existing financial position and your life goals
  2. A list of recommended investments and an explanation for why they have been recommended
  3. Suggested insurance policies
  4. Fees and charges, you will pay to the adviser

It’s also a good idea to go through this with your adviser so you understand the consequences of accepting or rejecting their advice.

Protecting your position

Part of developing your financial plan is working out how to protect your assets and your income sources along the way. This will often involve taking out different insurance policies including:

  1. Life insurance: to protect you and your family if you die.
  2. Total and permanent disablement insurance: which may pay out should you suffer an injury, accident or illness that means you are unable to work.
  3. Trauma insurance: which may provide cover should you be unable to work due to conditions such as cancer or heart attack.
  4. Income protection insurance: which may replace your wage if you are unable to work due to illness or injury.
  5. Insurance can help you meet your mortgage repayments and other obligations if you suffer an accident or illness or protect you and your family if you are unable to work.

It’s important to consider the right cover for you, your family and your circumstances as part of your financial plan.

Key considerations

It’s easy to assume you don’t need a financial plan because you don’t yet have substantial wealth or assets, or, even because you are too young. But the sooner you start taking control of your wealth, the more confident you will feel about your future and the financial steps you need to take to get there.

Source: BT

Banner - Preparing for Retirement
Preparing for retirement during COVID-19
Preparing for retirement during COVID-19

Timing is everything. It’s true in comedy, and it’s also the case when it comes to retirement.

After decades of work, moving to the next stage of your life is a time of great anticipation. Your super is at its highest, you’ve planned for a lifetime of retirement income... and then…. 2020 happens.

In the grip of the covid-19 economic crisis, interest rates have been cut and companies are slashing dividends. All of a sudden, retirees relying on dividends for income may be considering withdrawing capital to fund their retirement.

That’s why, now more than ever, it’s important to understand sequence-of-returns risk – or simply sequencing risk – and its effect on your long-term portfolio value. Taking this risk into consideration will give your investments the best opportunity to recover when the market does.

Understanding sequencing risk

When your assets are at their peak, so is their exposure to market fluctuations. If you’re nearing or in retirement and this coincides with the end of a long market rally, this can be bad news.

Significant negative returns in the years around your retirement can have a big impact on your future finances. That’s because you have to sell more shares to get the same income. When the market does recover in the future, you have fewer shares to benefit from the rebound.

Challenges for retirement income

2020 has been a difficult year for generating income from your retirement assets. The effect of record low interest rates has been well documented. Many companies have also cut dividends, including traditional dividend stocks such as the big banks.

This may have a large impact on portfolio income, and for some investors it may be tempting to move from equities to other income generating assets – or drawing down from super altogether to supplement income.

Knee-jerk selling during times of volatility or a market downturn can have a long-term negative impact on your investment objectives, as your portfolio may no longer match your risk profile.

For investors who rely on dividends to pay their bills, it will feel like a long wait for dividend payments to recover. What can you do in the meantime to balance the need for income and minimising sequencing risk?

Weathering market volatility

This year’s market volatility and dividend cuts show how important it is to have a flexible plan for your retirement. While your adviser can tailor a strategy for your individual circumstances, here are some ideas to consider.

Ensure your portfolio is well-diversified

Research shows that appropriate diversification across asset classes, local versus global markets, and even alternative investments not correlated to the market, can help lower the volatility of returns and lessen the impact of a downturn.

If you’re still working, aim to build a buffer of enough cash – or similar investments such as term deposits – to cover at least one year’s worth of living expenses.

If you’ve recently retired, liquid assets you can draw on outside super may help offset any reduced pension income. Otherwise, in a diversified portfolio aligned to your risk profile, drawing on cash holdings first will help keep your other investments exposed to the market.

Keep your money in super for longer

If you can afford to, keeping your money in super this year is important, as every dollar you pull out now won’t be there to benefit from a future rise in value.

If you’ve converted your super into an account-based pension (ABP), you may take advantage of the government’s halving the mandatory drawdown limits until 30 June 2021 and reduce your pension withdrawals.

