Mike Beal Financial Planning https://www.mikebealfp.com.au The Perfect Choice Wed, 27 Nov 2019 21:54:52 +0000 en-AU hourly 1 https://www.mikebealfp.com.au/wp-content/uploads/2014/11/cropped-mikebeal-32x32.png Mike Beal Financial Planning https://www.mikebealfp.com.au 32 32 Super fund fees Australia explained by Mike Beal financial planner https://www.mikebealfp.com.au/super-fund-fees/ Wed, 27 Nov 2019 05:13:50 +0000 https://www.mikebealfp.com.au/?p=2530 Confused by the super fund fees structure in Australia?  You’re not alone!  Here’s a superannuation fee structure summary to help you gain a better understanding. There are two major super fund fees: 1. The administration fee The first super fund fee is the Administration Fee. This can be either percentage-based or a fixed amount, say…

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Confused by the super fund fees structure in Australia?  You’re not alone!  Here’s a superannuation fee structure summary to help you gain a better understanding.

There are two major super fund fees:

1. The administration fee

The first super fund fee is the Administration Fee. This can be either percentage-based or a fixed amount, say $1.50 per week. 

Some super funds will tier the administration fees, for example, 0.50% p.a. on the first $100,000, 0.40% p.a. on the next $150,000 etc., decreasing progressively, the higher the balance. 

The administration fee is generally how the superannuation fund covers costs in running the super fund.

2. Internal Cost Ratio

The second is the Internal Cost Ratio (ICR). This is a measure of the overall cost to manage specific investments in the super fund, as a percentage.  This is also how the fund manager is paid. 

Sometimes this percentage will include a ‘performance fee’. This is paid to the fund manager for exceeding a benchmark. It can, therefore, act as an incentive for the fund manager to have better performance. 

It’s not always about the lowest fee

The ICR can be a simplistic measure. Whilst in general, you would seek as low an ICR as possible, the net returns after these fees are more important.

For example, the Magellan Global share fund has a high ‘Management Expense Ratio’ (MER) fee of 1.35% p.a.. And the ICR (the total cost including all fees such as the performance fee) is even higher at 1.49% p.a.  

However, this fund has returned 15.73% p.a. net of fees for the past 5 years. (Source: Morningstar, to 31st October 2019) Far exceeding its benchmark.

Another example is the Pendal Mirocap fund. With a high ICR of 1.66% p.a., yet has returned 17.92% p.a. net of fees over the past 5 years (source: Morningstar, to 31st October 2019). 

A return of 17.92% p.a. net is far more attractive than a fund with a low ICR that has returned only 10% p.a.

Other super fund fees

Ongoing adviser fee

If you have an adviser providing ongoing advice you will have an additional ‘ongoing advice fee’.  In the past, many advisers have charged a percentage-based fee. This means that, as your super balance increases, so too will the adviser’s fees. 

At Mike Beal Financial Planning, we charge a fixed, set fee if your situation warrants ongoing advice.  I believe this offers greater transparency.  

For smaller balances or situations where there is not a great deal of complexity, an ‘ad hoc’ fee arrangement may suit you better. For example, a meeting once per year whereby a fee is charged specifically for that meeting and the advice associated with it.

Insurance premiums

Most funds will have a default level of cover for which you are charged a premium. You may not have any debt or dependents and therefore you may be paying for something that you do not need. 

Smaller costs

There may also be other, smaller costs. Relating to regulatory costs, also for ‘exit fees’ when leaving the fund, or ‘switching costs’ for switching investments within the super fund.  

There will also be a ‘buy/sell’ cost. This is the cost incurred for purchasing or selling an investment within the super fund. The more complex the investment, the higher this buy/sell spread may be.

For example, it may be only 0.1% for many investments, but certain share funds may have buy/sell costs of up to 0.7%. Hence you need to be wary of these super fund fees before changing any investments within your super fund.

Get the right advice

In general, you should be looking for as low a fee structure as possible as these fees can substantially erode your returns. For example, if a super fund return is 6% p.a. & you’re paying 1.5% p.a. in super fund fees, a quarter of your return is being wiped out by fees.

However, as explained above, it’s not always best to choose the lowest fee, if the returns are better than others. Therefore, the best thing to do is to gain the advice of a professional financial advisor. They can tailor a solution for your unique circumstances.

