What I Wish I’d Known – Financial Advice for My Younger Self: #4 An Effective Super Strategy for Professionals

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By Brett Cribb, Financial Adviser

When it comes to making the most of superannuation, here’s my advice: Do what you can, as early as you can, to take advantage of the tax-efficient savings environment that the Australian superannuation system offers. Whatever you do (or don’t do) in relation to your super will be reflected in the lifestyle you will be able to afford when you retire.

The imminent reduction in the concessional super contributions cap (including both employer and pre-tax contributions and salary sacrifice) is likely to have significant consequences. This may affect Australians at a stage of life when many find they have the extra income available to contribute to their super, as the contributions cap may restrict their ability to do so.

With continuing changes to the rules associated with super, you should not assume that you will be able to rely on contributing large amounts to boost your super balance as you approach retirement.

Salary sacrificing (or making tax deductible contributions) can be an effective strategy for building your super. This strategy redirects some of your pre-tax income into super where contributions are taxed by the super fund at 15% (the same rate as your employer’s contributions), which is likely to be lower than your marginal tax rate. Note that if your income is above $250,000 pa, you may be subject to an additional 15% contributions tax.

Starting salary sacrificing early and maintaining it throughout your working life may help build your super balance for your retirement.

Here’s an example of how a young professional can use salary sacrificing to accumulate super for their retirement. Importantly, this strategy avoids relying on boosting their super savings through salary sacrificing significant sums from their salaries in the decade before their retirement.

Joe is a young professional with an annual salary of $100,000. With a good income and few financial responsibilities, Joe can comfortably salary sacrifice $5,000 each year. Compounded over 20 years or more, this will amount to very effective saving compared to.

If Joe is able to salary sacrifice $5,000 pa throughout his working life, his super will grow to a level that may not be reached by salary sacrificing large amounts in the decade before retiring – please see the projection on the graph below. The main reason for this is that pre-tax super contributions may be restricted to amounts that won’t have time to grow adequately before retirement.

Assumptions:

  • Joe is 30 years of age
  • Super balance at commencement $80,000
  • Joe’s salary is indexed by Average Wage Ordinary Time Earnings (AWOTE)
  • Joe salary sacrifices $5,000pa to superannuation
  • The net total return in superannuation is 7.40% pa

Outcome:

  • The difference in super balances by Joe making salary sacrifice contributions of $5,000 pa is over $200,000 in 20 years’ time.

Disclaimer: The above projection is for comparison purposes only and is not a guarantee.  The projection is not intended to be your sole source of information when making a financial decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about salary sacrifice contributions to superannuation.

The Dilemma:

Many Australians expect or even rely on being able to increase their super contributions later in their working life, once the mortgage is under control or in the final years of children’s schooling. Their aim is to boost their super balance in the ten or so years before they retire. This may seem a sound plan, but the limits to make tax-effective super contributions may restrict their ability to do so.

In Summary:

Seeking advice and implementing a salary sacrifice strategy early in your career can make a huge difference to your super balance when you retire. I urge young professionals to seek professional advice which considers planning for their retirement. Please contact me if I can help you or a young person in your life on (07) 3007 2007 or bcribb@stratusfinancialgroup.com.au.


What I Wish I’d Known – Financial Advice For My Younger Self Series

  1. Three Golden Rules for Money Management
  2. How To Pay For Insurance
  3. A Most Important Financial Planning Tool
  4. An Effective Super Strategy for Professionals

    Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.

What I Wish I’d Known – Financial Advice For My Younger Self #3: A Most Important Financial Planning Tool

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By Steve Nicholas, Financial Adviser

I wonder how many young people know that superannuation is one of the most important financial planning tools we have to help us preserve and make the most of our wealth. I wish I’d known this earlier and made more informed decisions about my super when I was younger.

In particular, I should have looked at my super’s investment strategy; it could have made a big difference to my savings.

