Plan 2 Prosper

If you’re relying on your family home to provide a large chunk of your retirement savings, you could end-up disappointed.

The shortcomings of home ownership

Many people think that owning a home is the key to long-term financial security. However, unless you plan to rent out a bedroom, your home will not provide an income to meet your living expenses in retirement.

Even if you plan to ‘downsize’ your home (ie buy a cheaper one and invest the difference) you may not have much left over after paying real estate agents fees, legal fees and stamp duty.

You also need to consider whether you are prepared to part with the family home and all the memories that come with it. When it comes to the crunch, a recent study by a leading Australian strategic market research consultancy, found that only 16% of retirees under age 70 have actually sold their house to fund their retirement.

If you want to live comfortably, you should aim to build a substantial nest egg outside the family home. And for most people, it’s hard to go past superannuation now that the Government has legislated that no tax will generally be payable on super benefits from age 60 from 1 July 2007.

Your mortgage or your super?

If you currently have a mortgage, you will need to make the minimum loan repayments. But what should you do if you have some surplus cashflow? Should you pay more off your mortgage or invest it in super?

The traditional view has usually been to make additional loan repayments. The reason is that each dollar you pay off your mortgage can effectively earn an after-tax return equivalent to the home loan interest rate, without taking any investment risk.

But what this view ignores is that, depending on your circumstances, you may be able to put more of your cashflow to work if you make salary sacrifice super contributions. Salary sacrifice super contributions are made from your pre-tax salary and are taxed at a maximum rate of 15% in the fund. Conversely, home loan principal repayments are made from your after-tax salary (ie after tax is deducted at your marginal rate of up to 46.5%).

What is the right thing to do? … Seek advice regarding your situation

There is no one 100% right or wrong answer to this question … The most honest answer may sounds like a cop-out but it is true … It all depends.

The right answer for you will depend on a range of factors which are unique to you. For example, paying as much as you can off your home loan may still be the best approach if you prefer a guaranteed rate of return and don’t want to lock away your money in super.

Plan to spend some time and effort on determining your future and what you need to do to prosper.

Seeking advice will be an important part of your reflective planning so that you can truly take advantage of any changes in markets, legislation and your own personal environment.

Where to from here?

• Contact us
• Get more information about an Educational Forum for you and your friends
• Register and receive regular email updates

Dan Smith is a self employed Financial Planner based in Rockhampton. He has clients in various locations throughout Australia but predominately in Central Queensland and specifically the geographic area encompassed by the Rockhampton Regional Council.

For many personal risk policies, exclusions already apply for pre-existing conditions and self inflicted injuries. (Do you know what loadings and exclusions are in force on your policies? Have you stopped smoking? Are you now free from any previous medical conditions?)

A surge in Income Protection claims for car accidents as a result of driving offences (including drink driving and speeding), have resulted in the industry giving consideration to placing exclusions for criminal activity on their policies in states where these offences are punishable by jail term.

These types of exclusions could cause concern for people with a history of speeding and dangerous driving.

What does this mean for you, if you are in an accident and off work for longer than the waiting period?

• If you are charged for driving under the influence and consequently jailed, potentially no claim would be paid.
• If you are injured in a speed related accident, and charged for this offence, potentially no claim would be paid.
• If you are injured during your participation in a criminal activity, potentially no claim would be paid.

Remembering that we live in a society where we are innocent until proven ‘guilty’, it is important to keep in mind that if charges are dropped, back payment may be received. Never assume a claim will not be paid, there may be other mitigating factors for the underwriters to consider in assesment of the claim.

As at August 2007, only four of the major life companies have this exclusion. As the majority of my clients hold MLC policies, I will convey that MLC, as yet, has not embraced this exclusion  MLC Insurance … Enjoy Life.

My general recomendation to you is … revisit your insurance policy document and refresh your understanding of what your policy covers.

Should you need help in this contact us and organise a time to review your current protection strategies.

I have spoken with a few clients recently about their wealth protection needs. While we were rivetted in a values based exploration of what was important to them I was stopped when I began speaking about the likelihood of needing to go through underwriting.

The wonderful couple indicated that they’d heard their parents talking about underwriters previously but never been sure if it was a mysterious dark art or whether it is just someone wanting to make life difficult …. we shared a laugh and I then tried my best to explain the role of the Underwriter.

I referred to a client  guide MLC had previously provided to help me with my explanation. Upon reflection I thought it might be an appropriate thing to share with you …  Guide to Underwriting

Let me know by posting your comments if you find out something you didn’t know from the Guide to Underwriting.

Many people will receive some tax concessions from July 1 2007. There is currently a great opportunity to put the extra $$ to use before they are swallowed up in day 2 day spending.

