Our financial life cycle can be divided into 3 phases:
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Wealth creation involves taking steps now, to produce wealth in the future. These strategies can include saving or investing some of your income to buying a major asset, e.g. a home or investment property
Interestingly, wealth creation also includes improving your skills through further education, because it is well documented that college and university graduates have greater earning capacity.
The wealth creation phase starts when we leave school and continues to retirement. Our critical income earning years are from our late teens/mid twenties until 60/70 when we can retire.
Students are fantastic at living off the “smell of an oily rag” and the idea of saving or investing given that there is limited spare cash seems difficult to comprehend. Particularly if the focus is on the next overseas adventure or buying a car. However, a simple strategy is to “salary sacrifice” a few extra dollars each pay into your superannuation, or a high yield cash management account. It is our experience that most do not miss the few extra dollars and the discipline will produce long terms benefits.
Once we start full time work we experience is an urge to spend. To use our new found wealth to have a bit of fun. However, while it is important to enjoy ourselves, most people when they have just started full time work still have the budgeting mind set of a student. This means that if you save some of your income you will not miss it. The best way to do this, is to have it taken out of your pay and put into an investment.
For most of us buying a home and having a mortgage is the first major financial decision we make. A common strategy after 2-5 years is to draw on any equity you may have and use it to invest. This could mean using the equity to buy an investment property or to invest in shares, commodities, private equity, etc.
There is also the Aspire strategy that allows you to invest from your first mortgage payment. Importantly, you do not need to wait until property prices have increased to access your equity.
Once you have a range of investments the focus will very much be on ensuring that your investments are tax effective and correctly structured. Before you invest, it is important that you seek advice on the best structure, i.e. should the investment be outside of superannuation, and if so, be in your own name, a trust or company structure. If inside superannuation, should you have a Self Managed Superannuation Fund?
There are three components to wealth management:
Whether you are a student or working, your wealth management strategies should be to ensure that your superannuation is managed by a reputable company. You should at least conduct a six monthly check of the asset mix of the fund, i.e. how much does the fund invest in cash, shares, property and alternative investments. Because you are young investing in growth assets means that you generally have time to recover in the event of a major market correction.Another step you can take is to check that your fund has life and TPD insurance attached to your superannuation. If it does, you will see that you will need to nominate who the beneficiaries are of the life insurance in the event of your death. This may make you think about your mortality and the need to do a Will (estate planning).
Once you have the financial responsibility of a home loan, then it's important that you take steps to protect your wealth. You should have Home and Contents insurance to cover fire and other events that could destroy or reduce the value of your investment. You need to protect yourself from the situation where your asset value is lost or diminished while your mortgage remains. If you have no insurance you could be paying a mortgage and rent. Obviously not a desirable outcome.
Wealth management strategies also include taking out Income Protection and Trauma Insurance. Both of which will cover you in the event of a major accident or disease. Trauma insurance provides a lump sum payment to cover your mortgage and other expenses, whereas Income Protection provides you with a regular income for a defined time period. For more information, see our Insurance section.
Making extra repayments onto your mortgage is another wealth management strategy as is diversifying your investments. Having all your “eggs in one basket” is not a sound strategy.
If you already have investments the wealth management strategies include:
As we are all living longer it is reasonably common these days for people to leave full time work and work part time until their retirement. Many of us are made redundant and unexpectedly find ourselves in the position where it is not possible to get full time work and the few hours we work each week only pay the bills.
It is therefore important to plan for this possibility and take the appropriate wealth management steps, so that we do not find that we use up our assets, e.g. sell investments to fund our lifestyle. You need to talk to an expert about this.
The last stage is retirement. This stage may be divided into:
In retirement planning it is important to consider:
In considering these matters most people realise that there are gaps between the type of lifestyle they want in retirement and what they can afford. So the sooner steps are taken to address these gaps the better off you will be.
Therefore, it is important to talk and work with someone you can trust in planning for your retirement. There is no such thing as setting and forgetting your financial plan, it needs to be continually monitored to ensure that it reflects your changing circumstances.
Once you have reached the age of 55, you can draw on your superannuation before you permanently retire. If you do this it is called Transition to Retirement (TTR) and it is a strategy being adopted by those who can because it can be very tax effective. The funds withdrawn may be used to:
This TTR strategy enables you to access your superannuation as regular income through a transition to retirement pension, even though you are still working.
The benefits of a TTR strategy are:
At this stage all the planning and asset disposal should have been done and it’s just a matter of enacting your plan. The plan should have determined the mix of pension and lump sum payments and the pension type, as these have implications for estate planning.
There are different types of income streams available in retirement.
You will receive income payments until the money runs out. The factors determining how long your income lasts are:
Good estate planning will include nominating whether the payments will continue to be paid as a pension or converted to a lump sum and paid to a nominated beneficiary.
There are different types of fixed-term pensions and annuities. The feature they all have in common is that you will be paid regular income for a set period of time and at the end of the term, e.g. 25 years the payments cease. This type of income stream is inflexible if you want immediate access to your money.
Some of these products are designed to return:
With the last two options a higher rate of income is usually paid
If you die before the term is completed, you can nominate for payments to continue or for a lump sum to be paid to a nominated beneficiary. If no person has been nominated, a lump sum will be paid to your estate.
Life time pensions and annuities pay a guaranteed income for life. Payments can be increased each year by a fixed percentage or to move in line with the Consumer Price Index (CPI). The benefit of this product type is that it provides security of receiving payments for someone’s lifetime, however this plan is inflexible as money is locked up so you cannot access for investment.
The answer to this depends on the level of flexibility you wish to have with your financial affairs. If you want:
Many banks, building societies and credit unions offer a special at-call deeming account where the interest rate is based on the social security deeming rate. The rates of interest paid on deeming accounts will usually vary if the deeming rate changes.
Interest rates paid on deeming accounts differ across institutions and they may set different rates depending on the account balance. Interest may be calculated daily and paid monthly, or calculated daily and paid yearly. The greater the frequency of interest payment the better, as the benefits of compounding accrue, although the rate of interest will be lower for more frequent interest payments. You need to declare the interest received, rather than the amount deemed to be received, on your income tax return in the year it is paid. Institutions may charge fees. Features typically available for deeming accounts include:
There may be restrictions on who can have a deeming account.
This is a difficult subject to discuss, because no healthy person wants to die. The human spirit is strong and life is wonderful. However, as the saying goes there are only 2 certain things in life “death and taxes”.
It is important that you update your Will, but that is only part of the story. To stop arguments between family members and others after you die it is important to discuss your Will with all major beneficiaries. If you explain the reason why you are planning your estate as you do, it can resolve any potential issues before you die. This also has the added benefit that courts are less likely to interfere and amend your Will.
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