Super can be a complex issue and requires expert financial guidance if you want to make the most of it, particularly if you are relatively new to the workforce. It is important to understand that  your choice of super investment strategy when you’re young can help to grow your savings.

Many young people are given ‘default’ super choices by their first employer which may not necessarily be the most appropriate option for them. Typically, default funds are invested in a ‘balanced’  investment option which can have around 30% invested in defensive fixed interest and cash type investments. This default investment option for your super may be more conservative than it perhaps should be.

One of the benefits of having a super strategy that is appropriate for your circumstances is that you can earn a better return with higher growth, making your money work harder for you.

For example, a more ‘aggressive’, higher growth investment option could achieve on average a 1 to 2% per annum higher return than a balanced fund. Compounded over a long period of time, this extra return will significantly increase the amount of super you accumulate, in some instances over $100,000. As a result, you will have more options when it comes to enjoying the lifestyle of your choice in retirement.

If you don’t have an appropriate strategy in place early, you may end up foregoing wealth and reducing your opportunities later in life.

This chart shows the difference between ‘balanced’ and ‘aggressive’ super investment options over a 35-year period.

 

Key Assumptions:

  • Kylie’s salary is $80,000 at age 30 with legislated super guarantee contributions received while she works through to age 65. Her salary increases at 3.0% per annum and inflation is 2.50% per annum.
  • Kylie has an initial super balance of $40,000.
  • Figures are net of fees; returns are pre-tax; taxation is not considered in the projection.

Situation 1: ‘Balanced’ super portfolio (the green line)

At age 30, Kylie’s super balance is $40,000 with an investment return of 8.00% per annum. At age 65, her super balance is $797,400 (in today’s dollars).

Situation 2: ‘Aggressive’ super portfolio (the red line)

At age 30, Kylie’s super balance is $40,000 with an investment return of 6.50% per annum. At age 65, Kylie’s super balance is $606,280 (in today’s dollars).

Disclaimer:  The above projection is for comparison purposes only and is not a guarantee. The projection is not intended to be your sole source of information when making a financial decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about salary sacrifice.

Get financial advice early

Financially speaking, the sooner you take financial advice, the more you will benefit – both now and later on – from your income. Many young professionals are given default super schemes which may not align with their circumstances, interests and goals. Seeking the right advice early is key, but do your homework and choose a professional who feels like a good fit.

Here are some tips on how to choose a firm to advise you:

  • Ask for recommendations from your peers.
  • Check out a firm’s and advisers’ credentials and read their client testimonials.
  • Enquire about their specialisations.
  • Contact them by phone or email, and start asking questions.

If you (or a young person in your life) would like to talk to a financial planner at Stratus Financial Group about cash flow, insurance, super or any other financial matter, please contact us. It will be our pleasure to help. Phone (07) 3007 2007 or email snicholas@stratusfinancialgroup.com.au.


What I Wish I’d Known – Financial Advice For My Younger Self Series

  1. Three Golden Rules for Money Management
  2. How To Pay For Insurance
  3. A Most Important Financial Planning Tool
  4. An Effective Super Strategy for Professionals

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.

What I Wish I’d Known – Financial Advice for My Younger Self #2: How To Pay For Insurance

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By Ross Munro, Financial Adviser

We tend to feel pretty invincible when we’re young. We’re optimistic about the future and not ready to consider the ‘what ifs’: stroke, heart attack, melanomas, chronic illnesses or injury and even death.

I’m lucky not to have experienced any of these, but I’ve known many people ‘just like me’ who have and weren’t prepared. The good news is, there’s a range of insurance policies available to protect our wealth, our business and our families in the event of our death or disability or the loss of a business partner. But one thing I wish I’d known is that there’s a significant benefit in taking out insurance when you’re relatively young. Keep reading for the insurance advice I would give my younger self.

When you purchase life, total and permanent disability (TPD), income protection or trauma insurance, you can choose whether to pay for it in ‘stepped’ premiums or ‘level’ premiums. My advice, in summary, is to consider paying level premiums if you’re under 40. This short video provides a helpful overview.

