May is here, and as the weather begins to cool the political climate is heating up. The federal election on May 18 bookends a busy period on the national political and economic front which began with the Budget on April 2.
Australian financial markets were surprised by an unexpected fall in inflation. The Consumer Price Index, Australia’s main inflation measure, fell from an annual rate of 1.8 per cent to a record low of 1.3 per cent in the March quarter. This is well below the Reserve Bank’s 2-3% target and leaves the door open to a cut in official interest rates to stimulate economic growth. The cash rate has been unchanged at a record low of 1.5 per cent since August 2016. Australia’s 10-year bond rate is at 10-year lows of 1.78 per cent, indicating the market expects slower economic growth.
The Australian dollar fell half a cent on the inflation news and speculation about a rate cut, finishing the month at around 70.5 US cents. But Australian shares jumped to an 11-year high in line with Wall Street where shares hit a record high in response to better-than-expected company profit reports. The news from China was also positive, with economic growth steady at 6.4 per cent in the year to March.
The good news is that inflation is now well below average wages growth of 2.3 per cent per cent. Australian consumers remain positive on the back of lower prices and a strong jobs market. Unemployment held steady at 5 per cent in March, near decade lows, while the ANZ-Roy Morgan consumer confidence index rose to a four-month high in April, before dipping slightly in the final week.
Most of us dream of the day we can stop working and start ticking off our bucket list. Whether you dream of cruising Alaska, watching the sun rise over Uluru, improving your golf handicap or spending time with the grandkids, superannuation is likely to be a major source of your retirement income.
The more money you squirrel away in super during your working years, the rosier your retirement options will be. The question is, how much is enough?
Estimating your needs
Financial commentators often suggest you will need around two thirds (67 per cent) of your pre-retirement salary to enjoy a similar standard of living in retirement.i Lower income households may need more because they typically spend more of their income on necessities before and after retirement.
The latest ASFA Retirement Standard estimates that a couple retiring today needs a retirement super balance of $640,000 to provide a comfortable standard of living. This would provide an annual income of $60,977.ii
Singles need a lump sum of $545,000 to provide a comfortable income of $43,317 a year. These figures assume people own their home and include any entitlements to a full or part Age Pension.
How do I compare?
According to the latest figures, the mean super balance for all workers is $111,853 for men and $68,499 for women. The mean balance at retirement (age 60-64) shows most people retiring today fall well short of the amount needed for a ‘comfortable’ retirement. ii
The gap between men and women persists at all ages. By the time women reach their 60s they have 42 per cent less super than men on average and are more likely than younger women to have no super at all.
How can I boost my super?
If your super is not tracking as well as you would like, there are ways to give it a kick along. When your budget allows, or you receive a windfall, consider putting a little extra in super. Even better, set up a direct debit or salary sacrifice arrangement.
You may be able to make a tax-deductible contribution up to the $25,000 annual concessional cap but be aware that this cap includes employer contributions and salary sacrifice.
You may also be able to contribute up to $100,000 a year after tax, or $300,000 in any three-year period. You can’t claim it as a tax deduction, but earnings will be taxed at the maximum super rate of 15 per cent rather than your marginal rate and you can withdraw the money tax-free from age 60. Your age and the amount you have in super can restrict the amount of contribution caps.
If you earn less than $37,000, your other half can contribute to your super and claim a tax offset of up to $540. The offset phases out once you earn $40,000 or more.
If you are a mid to low income earner and make an after-tax contribution to your super account, the government will chip in up to $500. To receive the maximum, you need to earn less than $37,697 and contribute at least $1,000 during the financial year. The government co-contribution reduces the more you earn and phases out once you earn $52,697.
Speak with your employer about directing some of your pre-tax salary into super. ‘Salary sacrifice’ contributions are taxed at a maximum of 15 per cent (30 per cent if you earn over $250,000). But stay within your concessional contributions cap of $25,000 a year, which includes employer contributions.
To work out the difference extra contributions could make to your retirement nest egg, try out the MoneySmart retirement planner calculator.
As the end of the financial year approaches and with the federal election looming, this is a great time to utilise your annual contribution caps and get a tax deduction for voluntary concessional contributions. If you would like to talk about your retirement income strategy, give us a call.
i Moneysmart, Last updates 27 Aug 2018, https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough
ii ASFA Retirement Standard, 1 December 2018, https://www.superannuation.asn.au/resources/retirement-standard
iii Superannuation Statistics, March 2019, ASFA, https://www.superannuation.asn.au/ArticleDocuments/269/SuperStats-Mar2019.pdf.aspx?Embed=Y
We often like to think of artificial intelligence as some fantasy of the distant future, the stuff of sci-fi movies. But the reality is, it’s already here. From flight comparison websites to predictive text, AI is everywhere, but what is it exactly?
AI is the development of computer systems that have the ability to perform tasks normally requiring human intelligence. These processes include learning, reasoning, and self-correction. The first AI algorithms were in fact written way back in the fifties, but it’s only been in the last twenty years, with huge advances in computer processing power, that we’ve really been able to see the tangible effects of AI in our lives and on our finances.
Big data, changing legislation and technological advances are feeding an AI revolution in the finance sector that is having wide-ranging repercussions for stock market trading and our personal finances.
Impact on trading
Since the late 90s when electronic trading became widespread, the proliferation of AI has totally changed the functioning of the global economy. Most of this is done through algorithmic trading, which, though nothing new, has been enhanced by huge advances in computational power.
