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Welcome to this edition of Your Financial Future, which reviews the December 2006 quarter. In this issue, we question whether your super will be enough to provide you with the retirement you would expect and discuss ways to cure that Christmas spending hangover.
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We also discuss how you can help yourself by contributing to your spouse's super and expose the myth that bricks and mortar are always your best investment. In addition, we introduce you to one of your Business Relationship Managers, Melinda Gibson, and profile Alliance Bernstein, one of the fund managers chosen by the Fund to manage your money.
Also in this edition is an update of the latest offers from the Fair Go Member Benefits program and a run down on how the different asset classes have performed in the past quarter.
Will your super be enough?
It's estimated that less than 10% of Australians will be able to afford the lifestyle they are expecting in retirement. But there's still plenty they can do to change this no matter how old they are, if they start now, get good advice and take advantage of changes made to super in the last Budget.
This was the message to delegates at a recent conference in Port Macquarie from Andrew Whelan, manager of Chifley Financial Service's Wealth Planning arm.
Chifley Financial Services provides information and advice to members of the Fund.
Mr Whelan explained that the best one could expect from the Age Pension was less than $13,000 for a single person and $21,700 a couple. "And, if you think this will increase significantly, then you're in for a shock. In fact, it's more likely in real terms to get less."
He added that because Australians were now living significantly longer thanks to medical advances, they would spend more years in retirement. Men, for example, now had an average life expectancy of almost 80 years of age, compared to about 65 a century ago.
"The retirement strategy for males around 1900 was pretty simple…you just died. But now on average, males will spend 12-15 years in retirement while females live even longer," said Mr Whelan.
He noted that some people would be forced to work longer to fund their retirements and some might not have the skills to avoid redundancy.
But all is not lost, because there's plenty one can do to avoid becoming a poor statistic.
Mr Whelan said what really counted was investment returns. "You can have the world's most tax efficient strategy, but if you don't make a return, you won't have enough."
Mr Whelan stressed the importance of planning as early as possible. He added that changes outlined in the Budget, such as the $150,000 limit on post tax contributions to super and the cap on deductible contributions of $50,000, were also a clear indication that one needed to start planning earlier.
"You can't wait until your mid-50s, for example, and then sell the investment property or your home, downsize, and dump the proceeds into super. The Government has announced a transitional amount of $1 million, but after July 2007, it will be $150,000. The Government did clarify that you can make three years worth of contributions at one time so you could potentially get in $450,000 and if you have a partner, $900,000. However, it's a big risk and you could end up having your retirement savings exposed to high rates of tax and be caught short, not to mention the risk of subsequent governments making further changes."
Mr Whelan disagreed with Treasurer Peter Costello's claims that he'd made super so simple through the Budget that he'd done away with the need for financial advisers. "With all that is going on with super, the big danger is making an ill-informed decision. In fact, contrary to Mr Costello's comments it is NOW more important to seek advice. Remember that providing for your retirement will involve the biggest investment decisions of your life. It's not the time to rely on gut instinct or general advice."
Get rid of the post Christmas financial hangover
Did you overspend over the festive season? If you did, you aren't alone as Australia's rising debt statistics show. Trouble is that interest rates have also been rising. They went up three times in 2006, making it tougher to get out of a debt hangover than it was this time last year.
It's important to take control of your debts because they can quickly spiral out of hand. Remember the interest you pay on debt, including credit card debt, is money that cannot be saved or invested - it's just gone!
The first step in managing your debt is to draw up a realistic budget to track where your money goes and ensure that you don't spend more than you earn. Click here to access the handy budget planner and savings tips the Fund has prepared for you.
Also included in your budget should be a list of all the payments you need to make on loans, such as your mortgage or car loan repayments. You should also examine how much excess income you have to help pay off debts.
Step two is to rank your different debts according to the interest charges they incur, from the most expensive to the cheapest.
Step three is to draw up a plan to eliminate these debts. But remember, debt reduction is like losing weight, you need to stop listening to your impulses and keep to the plan.
Questions to consider when drawing up a plan include:
- How long will it take to pay off the loans if you keep repayments at the same level?
- Will you pay higher fees and charges if you pay off any of your loans earlier? (Some loans have conditions that lock you in).
- Can you claim a tax deduction for the interest paid on any of your loans?
It makes sense to pay off the more expensive debt such as your credit card first, rather than the cheaper debt, which is usually your home loan. You then save the difference in interest between the more expensive debt and the cheaper debt.