Most policies are paid for in stepped premiums. These are calculated according to your age and recalculated each year when you renew the policy. You pay for the risk associated with your current age, which means that your premium increases as you age as the likelihood of a claim increases. So the older you get, the more you can expect to pay.

  • A disadvantage of paying stepped premiums is that some people may no longer be able to afford the same level of cover as they age (and potentially have more need for the cover) and the premiums increase.
  • An advantage of paying stepped premiums is that they are generally cheaper at the start of the policy, making it more affordable to hold insurance in the short term.

In contrast, level premiums are calculated according to your age when you open the policy, and usually don’t change (other than to reflect CPI and the insurer’s fee) until you are 65 (at which time they revert to stepped premiums).

  • A disadvantage of paying a level premium is that it usually costs more than a stepped premium in the very short term, although you’ll generally get pay-back after seven to eight years.
  • An advantage of paying a level premium is that you know in advance what your premiums will be and can plan accordingly.

Further considerations

  • If you’re under 40, it’s definitely worth considering level premiums as, by the time you are 65, the total cost of your insurance policy will usually be significantly less than if you had chosen stepped premiums.
  • As a young professional, you are likely to be able to afford the initially higher level premium given that you have fewer financial commitments. And later, as your expenses and financial obligations increase, you will be able to enjoy the fact that your insurance premium won’t.

Get financial advice early

You should discuss the advantages and disadvantages of stepped and level insurance premiums for your particular circumstances with your financial adviser. Seeking the right advice early is key, but do your homework and choose a professional who feels like a good fit.

Here are some tips on how to choose a firm to advise you:

  • Ask for recommendations from your peers.
  • Check out a firm’s and advisers’ credentials and read their client testimonials.
  • Enquire about their specialisations.
  • Contact them by phone or email, and start asking questions.

If you (or a young person in your life) would like to talk to a financial adviser at Stratus Financial Group about cash flow, super, insurance or any other financial matter, please contact us. It will be our pleasure to help. Phone (07) 3007 2007 or email rmunro@stratusfinancialgroup.com.au


Related Articles

What I Wish I’d Known – Financial Advice For My Younger Self Series

  1. Three Golden Rules for Money Management
  2. How To Pay For Insurance
  3. A Most Important Financial Planning Tool
  4. An Effective Super Strategy for Professionals

Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.

What I Wish I’d Known – Financial Advice For My Younger Self #1: Three Golden Rules For Money Management

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by James Marshall, Financial Adviser

If you could go back and advise your younger self on money management, what would you say? What do you wish someone had told you? And which good money habits do you wish you’d picked up sooner?

In this series of articles, we share advice for our younger selves in three core areas of financial knowledge. Article #1 includes helpful tips and what I wish I’d known earlier about day-to-day money management.

#1: Three golden rules to help you manage your money

When I first started earning, I remember the freedom and independence that came with it. I had very few financial commitments and no serious responsibilities, and I spent just about all my income. But before long I was wondering where my money was going. I wasn’t seriously in debt, but I did have a niggling feeling that something wasn’t quite right.

In retrospect, I wish I’d known these golden rules for managing my cash flow:

Rule 1: Never spend more than you earn
Rule 2: Know where your money is going
Rule 3: Save some of it

Using these rules puts you in control and removes the considerable stress of suddenly finding out that you have overspent or won’t be able to afford an unavoidable expense. Using these rules also helps you to develop a financial understanding that will develop further and benefit you in the years ahead as your circumstances become more complex and may involve other people such as your future family.

Rule 1: Never spend more than you earn

It all starts with knowing how much you earn – this is your income including the tax you pay to the ATO.  The tax is your money too and with appropriate financial planning strategies, you may be able to keep more of it than you thought.  But that’s another story …

Let’s assume you earn $100,000 p.a. and pay $26,500 tax. This will leave you $73,500 in hand (your ‘take home pay’) to cover all your expenses over 12 months. Rule number 1 is to never spend more than your take home pay, so you’ll need to review your annual expenses to make sure they come in at less than $73,500.

