Financial News Articles

Helping your parents financially while saving for retirement

Many people are finding themselves in a situation where they need to provide financial support to their aging parents.

Balancing the responsibility of helping your parents financially while saving for your own retirement, is no doubt challenging.

Effective financial planning can help you provide for your parents while still securing your own financial future.

Assessing your parents’ financial situation

1. Review assets and savings

It can be tough to start a conversation about money with your parents, but it’s one of the most important conversations you can have.

Having access to their financial information will give you a better understanding about their situation. More importantly, you’ll know if you’re going to be required to help them financially in a significant way.

Ideally you want a clear picture about the assets they own, savings and debts, plus an understanding of their income and expenses. There are budget planners and phone apps you can use to get visibility around spending habits. You may also want to use the MoneySmart retirement planner calculator to give an idea of how long their money could last.

If you find they don’t have enough income to support their retirement, there may be things they can implement to change it. This could include cutting down expenses, moving to a more affordable home or renegotiating their debt. It’s also important to make sure they are maximising any social security entitlements.

2. Review health costs and insurance

As your parents age, their health can become more fragile, and the cost of medical care can increase significantly. Being aware of the potential financial burden that healthcare can place on your parents, is therefore important.

Understanding your parents’ private health insurance coverage and any available healthcare subsidies or concessions is also essential.

3. Consider home maintenance costs

Many elderly parents wish to age in their own homes. However, this may require modifications for safety and accessibility.

These types of changes come at an expense so they may need to factor in additional costs for things like installing ramps, home repairs or transport assistance.

Government assistance programs

Australia offers various government programs designed to assist aging individuals. Some of these include:

  • Age pension: if they’re eligible, your parents may be able to access the full or part Age Pension. This provides financial support to help cover living expenses during retirement.
  • Aged care support: if your parents qualify, they may be able to access the aged care system which is designed to help seniors access various services, such as in-home care or residential care, depending on their needs.
  • Carer allowance/ Carer payment: these payments provide financial assistance to individuals who take care of elderly parents or relatives who have a disability, illness, or age-related condition.

Assessing your own financial situation

Before you can effectively help your parents, it’s important to evaluate your own financial position, as this information will serve as the foundation for your future financial planning. Here’s how to go about it:

  • Current savings and investments: knowing what your current financial resources are is crucial for planning future expenses. This means reviewing your savings and super accounts. If you have any investments such as shares or property, tally up their value.
  • Debt: evaluate any outstanding debt, such as mortgages, loans, and credit card balances. It's crucial to know your total debt and the interest rates associated with these obligations.
  • Retirement goals: define your retirement goals, including the age at which you plan to retire and your desired lifestyle in retirement. This information will help you calculate how much you need to save.
  • Budgeting: learn how to create a budget that takes into account your daily living expenses, savings goals, and funds available for supporting your parents. Check out our article on the 50/30/20 budgeting strategy to help you with this.

Invest in your own retirement

If you find you need to make financial adjustments to increase your retirement savings, one option could be to contribute more to your super on a regular basis using your before-tax or after-tax income. There are tax benefits that come with this too.

For example, if you contribute some of your after-tax income or savings into super, you may be eligible to claim a tax deduction. This means you’ll reduce your taxable income for the financial year and potentially pay less tax, while adding to your super balance. It’s a win-win.

There is a cap for concessional (before-tax) contributions which is currently $27,500 per financial year. If you have not contributed the whole $27,500 in a financial year, you may be able to carry forward the unused amount to the next year. This means you could contribute more than $27,500 in one year, if you meet certain criteria.

However, if you exceed your concessional contributions cap, the excess concessional contributions are included in your assessable income. These are taxed at your marginal tax rate (the tax rate you pay on your personal income) less a 15% tax offset. Other taxes may also apply.

Set clear boundaries

It’s an admirable thing to help your parents but be clear about what that help consists of. For example, it’s one thing to help out with their bills occasionally, but it’s another to have your name placed on loan documents!