You might also consider consolidating all your loans into the lowest interest loan, such as your home loan. But check first that there are no penalties for repaying your existing loans early and that there are no fees for increasing your mortgage.
If your income is limited and repaying debts while paying your day-to-day bills seems impossible, you could consider where you can cut back on daily costs or selling some unwanted assets.
It's advisable to speak to a financial planner before consolidating your loans. A key area to assess is whether any loans are tax deductible. Your Fund's financial planners are able to assist you with this without cost or obligation. To speak to a planner, please call 1800 800 002. You can also contact the credit helpline in NSW on 1800 808 488.
Help yourself by helping your spouse
Did you know that you can claim a rebate from the Government if you contribute super on behalf of your spouse or de facto partner if they are not working or are on a low income?
You can do this through a spouse rebate. Here's how it works:
The maximum rebate you can claim is $540 a year, but to be eligible to claim the rebate, your super contributions must:
- be made on behalf of a spouse or de facto partner who is under age 65 and an Australian resident;
- be made after tax; and
- not be claimed as a tax deduction by you.
The rebate you receive will be 18% of the following (whichever is less):
- $3,000 (reduced by $1 for every $1 by which the spouse's assessable income and reportable fringe benefits for that year exceeds $10,800, and is not available when the low income spouse's assessable income is $13,800 or more per annum).
- the total of the spouse super paid. For example, if your spouse receives less than $10,800 a year and you pay $2,000 into a super account for them, then you'll get a rebate of $360.
If your spouse earns more than $13,800, you can still contribute to their super. But you won't get the rebate.
If you require assistance with the spouse rebate, please call Member Services on 1800 067 059.
Are you getting the best out of your home loan?
With interest rates on the up and up, there's no better time than now to review the mortgage rate and charges you are currently paying on your home loan.
Remember that money paid on uncompetitive mortgage rates is money that cannot be saved or invested. It just goes to boosting profits for your bank's shareholders.
The home loan market is extremely competitive at present with a wide range of different deals on offer. And, among those offering the most competitive deals is award winning home loans through Chifley Financial Services.
Chifley Home Loans offers you low interest rates, a choice of loans to suit your circumstances and a simple process that takes all the hard work out of getting and maintaining your home loan.
Some of our Home Loan features include:
Application fee - $0
Monthly account keeping fee - $0
Split loan fee - $0
Electronic redraw fee - $0
Redraw facility - yes
For more information on our Home Loans, click here or call 1800 800 002.
Annual Woolcott Member Survey
As part of improving and developing the services we provide to you, we will once again be conducting research using Woolcott Research Pty Ltd.
The intention of the research is to obtain feedback from you on our services and products to allow us to benchmark ourselves, and also to identify opportunities for improvement.
You may receive a telephone call from a Woolcott Researcher towards the end of January and in February. You are encouraged to participate and provide feedback, but you are under no obligation to do so. If you do not wish to participate you simply need to let the researcher know.
We are committed to ensure the confidentiality of all member information, and Woolcott Research will only obtain a member name and telephone contact number for the purposes of conducting the research.
If you have any questions about the research and how it is conducted, please telephone Member Services on 1800 067 059.
The myths of financial planning
In these days of financial information overload, it's often difficult to discern fact from fiction. For this reason, we expose another financial planning myth in each issue of Your Financial Future to help guide you through the maze of information out there in the marketplace.
Myth: Bricks and mortar are always your best investment
Perhaps one of the most common myths among Australian investors is that residential property provides better security and returns than other asset classes.
However, there are many studies to show that although property has outperformed fixed interest and cash over the longer term, shares have still outperformed property.
So why do so many people get the idea that residential property performs so well? One reason is that house values are not as obviously cyclical as other asset classes. Although they fluctuate in price quite dramatically, the movements are not so noticeable because property is not re-valued daily, weekly or even yearly. By contrast, investments in shares and fixed interest are, by definition, valued at every trade each day.
Also overlooked are the proportionately higher costs associated with buying and selling property, such as stamp duty, legal fees, agent's commissions, loan fees and so on. Additional costs for holding an investment property include agent's management fees, rates, insurance and maintenance. There's also a chance that your property will be without a tenant at times, adding to your costs. And, each rise in interest rates can dent your returns from property, if your investment is mortgaged.
Security
Investment property can reduce the security of an investment portfolio simply by taking up a large, if not total, proportion of it. Conventional investment advice is not to put all your eggs into one basket and to spread your risks, because if one asset class in your portfolio is doing badly, others may be booming and able to offset any losses you may incur.
