Wealth strategies through the decades

August 26, 2016

Time can fly when you’re having fun, so coming to grips with budgeting in your early years should be a priority.

Good budgeting now will carry you through the rest of your life” – Sean Cummins, financial adviser

Mercer’s team of financial advisers say the three key areas of good budgeting are: paying off debt, saving for retirement and boosting emergency funds are the basics to financial health. It’s knowing how to prioritise and approach these tasks that will change through each decade.

In your 20s

Financial adviser Sean Cummins says get rid of credit card debt and budget, budget, budget:

Budgeting

It’s few people’s idea of fun, but having a budget; setting up your personal banking to ensure you can meet life’s basics, and saving (for a house, a trip to Europe or whatever) will help you have more fun, for longer.

Step 1:  Set up your personal banking to have three accounts: Basics, Good times and Savings.
Your income needs to go into Basics with automatic transfers to Good times and Savings.

Step 2:  Track your spending. If you’re spreadsheet enthusiast that’s well and good, if not, there are plenty of good budgeting apps for your smartphone.
It’s not about denying yourself, it’s about understanding where your money is going and making informed decisions. Good budgeting now will carry you through the rest of your life.

Step 3:  Call your parents and admit they were right all along!

Personal loans/credit card debt

If you have personal or credit card debt, kill it; substitute “save” for “pay of debt ASAP”.

Interest applied to personal loans and credit cards range from 9-30%. Generally, no investment will ever out run it.

Finally, beware of barbecue conversations. My mate Dave reckons…  as they lead to no good.

In your 30s

Keep chipping away at debt and focus on the home loan and saving for your kids’ education:

Home loans

Lenders will constantly tell you how much equity you have to renovate, holiday or invest. What they really mean is borrow more. The trick with mortgage debt is to think of increasing repayments as purchasing time, bigger repayments = more time.

Paying off your mortgage is always a good investment.. When your home is debt free that big slab of your after-tax income that was disappearing each month is now available for you to make new guilt-free decisions; Italy anyone?

Save for the kids’ education

There are quite few investment options for funding kids’ education but eliminating mortgage debt is the surest bet. The return is guaranteed and you hedge against future interest rates hikes. Structuring your debt to use an offset account can be a way to isolate the funds however, for some offset accounts can be a very tempting honey pot.

Finally, beware of dinner party conversations. These are the same as barbecue conversations but you are a little more mature and sophisticated now…

In your 40s

Mercer’s Simon Rohead says that if you haven’t seen a financial adviser by now, then you should. Understand what you are doing with your actual income as this can allow you to have areas to cut back on or allocate funds elsewhere:

- See a financial planner to get more value in the longer term.

Debt reduction. Mortgages are a lot bigger these days, so you really need to focus on getting rid of debt.

- Insurances are absolutely essential as this age group a) has a reasonable mortgage; b) youngish kids, and c) is earning pretty good incomes, so you need protection on ability to earn a living.

- Need to build up assets outside of super. The government will probably keep pushing out the retirement age so if you want to retire before 65 you will need income streams and assets to do that, so need cash other than income.

- This demographic has had superannuation most of their working life so are pretty good at salary sacrifice, but there are better ways to use this money now. Remember, advisers can advise on more than just super.

- Think about where your super is invested; consider more than the default option but keep in mind your age group and how much risk you are facing and can afford to take on.

- Typically for people in their 40s and early 50s it’s a time when living expenses are most high because of mortgages and kids’ school fees so have a good handle on what you spend or saving.

In your 50s

Now is the time to ramp up the savings into super and get serious about engaging a financial adviser, says Mercer’s Shaun Cossart-Walsh and Allan Grant.

- Previously many pre retirees would maximise their salary sacrifice contributions in their last few years in the workforce. The budget proposals have lowered the maximum salary sacrifice to $25,000pa. One way to maximise funding into super could be to start higher pre-tax salary sacrifice contributions earlier.

- As your investment assets grow and the children have less dependence it could be time to review and potentially reduce personal insurances to help build more funds in your super.

- For others it is improve your insurances. Many super fund members do not realise income protection in super will only protect your income for two years. Many do not understand the Total and Permanent insurance definition is not specific to their own occupation. Your insurances can be enhanced alongside your existing super cover to provide more comprehensive overall protection for your family.

- To safeguard against legislative change, consider building an investment portfolio outside of super. There are many tax-effective ways to achieve this and your adviser can explain how to provide for that gap if you are intending to retire before you draw on your super.

- Current Transition To Retirement investors will need to discuss with their adviser whether the proposed tax on earnings in pension funds could reduce the effectiveness of this strategy in 2017.

- Your super fund is getting bigger and you need to maximise its growth potential while also protecting the capital. You may wish to explore property investment or a direct share portfolio to complement your super funds.

- If you have divorced or remarried, find out whether your will is still valid or if the beneficiary nominations in your super are still current. Discuss how the assets of a blended family will be managed in the future if one partner should predecease the other

In your 60s

Shaun and Allan encourage you to embrace retirement – you’ve worked hard and now is the time to settle in and have fun with the family and your hobbies.

- Consider an income stream (TTR or account-based pension) as the pension payments and interest in the fund are, for now, completely tax free. We have at least one more year where you can choose to have your super fund grow with no tax. It’s odd how hard people will strive for a $10,000 work bonus, which is then taxed, but won’t act to save $10,000 of earnings tax in their super fund.

- In the lead up to retirement, review asset allocation of your investments to ensure you’re comfortable with the degree of risk in the fund. This doesn’t mean you have to get ultra-conservative, remember Australians are living well into their 90s. You are still talking about very long term investment timeframes. But it might be wise to consider putting some funds into defensive assets if these funds will be drawn immediately in retirement for that big holiday.

- If you are considering downsizing the home, seek advice. There may be an advantage to sell before retirement so you can move more funds into super.  

- Centrelink rules will be changing in 2017. It is very important to understand how these changes could reduce age pension entitlements. There are many strategies to manage these changes and obtain a higher age pension.

- Embrace your retirement, you’ve worked hard for it. Understand it and look forward to it.

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