Advocates of this sort of trading talk about how it eradicates human error, and removes emotion from investment decisions. While others argue that if algorithms aren’t thoroughly back-tested over a long enough period—or if the input data is somehow compromised—people’s assets are at risk. Many point to the inability of AI to predict the GFC as an example of this. The 2010 Flash Crash is another, wiping nearly $1 trillion USD from the market in seconds because of spoofing algorithms (which have since been banned), before rapidly rebounding.i
The truth is, as AI has developed so has its regulation, meaning hiccoughs experienced even ten years ago are less likely to occur today. And you need only look at changing rules around data sharing and instant transactions occurring globally, or the massive returns last year on quantitative hedge funds—which employ algorithms and machine learning to inform their investment decisions—to know that this sort of trading is here to stay.ii
AI has already had a big effect on how we manage our personal finances. The credit card industry for example has benefited from increased data security and reductions in fraud as a result.
Similarly, banks are now able to analyse the data of billions of transactions to predict the spending of consumers and market their products accordingly. This same technology allows individuals to automate their expenditure, with many banking apps now sorting purchases by type and alerting users when they’re reaching their limits.
AI is also changing processes around lending and borrowing. This is especially true in the developing world, where credit scores might not be available. Startups such as LenddoEFl in Singapore are tracking people’s behaviours on their smartphones to glean the likelihood of them meeting their repayments.iii The algorithm they’ve developed recognises behaviours indicative of financial responsibility and therefore can advise lenders, with a high degree of accuracy, on whether the loan should be approved. This technology will be interesting to watch as banks tighten lending standards and start to look not just at salary but also spending habits to determine if a loan is approved.
The robots aren’t coming… yet
In the world of AI, scholars often make the distinction between Artificial Intelligence, which is now common place in many industries, and Artificial General Intelligence (AGI), the sort that might mimic a human brain and create links between disparate ideas and deal in abstract notions.iv We are still a long way from achieving the latter. And it has been argued that there are some aspects of the human experience that can’t be replaced by code, however clever it is.
When it comes to your financial life, technology can certainly provide us with useful tools. There is no substitute however for knowledgeable advice that takes into consideration your unique circumstances, goals and dreams. We can help you navigate this brave new world, while also assisting you in a way that no algorithm is yet capable of.
Who among us hasn’t daydreamed about receiving a windfall? In reality, people receive large sums of money in the form of inheritances, redundancy payouts and lottery wins all the time. Yet many soon find themselves back in their pre-windfall financial position.
To take a recent example, 28-year-old Victorian Brodie Bond burned through a $220,000 inheritance in 12 months by splurging on drugs, alcohol, clothes and a car (which she crashed).i
The wisest use of a windfall will depend on its size and its recipient’s circumstances. But here are some broad guidelines for avoiding Brodie’s fate.
Splurge (a little bit)
You’re going to want to live it up a little. That’s fine, but make a deal with yourself to spend, say, at most 10 per cent of the windfall on a new car or family holiday. Then devote the other 90 per cent to investments that will facilitate long-term financial security.
Pay down debts
Before you start looking at investments, it makes sense to clear non-productive debts beginning with the one with the highest interest rate, such as a credit card. Then look at non-tax-deductible debt such as your home loan.
Paying off the mortgage has emotional as well as financial benefits - the sense of security that comes with owning a home is priceless. Yes, while mortgage interest rates are low you might get a better return investing elsewhere, but you’ll have money to plough into other investments after slashing your housing costs. Plus, those who receive a windfall while they still have a substantial mortgage can save hundreds of thousands in interest by paying back the bank early.
Top up your super
If you are close to retirement or already have substantial equity in your home, you might top up your super.
If you received a large windfall, you could make an after-tax (non-concessional) super contribution of up to $300,000 in any three-year period, for those aged under 65 depending on your superannuation balance.
You can also make tax-deductible (concessional) contributions of up to $25,000 a year, including contributions made by your employer. You may also have the option of combining five years concessional contributions and depositing up to $125,000 in any one year.
The pro of super is that it is a tax-effective home for your retirement savings. The con is that you can’t access your money until you reach retirement age.
Start (or grow) an investment portfolio
Over the long term, it’s hard to get a better return on your money than buying growth assets such as shares and property.
While past performance is no guarantee of future returns, during the 20 years to December 2017, Australian shares returned (before tax) 8.8 per cent a year and residential investment property returned 10.2 per cent.ii
In recent years, technology has made it much simpler and cheaper to trade shares. The advantage of investing directly in the sharemarket (rather than indirectly through your super fund) is that you can sell your shares and access your money whenever you want. The disadvantage (which also applies to investment property) is that you’ll have to pay capital gains tax on your profits at your marginal rate, less a 50 per cent discount if you hold the investment for more than 12 months.
Historically, Australians with spare capital have been inclined to purchase an investment property. Around two million Australians own one or more.iii Australia’s major property markets are currently deflating, but this may offer good buying opportunities down the track.
Final tip – don’t get carried away
Humans seem prone to blowing windfalls. Academic studies suggest people take bigger risks with money that arrives out of the blue than with money they’ve had to work for.iv
Post windfall, after you’ve celebrated your good fortune, discuss your changed circumstances with your spouse and, where appropriate, other family members. Avoid the temptation to do anything rash, such as quit your job. Your investment strategy will vary depending on your circumstances but, whatever it is, keep in mind Warren Buffett’s two investment rules.
Rule One: Never lose money.
Rule Two: Never forget Rule One.
If you’d like some advice on how to make the most of a windfall, please call us.