The breaks and concessions will definitely not be enough to have an epiphany and leave work, but they will provide potentially provide you some additional cashflow which could be harnessed.

5 things you could do include:

• Pay of any non deductable debt you have
• Salary Sacrifice more $$ into super (to maintain your disposable income)
• Receive Government Co-contribution
• Increase your insurance cover
• Start a regular savings plan

There are many variations on the 5 ways listed above:

for example, you may not personally be eligible for Government co-contribution but your teenage son/daughter/grandchild who is working part time could be. Your extra contribution to their super could be an ideal way to help them get a headstart in later life.

What is appropriate for you will depend upon your timeframe, goals and attitude to investment risk.

Make the time to review your cashflow so the few extra $$ don’t just get swallowed up.

Unless you have been living under a rock trying to be a hermit and have cut yourself of from all civilisation, you would no doubt be aware that there are some tremors and concerns within the American Economy.

This has already and will continue to have some effect on our economy. Many of the world’s economies are now closely interwoven through their onselling of debt vehicles to drive investments. MLC has provided an investment update to provide some more detail of what is going on from a broader perspective and how this relates to some of their investments. Read more about …. Sub Prime Debt

I believe regardless of the things going on in the world around us which we cannot control, we should all gain some comfort from the real things which we can see and feel each day:

• We eat real food (Kellogs, Kraft, Nestle, DairyFarmers)
• Generally these real foods items have been purchased at a real shop (be it coles, woolworths or local convenience store)
• If we drive we drive in real cars …
• We talk to real people ….

I am sure you follow the examples which could continue to go on … The markets rise, the markets fall … like the sands through the hourglass … these are the days of our lives.

Don’t worry about virtual things which are beyond our control… make sure your plans are in place, with appropriate levels of diversification (see previous blogs for more on this point).

If you would like to review your plans to prosper contact us.

One page summary of investment markets provided by our licensee.

July Investment Review and Outllook 2007

If you are retired, or close to retirement, there’s never been a better time to assess your eligibility for social security benefits.  Between now and 20 September 2007 you should take action to maximise your social security benefits.

A number of changes to the rules on social security eligibility may entitle you to either:

• a full age pension for the for the first time
• higher benefits if you already receive a part-pension
• social security benefits if you are not eligible for a pension, by investing some money in a ‘complying’ asset such as a Term Allocated Pension.

What are the changes?

There have been two recent changes to the rules around superannuation which have impacted on social security eligibility.  The first is that the 50% asset-test exemption will be removed from September 20, 2007.

The second change is halving of the pension assets test taper rate from September 20 which will increase the value of assets which can be held before age pension benefits cut out.

Why a term allocated pension?

A Term Allocated Pension is a complying income stream that combines features of a traditional allocated pension with a fixed term annuity.  The income stream will be payable to you for a specific term of your choice over which time your capital investment will be returned to you.

The reason for choosing a complying pension such as a TAP is that if you do this before 20 September 2007, only 50% of the money you invest is countered towards the Assets Test for social security purposes.  From 20 September 2007, it will no longer be possible to purchase a new Assets Test exempt income stream.

Changes to the taper rate also make Term Allocated Pensions an attractive option before September 20 as for example a couple can have up to an estimated $800,000 in assets (in addition to their own home) before they no longer qualify for an age pension.

Consider your options

There are some restrictions around Term Allocated Pensions and you may want to consider a combination of an allocated pension with a Term Allocated Pension.  It’s important to get advice around your individual circumstances and your retirement goals.

To find out more about these important changes please contact your adviser or make an appointment with Plan 2 Prosper, remember you must act before 20th September, 2007.

The last few weeks have been a concerning time for many people to to the drop in the value of their investments. At times like this, it’s natural to feel like you should be doing something to protect your capital. Before you make any decision that could have an impact on your future standard of living, its important to remember some of the fundamentals about investment markets.

While its disheartening to see your investments fall in value over the short term, the reality is that share markets do bounce back and continue to grow over the long term, despite a range of market shaking events. What’s more, time has previously and continues to play an important role in smoothing out market highs and lows.

If you abandon your investment strategy now, you might end up converting a paper loss into an actual loss. You could also give yourself no chance in participating in any future recoveries. If you are like most people, the best investment approach going forward could involve sticking with the investment strategy that was developed by you and your adviser.

Granted, the ‘do nothing’ approach may not be the most ideal solution for your circumstances, so the best thing you can do is speak to your adviser. Together you can:

• Review your investment strategy
• Reaffirm your goals
• Revisit your investor profile and tolerance of market volatility
• Help you with any other questions.

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