TIP Make sure you know your annual income. It may be on your payslip or previous tax return.

TIP Setup a direct debit from your transaction account to your savings account so savings happen automatically – as Warren Buffett says ‘Don’t save what is left after spending, spend what is left after saving’.

Rule 2: Know where your money is going

A helpful way to investigate your expenses is to divide them into ‘essentials’ and ‘non-essentials’. As the name implies, essential expenses are difficult to avoid and include things like mortgage or rent payments, utility bills, the costs of running a vehicle, car insurance, home insurance and so on. In contrast, what you spend on non-essentials (entertainment, eating out, travel, hobbies and clothing) is a conscious decision and tends to vary more than your essential expenses.

While I’m not suggesting that you miss out on all the good things in life, conscious decision making is simply good practice so that you don’t spend what you don’t have.

Stratus Financial Group’s cashflow service provides the automatic link of your bank transactions to budgeting software. This allows you to build a personalised spending profile by linking with and tracking transactions in your securely-linked bank accounts. Budgeting in the 21st century no longer means you need to manually download or enter transactions from your online banking. It’s quick, easy and simple to use – you’ll even have the ability to track your spending on the go with iPhone and android apps.

TIP Once you’ve reviewed your spending patterns it’s time to identify where you can save. Found you’re spending too much on clothes? Why not reduce temptation by decreasing your ‘spending money’ by increasing the amount you transfer to your savings account?

Rule 3: Save some of it

Before long your basic cash flow should be under control and you will be spending less than you earn. At this stage, a simple way to jumpstart your life savings is to invest some or all of your surplus income. Putting a little extra away now can make all the difference to your financial future.

TIP Use one of the many free online forecasting tools to plot a savings graph for yourself like the one shown below. It can be very motivating to see what the actual outcome would be of your own regular savings habit. They say you can’t score without a goal, so why not set yourself a savings goal at the same time?

TIP Each time you receive a pay rise make sure you increase the regular debit to your savings account.

The following chart helps you consider the potential impact of saving $1,000 per month for five years. Saving $1,000 per month should be comfortably manageable if your income is around $100,000 p.a.

Key Assumptions:

  • Sam has an income of $100,000
  • Sam invests $1,000 per month for five years (commencing with $1,000 in January 2017)
  • Sam reinvests the interest on their account
  • Interest rate of 2.80% p.a. compounded monthly
  • Excludes the impact of tax.

Disclaimer:  The above projection is for comparison purposes only and is not a guarantee.  The projection is not intended to be your sole source of information when making a financial decision. You should consider whether you should seek advice from a licensed financial adviser before making any decision about salary sacrifice.

Get financial advice early

Financially speaking, the sooner you take financial advice, the more you will benefit – both now and later on – from your income. Many young professionals with relatively few financial responsibilities get into the habit of spending most if not all of their income without a thought about their future wealth. Seeking the right advice early is key, but do your homework and choose a professional who feels like a good fit.

Here are some tips on how to choose a firm to advise you:

  • Ask for recommendations from your peers.
  • Check out a firm’s and advisers’ credentials and read their client testimonials.
  • Enquire about their specialisations.
  • Contact them by phone or email, and start asking questions.

If you (or a young person in your life) would like to talk to a financial planner at Stratus Financial Group about cash flow, super, insurance or any other financial matter, please contact us – it will be our pleasure to help. Phone (07) 3007 2007 or email jmarshall@stratusfinancialgroup.com.au


Related Articles

What I Wish I’d Known – Financial Advice For My Younger Self Series

  1. Three Golden Rules for Money Management
  2. How To Pay For Insurance
  3. A Most Important Financial Planning Tool
  4. An Effective Super Strategy for Professionals

    Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Stratus Financial Group strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.

Taxation outcomes are illustrative only. Always confirm your tax position with a registered tax agent.