If that isn’t the type of help you had in mind, it’s important to communicate that and stick to it.

Seek professional help

Enlisting the help of an expert, such as a financial adviser or coach, may alleviate some of your pressure.

Better yet, financial experts can assist in developing appropriate strategies to ensure you’re meeting your own retirement goals as well as supporting your parents.

For example, you may need to reduce your current spending to help your parents retire more comfortably. That’s a short-term cost to you but if it means your parents can keep important assets like the family home, you may benefit from that in the long-term.

Source: MLC

Do you know your Total Superannuation Balance (TSB)? You should!

The total superannuation balance or TSB was a significant change introduced as part of the Government’s superannuation reform package, taking effect on 1 July 2017. However, unlike other changes, such as the pension transfer balance cap, the total superannuation balance has generally been overlooked despite its broad implications.

If legislated, the Federal Government’s proposal means an additional 15% tax on superannuation earnings applies when a member’s TSB exceeds $3 million. With the potential additional tax for balances over $3 million putting TSB back into the media spotlight, it is time for a refresher.

In simple terms, TSB is the total amount of money a member has in superannuation, assessed by the ATO each 30 June. It can be calculated by:

Adding:

  • The accumulation phase value of the member’s super interests that are not in the retirement phase.
  • The retirement phase value of the member’s super interests.
  • The amount of each rollover super benefit not already reflected in the accumulation phase value or the retirement phase value (that is, rollovers in transit between super funds on 30 June).
  • In certain circumstances, the outstanding balance belonging to a limited recourse borrowing arrangement (LRBA) in an SMSF entered from 1 July 2018 if either:
    • The LRBA is with an associate of the fund.
    • The member has satisfied a condition of release with a nil cashing restriction.

Subtracting:

  • Any personal injury or structured settlement contributions paid into the member’s super funds.

There can often be confusion between the TSB and the transfer balance cap. TSB is the total value of someone’s superannuation assets and is used to calculate their eligibility for various concessions and strategies. The transfer balance cap is a lifetime limit on the amount a person can transfer into a tax-free retirement pension account.

The confusion arises because a member’s TSB must be below the general transfer balance cap, set at $1.9 million, to benefit from measures like non-concessional contributions. The three-year bring forward rule for non-concessional contributions is also reduced for TSBs over $1.68 million.

A member’s TSB is also a consideration for the following strategies:

  • Carry-forward concessional contributions: A TSB of less than $500,000 is required to use carried-forward concessional contributions.
  • Work-test exemption: A TSB less than $300,000 is required to use the work-test exemption.
  • Government co-contribution and spouse contribution: Both require a TSB less than the general transfer balance cap to be eligible.

Exceeding the TSB for a particular strategy can have costly ramifications. Anyone looking to implement a superannuation strategy should be mindful of their TSB each 30 June, accessible through the ATO online services portal on MyGov.

Members in large super funds can view their 30 June balance on MyGov in mid-July. For SMSFs, the MyGov TSB will be available after lodging the annual return.

Minimising the impact of the total superannuation balance measure

Couples should aim to maintain even balances through contribution splitting or a recontribution strategy. Also, thought should be given to the timing of contributions, as the ATO assesses TSB on 30 June each year. Contributions made in July only count toward the next 30 June, allowing an additional year of tax-effective strategies. In contrast, a contribution made in June may create restrictions.

Source: Bell Potter

6 things to consider before investing

Investing your money may be an effective way to help you build long-term wealth.

While it can seem overwhelming at times, given the breadth of options available, you don't need to be a financial expert to be successful at it.

But as Warren Buffet says: "Risk comes from not knowing what you're doing."** So understanding the basics is important.

To help you better prepare and potentially reduce your risk, here are some things to consider before investing.

1.  Set clear financial goals

Before investing, consider creating a plan. This helps you put into perspective not only your investment goals, but when and how you want to achieve them. It can also help to remove the likelihood of emotions influencing your investment decisions.