For further advice on super fund fees feel free to contact your Maroochydore financial planner, Mike Beal, on 0409 799 279 or mike@mikebealfp.com.au.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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How much money do I need to retire on the Sunshine Coast? https://www.mikebealfp.com.au/how-much-money-do-i-need-to-retire/ Wed, 18 Sep 2019 06:53:02 +0000 https://www.mikebealfp.com.au/?p=2518 How much money do I need to retire on the Sunshine Coast? Ahhh yes, good question! This is one of the first retirement planning questions I ask my clients. The thing that concerns me the most is the number of people that know the answer? Very few!  A rough guide to “how much money do…

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How much money do I need to retire on the Sunshine Coast? Ahhh yes, good question! This is one of the first retirement planning questions I ask my clients. The thing that concerns me the most is the number of people that know the answer? Very few! 

A rough guide to “how much money do I need to retire on the Sunshine Coast”

As a rough guide, 70% of your pre-retirement income may be an appropriate target figure as you no longer have a mortgage (hopefully) and you don’t pay tax (assuming you can get your money into super).

So, once I know the income you need I can work backwards to figure out what your ‘Sunshine Coast Retirement Planning Magic Number’ is

For example, let’s say you’re earning $100,000 p.a. pre-retirement, let’s go for a figure of 70%, or $70,000 p.a. as your retirement planning income goal during your pending retirement on the Sunshine Coast.

Do you want to maintain your capital or leave it intact?

Another variable will be whether you want to maintain your capital or leave the capital intact.

Obviously, you will need less if you are not intending to leave the capital intact because part of the income you are generating is from consuming the capital. 

Here are some figures you would need as a lump sum, assuming you want to either maintain the capital vs depleting the capital to nil. For the depletion scenario, I’ll assume the time-frame is 25 years. For both scenarios, I’ll assume a reasonably conservative 4% p.a. return.

Compare this to the cost of an industry fund or low-cost retail fund at say, 1% p.a. ($7,500 p.a.) then it does not make much sense to maintain the SMSF if it costs $11,500 p.a. more to manage. That’s not even factoring in the time it takes for you to maintain and manage the SMSF. So, why have the hassle and time-costs associated with the SMSF? 

  $50,000 $60,000 $70,000 $80,000 $90,000 $100,000
Maintain
capital
$1,250,000 $1,500,000 $1,750,000 $2,000,000 $2,250,000 $2,500,000
Deplete to nil, 25 yrs $781,104 $937,325 $1,093,546 $1,249,766 $1,405,987 $1,562,208

So, for our scenario, where my imaginary Sunshine Coast Financial Planner client requires $70k p.a., let’s say they have 10 years until they retire at 65. They currently have say, $500k in super. If we assume an earnings rate of 5% p.a. for the next ten years the $500k would grow to $814k leaving a shortfall of $936k. 

What if your employer is contributing?

However, their employer is contributing 9.5% or $9.5k p.a. (9.5% of $100k salary), this would add $119k, reducing the savings shortfall to $695k. 

To save this amount they would require additional savings of $55k p.a. (a little prohibitive on a $100k p.a. salary) although this assumes they maintain capital during retirement, if they deplete the capital to nil during their retirement over 25 years, their target goal is $1.093m rather than $1.75m – this will reduce the required savings level to a more manageable $12.7k p.a., which may well be achievable. 

What if you fall between the two scenarios?

Also, many people may fall between the two scenarios whereby, although part of the capital would be eroded during retirement there is likely to be a lump sum left over.

For further analysis of how much income you might need to retire on, consider research by ASFA (Association of Super Funds of Australia, www.asfa.com.au).  According to ASFA, for couples wanting a ‘comfortable’ retirement you would require an income of $61,522 p.a.  (June Quarter, 2019).  Or a tad over $40 p.a. for a ‘modest’ lifestyle. 

For a single person wanting a ‘comfortable’ retirement, you’re looking at almost the same as the ‘modest’ couple’s retirement, around $43k p.a.  And finally, $27k p.a. for a ‘modest’ single person’s retirement.

The difference between comfortable and modest retirement

What’s the difference between ‘comfortable’ and ‘modest’? Here’s a few of the categories that have some of the larger differences.