Indeed, very few investors can afford to hold property and gain adequate diversification to balance their property allocation with suitable investments in other asset classes.
Liquidity
Residential property takes far longer to sell than other investments. While you can offload your shares in a day, selling property can take time. You have to find an agent, advertise, have open inspections and wait for contracts to be settled.
A place for everything…
Like shares, property is an investment that can provide growth and income and because of this, it has an important place in a diversified investment portfolio, especially for those who can benefit from negative gearing.
But for many investors, accessing the benefits of property in proportion to the other investments they can hold can often be better achieved through Listed Property Trusts (LPTs). LPTs diversify across a range of properties and require a smaller minimum investment than when buying bricks and mortar.
To discuss which route is best for you and to find out more about the LPT investments available through the Fund, contact Member Services on 1800 067 059.
Meet your Business Relationship Manager: Melinda Gibson
After taking six months off to teach English in a remote part of China, Melinda Gibson is back in full swing at Chifley Financial Services.
Over the past year, she's been busy presenting Wealth Creation seminars in regional NSW and around Sydney and catching up with old friends at the different worksites (although not everyone recognises her because she's dropped a few dress sizes).
Melinda, who adores public speaking, says the seminars are not so much about super or retirement, but about "getting people to think outside the square".
"They give me the chance to help people and to inspire them to do something. One thing I've learnt from my own life is that one of the biggest mistakes in securing your future is not doing anything. People are scared to do things, but even just doing a small thing can add up and make a big difference later."
What frustrates Melinda is that so many Fund members are just too tired or busy to attend the Wealth Creation seminars, even though these seminars are free and can make such a big difference to their futures. "Before they know it, another five years will have passed and they will have done nothing," she says.
Melinda, who has a Bachelors degree in communications and diploma in financial planning, started her career assisting unemployed people, but later moved into the financial services industry, where she has worked for the past decade.
She joined Chifley Financial Services eight years ago as a union liaison officer, but later started presenting superannuation seminars for the Fund at worksites in the West and South West regions.
After a stint at FuturePlus Super, where she dealt with prospective employers and members, she took leave in February 2005 after what she jokingly describes as "my first mini mid-life crisis" and headed off to Lanzhou in China to teach English at a school.
Of the experience, she says: "I loved living in a different culture and having time to look back on my life and how we live in Australia, and to appreciate Australia. We take so much for granted here."
In her spare time, Melinda can found riding her bike and pushing weights to maintain her slimmer frame and to remain healthy and fit. But right now, she's spending five weeks exploring Columbia, where she went to attend a friend's wedding.
Meet your fund manager
Alliance Bernstein, which already manages an international equities portfolio for the Fund, now also manages a portion of our Australian shares.
Alliance Bernstein, which is headquartered in New York and has offices in 47 cities in 24 countries around the world, managed US$625 billion by the end of June 2006, including US$55 billion in Australia and New Zealand. Its Australian based team manages domestic shares for the Fund.
Alliance Bernstein relies heavily on research and quantitative tools when picking shares and constructing a share portfolio.
Its investment philosophy is based on research in behavioural finance that shows investors tend to overreact to short-term events. When a company's earnings are faltering, for example, investors frequently extrapolate this weakness into the future and price the shares accordingly. Much of the time, however, company managements do take corrective action and the company's finances improve.
Alliance Bernstein says its ability to determine whether managements' strategies are likely to succeed and its willingness to act on views that are different from the general consensus have been the lynchpins of its success over the past three decades.
That said, Alliance Bernstein was not only chosen because of its skill and investment track record, but because of how its style complements other managers in the Fund's portfolio. Indeed, different managers have different styles of investment and some styles perform better at different times of the investment cycle. That's why the Fund takes great care in how we combine managers and their styles to ensure that your share portfolio is not biased in any style direction.
Alliance Bernstein, for example, is a value manager and like other value managers it seeks out companies that look inexpensive, but which it believes are fundamentally strong and have gone unrecognised by the share market.
Its approach compliments that of growth managers looking after the Fund's money such as Orion and ABN Amro. Growth managers do not mind paying full price - or even a premium - for stocks which they believe will show strong growth in the future. Typically, companies chosen by growth managers offer products or services that are in demand, have solid business plans and management teams and a healthy financial picture.
If you have further questions, or if you do not understand any of the information provided to you, please contact Member Services on 1800 067 059.
Fair Go promotions
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