Start by asking yourself what you aim to achieve through your investments. Are you looking to build wealth for retirement, save for a down payment on a house, or fund your child's education? Your goals can influence your investment strategy and the level of risk you’re willing to take.

2.  Review your timeframe and comfort with risk

Before investing, it’s important to consider how much time you're giving yourself to build towards your financial goal and how much risk you’re prepared to take on to get there.

For example, an investment plan for retirement may look very different to someone who is much younger. If you're looking to access your money in a shorter time frame, remaining invested through ups and downs in the market may be unlikely, so a less risky investment approach may work to your favour.

3.  Research the market

Understanding what's going on in the market, domestically and globally, is important as it may have an impact on your investments. This can include things such as growth, unemployment rates, interest rates and inflation and even political events.

4.  Check your emotions

There's no denying that the nature of investing can be emotional. There are times where you may feel tempted to change your investment strategy because an area of your portfolio isn’t doing well, or you received recent news the market is going to plummet.

While these events may cause you to react quickly, such as selling off your assets, it's important to consider your investment strategy. If your approach is intended to be a long-term plan, making decisions based on short-term market fluctuations, may greatly affect what you set out to achieve.

5.  Consider where to invest your money

You may choose to divvy up your money across a variety of asset classes such as shares, cash and bonds, or you may choose to invest your money in a single asset class, such as a residential property. 

Diversification

One of the main advantages of investing in different asset classes, is the ability to diversify your risk. This means if one of your investments doesn't perform well, your losses may not be as severe as your other investments will help to level it out. On the flip side, it does take more effort as you'll need to remain up to date across a variety of market sectors.

6.  Understand investment options in Australia

There are many ways you can go about investing your money depending on how confident you feel and whether you'd prefer to take a more passive or active approach to managing your money. Here are some of the most common:

  • Shares: when you own shares in a company, you become a shareholder and have the potential to receive dividends (income distributions) and benefit from capital gains (profits when you sell the shares at a higher price than you bought them). The Australian Securities Exchange (ASX) is the primary platform for trading shares in Australia.
  • Bonds: bonds are debt securities issued by governments, corporations, or other entities. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond's value when it matures. Bonds are generally considered lower risk than shares but offer lower potential returns.
  • Property: you can invest in residential or commercial properties, either directly by purchasing property or indirectly through real estate investment trusts (REITs). Rental income and property appreciation are common ways to generate returns.
  • Managed funds: managed funds pool money from multiple investors to invest in a diversified portfolio of assets. Professional fund managers make investment decisions on behalf of investors, making them suitable for those who prefer a hands off approach to investing.
  • Exchange Traded Funds: ETFs are similar to managed funds but trade like shares. They aim to replicate the performance of a specific index or asset class. ETFs offer diversification, liquidity, and lower risk to some other investment options.
  • Term deposits and savings accounts: term deposits have fixed terms and offer a fixed interest rate, while savings accounts provide more flexibility but typically offer lower interest rates. They are suitable for conservative investors looking for capital preservation and a modest return.
  • Super: super is a long-term savings vehicle designed specifically for retirement.
  • Cryptocurrency: highly volatile, cryptocurrencies like Bitcoin and Ethereum have gained popularity as alternative investments. Some investors allocate a portion of their portfolios to cryptocurrencies for potential high returns, but they come with significant risk and should be approached cautiously.

Source: MLC

 

** https://www.cnbc.com/2017/05/01/7-insights-from-legendary-investor-warren-buffett.html

A breakup is super hard – and can be hard on your super

Love song dedications are out the window and you’re wondering how you’ll move forward, not to mention divide your money, possessions and debts. But what about what you’ve saved in super? 

Breaking up is hard to do. It can be an emotional rollercoaster, with lots to consider – Do you have to move? Who’ll get the furniture? What are the kids going to do? Where will your pets end up? 

One of the bigger challenges is splitting your money, other assets, belongings and debts, whether they’re owned separately or together. And what might come as a surprise is this may include what you’ve both saved in super!