  Comfortable ($ per week) Modest ($ per week)
Groceries $204 $168
Heath Services $191 $96 (no private health ins)
Holidays $95 $47 (no overseas holidays)
Dining, cinema, takeaways, alcohol $161 $92
Transport/Car $159 $96 (higher quality vehicle)

You may also be entitled to the Government Age Pension thus reducing the required amount of capital during retirement. The maximum age pension is $36,301 p.a. for a couple who own their own home or $24,081 p.a. for a single homeowner.

What if I have assets?

You can have assets, excluding the family home, of $394,500 for a couple and $263,250 for a single and still receive the full government age pension, the Government Age Pension is gradually decreased until you have assets of $860,000 (couple with home) or $572,000 (single with home) at which time it is phased out completely (note that an income test also applies).

If you would like a personal analysis and be able to ask a professional financial planner “how much money do I need to retire on the Sunshine Coast?” then contact Mike Beal your Sunshine Coast Retirement Planning Expert. Mike is a financial planner based in Maroochydore but can also see you at your home. Whether you need a financial planner in Caloundra, Noosa, Buderim, or Kawana just give Mike Beal Financial Planning a call on 0409 799 279 or emailmike@mikebealfp.com.au

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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Should I wind up my Self Managed Super Fund? https://www.mikebealfp.com.au/self-managed-super-fund/ Tue, 03 Sep 2019 07:01:00 +0000 https://www.mikebealfp.com.au/?p=2494 Recently I met a couple in Buderim on the Sunshine Coast.  They had a Self Managed Super Fund (SMSF) but were concerned about the hassle and increasing costs of maintaining it.  The couple were in their mid-70’s and I asked them why they established it in the first place They said they were advised to…

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Recently I met a couple in Buderim on the Sunshine Coast.  They had a Self Managed Super Fund (SMSF) but were concerned about the hassle and increasing costs of maintaining it.  The couple were in their mid-70’s and I asked them why they established it in the first place

They said they were advised to establish a self-managed super fund by their accountant many years ago however they really didn’t know why they still had it. “It’s what we’ve done for a few decades now and don’t really know what other options are around”.

Why have a Self Managed Super Fund?

SMSF’s are complex.  They are also expensive and time-consuming to manage.  As you get older you’re more likely to want to simplify your life and reduce financial complexity, so it may not be appropriate to maintain your SMSF. 

In my opinion, the only reason you’d really want to maintain an SMSF is if you own direct property. Other than direct property, you can own almost any asset in an ‘investment wrap account’, or an industry super fund.

Do the SMSF costs outweigh the benefits?

For many people, the cost of maintaining a self-managed super fund will outweigh the benefits. Take the couple in Buderim – they had $750,000 invested in their SMSF and they owned various managed funds.

Their accountancy fees were approximately $3,000 p.a. plus the various ATO costs, audits and so on were another $1000 p.a. Then the cost of the managed funds, averaging 1% p.a., that’s another $7,500 p.a. Plus, on top of this they were paying a financial planner on the Sunshine Coast a further ‘ongoing advice fee’ of 1%, p.a., another additional $7,500 p.a. Making the grand total cost a whopping $19,000 p.a. 

Compare this to the cost of an industry fund or low-cost retail fund at say, 1% p.a. ($7,500 p.a.) then it does not make much sense to maintain the SMSF if it costs $11,500 p.a. more to manage. That’s not even factoring in the time it takes for you to maintain and manage the SMSF. So, why have the hassle and time-costs associated with the SMSF? 

How to wrap up an SMSF – Self Managed Super Fund

It can be a fairly painstaking process to wind up an SMSF.  Whilst many accountants and other advisers are experienced with establishing SMSF’s, in my opinion, many are not familiar with the process of winding up the SMSF.  The steps in winding up a self-managed super fund include:

  • Examine the Trust Deed to make sure you satisfy any requirements the Trust Deed contains for winding up the fund
  • Selling down the investments within the SMSF and transferring the cash to the SMSF bank account
  • Arranging a rollover benefits statement in order to roll the balance over to a new super fund
  • Informing the ATO that the SMSF is being wound up (within 28 days)
  • Having a final tax return completed for the fund
  • Having a final audit of the fund
  • Payout any final tax bills
  • Close the SMSF bank account
  • Cancel the ABN

What about Capital Gains Tax?