If you’re in a platform or an SMSF you have flexibility to decide how to fund your ABP payment. On the other hand, retail or industry super funds will generally make the decision for you – in either case, speak to your financial adviser to find out more.

Consider an annuity

Buying a term or lifetime annuity provides you with a guaranteed income stream over a chosen period, regardless of the sequence of investment returns. While an annuity will give you peace of mind, the returns tend to be lower than other higher risk investments, which may not be suitable for everyone.

Review your spending plans

Whether it’s on travel or new hobbies, new retirees generally spend more than they do later in retirement.

Now is a good time to review your spending plans. While covid-19 is making people delay their big trips, other steps you can also take to reduce your withdrawals and stay invested will minimise the impact on your retirement portfolio.

While wealth accumulation when you’re working may appear simple (save, save, save!) – the best way to draw down on your accumulated assets in retirement can be more complex. Covid-19 is a reminder that generating a steady and sustainable income for your lifetime requires careful planning.

Source: Perpetual

Banner - Your no. 1 financial focus – decade by decade
Your no. 1 financial focus – decade by decade
Your no. 1 financial focus – decade by decade

Everyone has a different life journey they’re on. But getting on top of key financial goals as you follow your own path could see you enjoying a more comfortable lifestyle and being ready for the next chapter to begin. Read our guide to getting all your money matters sorted out, one decade at a time.

In your 20s

Goodbye debt – the real danger in your 20s comes from building up debts that will need to be paid off before you can use your income for other financial goals. Buying a home, investing or saving for retirement – all these things can end up on pause indefinitely while you get debts under control.

Hello investing – any investment is unlikely to earn more than you’d pay in interest on personal borrowing, so it’s important to pay debts down before getting started with investing. But investing while you’re young is important because the gains you can make through compounding returns really add up over time. Keeping surplus money in cash or in a bank account could leave your savings losing value thanks to inflation.

Your super – super is likely to be one of your most tax-efficient ways to invest. So give some thought to your super fund as one of several options to turn savings you have now into future income.

In your 30s

Personal insurance – your 30s are often a time when commitments and responsibilities start to ramp up. Career, kids and a mortgage could all be coming into the picture. If you haven’t arranged personal insurance until now, make sure it’s on your checklist. You may have cover through your super fund, so remember to check your super statement and consider whether it’s enough cover to provide for your family.

Paying for education – if you have kids then private education fees may be on the cards in the years to come. Making some timely investments that can earn enough to cover those costs will save your cash flow from being squeezed when you may have many other big bills to pay for – household expenses, your mortgage and more.

Your super – as your super balance starts to grow through superannuation guarantee contributions, keeping an eye on things like fees and investment options will ensure you’re on track for a comfortable retirement in a few decades’ time.

In your 40s

Manage spending – the great news is you’re probably hitting your straps in your career and earning more. But living expenses can skyrocket at this time if you have a mortgage and kids are on the scene. Now is the time to focus on what you value and budget accordingly.

Reduce money stress – if you’re struggling to manage cash flow, focus on your spending and lifestyle priorities and feel like your finances are out of control, a financial plan can help.

In your 50s

Get mortgage-free – if you still have a big home loan balance, now is the time to chip away with extra payments so you can get mortgage-free before retirement. Not only will it save you on interest in the longer-term, it means more of your retirement income can go towards ticking things off the bucket list, rather than keeping a roof over your head.

Invest wisely – once you’re in the clear with debt, consider putting any cash flow surplus into super. And as you get closer to retirement, it’s important to make sure your super is invested in a way that won’t put your savings and income at risk when you decide to retire.

In your 60s

Manage your savings and income – apart from your home if you own one, your super is likely to be your biggest asset at retirement. So it makes sense to do some careful thinking and planning before making choices about how to maximise income from your retirement savings.

Get ready to hand over – being in the best of physical and financial health means you can look forward to a retirement with few restrictions. While you’re feeling and living well, it’s a good idea to get your Power of Attorney and estate plan arrangements organised. This will allow you to get the help you need if and when things change, and you’re less capable of taking care of your finances.

Source: Money and Life