So, if you’re wondering if what’s yours is now potentially theirs, here’s what you need to know.

Do you have to split your super if you go separate ways? 

All your assets and debts come into the equation when it’s time to divide things up, and that applies whether you’re married or in a de facto relationship. 

However, you may not have to divide your super if you can divide other assets and debts to reach a fair agreement. 

How do you find out the value of your partner’s super? 

It’s worth knowing how much you and your partner have in super, and keep in mind that nearly one in four people in Australia have two or more super accounts.

You can get this information by completing the form in the court’s Super Information Kit at https://www.fcfcoa.gov.au/fl/forms/superannuation-kit.

What’s the process if you do want to divide super? 

There are a few ways super can be split between you. 

You may have a formal super agreement in place already, or you might put one in place, as part of a broader financial agreement when you break up.

If you don’t have a binding financial agreement (or prenup) in place but have agreed how you’d like super split, an Application for Consent Orders can be filed in court.

The alternative, if you can’t agree, is applying for court orders, where a hearing will decide how super will be divided between the two of you. There’s generally a time limit you need to do this in.

If you decide to put off how you’ll split your super for whatever reason, you could set up a flagging agreement which means the super fund can’t pay out the super until the flag has been lifted.

How do you get the money? 

Super is treated differently to other assets as there are rules around when it can be accessed. 

That means the agreed amount may be paid into your super account or your partner’s. If someone has already retired, they might be able to access the money as a super benefit straight away.

Are there costs involved if you do split super? 

On top of potential legal fees, financial advice fees and court costs, there may be other things you need to pay for when splitting super. 

The super funds involved may charge for things like information applications, super splits and anything involving flagging agreements.

Where can you go for help? 

There are complicated rules to navigate, so it may be worth getting legal advice and talking to your financial adviser, particularly if discussions aren’t going as smoothly as you’d hoped.

 

Source: Colonial First State

 

Outliving your savings

While living a long and healthy life is a goal for most of us, it does raise a valid question. Is there a chance that you could outlive your savings?

Why does living longer matter in retirement?

The risk of outliving your savings is known as longevity risk. With Australians living for longer it is more important than ever to make sure your savings will go the distance.

  • Research* shows that Australians retiring today are living a staggering ten years longer than in the 1990s.
  • When improvements in medical care and living standards are taken into account a 65-year-old today can expect to live well into their 90’s and may now spend up to three decades in retirement.

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Source: Challenger Life Company estimates

The retirement income challenge

A big challenge for Australian retirees is how to plan for retirement income that will last a lifetime. Income from super such as an account-based pension is generally not guaranteed which means payments will stop as soon as your account balance runs out. Poor share market performance can also put you at risk of outliving your savings. Adding a source of regular income such as a lifetime annuity to your retirement income plan can help you manage the risk of outliving your savings.

Feel confident your retirement income will last as long as you do

Living for longer requires a smarter approach to planning your income in retirement. The good news is that it doesn’t need to be complicated. It starts with three key steps. 

  1. Understand how long your super and savings will last. As a rule of thumb, you should plan to be able to meet your essential expenses for the rest of your life.
  2. Get support from the Age Pension. If you’re eligible, the Age Pension can form part of your safety net income. Bear in mind that even the full Age Pension entitlement may not be enough to cover the cost of living of a modest retirement.
  3. Secure your retirement income with a regular lifetime income stream. A lifetime annuity can boost your safety net income with regular income for life, giving you confidence you can pay for your essential expenses even if you live to age 100 or older.

Managing the risk of outliving your savings – what are the options?

  • Talk to a financial adviser about how long your super and/or savings may last.
  • Check your eligibility for the Age Pension. The sooner you prepare to apply for the Age Pension the better, as it cannot be back-paid.
  • Consider a regular lifetime income stream such as a lifetime annuity to complement your retirement income.

*Challenger Retirement Income Research, September 2019

Source: Challenger