Most people I see winding up SMSF’s are retired. Therefore, they aren’t concerned about CGT implications as they are already in a nil tax environment, being retired and in pension phase. However, for younger people, CGT can be an issue when selling down investments in the SMSF.

Older people with Self Managed Super Funds are also not normally concerned with the loss of insurance in the SMSF. But again, this may be more of an issue for younger people that still have debts, dependents and so on.

If this is you then make sure you sort out your insurances prior to the insurance being lost when winding up your SMSF. Also, don’t forget, you will also need to make new death benefit nominations in your new fund as well.

Not sure if you should wrap up your Self Managed Super Fund SMSF?

The best advice is to get some advice from your local Sunshine Coast Financial advisor, Mike Beal. Mike is a financial planner based in Maroochydore but can also see you at your home. Whether you need a financial planner in Caloundra, Noosa, Buderim, or Kawana just give Mike Beal Financial Planning a call on 0409 799 279 or email: mike@mikebealfp.com.au He is your Sunshine Coast Financial Planning Expert.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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The 9 most important lessons about investing https://www.mikebealfp.com.au/important-lessons-about-investing/ Mon, 17 Jun 2019 12:01:55 +0000 https://www.mikebealfp.com.au/?p=2369 I’ve worked in financial markets for over 25 years. Even before this I had a keen interest in financial markets. Along the way I’ve learned plenty of lessons about investing.  When I was 15 I remember the 1987 crash – I sold my bicycle to get money invested. I even persuaded my friends to sell…

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I’ve worked in financial markets for over 25 years. Even before this I had a keen interest in financial markets. Along the way I’ve learned plenty of lessons about investing. 

When I was 15 I remember the 1987 crash – I sold my bicycle to get money invested. I even persuaded my friends to sell their bicycles and get a syndicate organised with dreams of vast wealth being created (a few weeks before the crash). 

How fortuitous this occurred when I was so young so I could learn from these cycles in the market.  Think also of the Global Financial Crisis (GFC), financial deregulation and re-regulation (after the Royal Commission in particular), US domination, the rise of Asia and China in particular.  The more things change, the more they stay the same. 

The following information is general information only – all advice depends upon your individual circumstances. For customised financial advice please contact Mike Beal your Sunshine Coast Wealth Manager

1. There is always a cycle

Good times, bad times!  They have always occurred and they will keep occurring – eventually, they contain the seeds of their own reversal. Ultimately there is no such thing as new eras or new paradigms, it’s simply a cycle.

2. The smart money is sometimes pretty dumb – be a contrarian

The share-market is a pretty weird place to be, especially when it comes to lessons about investing.  It should be like your grocery shopping experience: “Hmmm, a can of baked beans is normally $1, now it’s 50c, so I’ll buy 2 cans”.  When the share-market drops dramatically and everything is on sale people say “Oooh, it’s on sale, but it sure has dropped a lot – I think I’ll steer clear of the share-market, it seems too risky”.  In fact, quite the opposite occurs: “Wow, that $1 share is now trading at $2, I better buy some!”

People often feel safest when investing in an asset when neighbours and friends are doing the same and media commentary is reinforcing the message.  An example of this is the Bitcoin crash in 2017 – I remember Uber drivers and golfing buddies alike discussing the merits of Bitcoin.  

The problem is that when everyone is bullish and has bought into an asset in euphoria there is no one left to buy but lots of people who can sell on bad news. So, the point of maximum opportunity is when the crowd is pessimistic, and the point of maximum risk is when the crowd is euphoric.  As Baron Rothschild said “Buy when there’s blood in the streets, even if the blood is your own.

3. Buy high, sell low…DON’T do this!

This is the same for shares or property.  With shares, the prices can be measured in terms of ‘Price-earnings’ ratios. These give an indication of how cheap or expensive a share is.  This is much like the ratio when you are selling a business. 

Take for example an independent Sunshine Coast Wealth Management Business that’s making $100,000 p.a. profit. This type of business might typically sell for say, 2.5 x earnings.  $100,000 x 2.5 = $250,000 sale price, or put another way, a price-earnings ratio of 2.5 times.  Of course, this is for a small business which is riskier. Larger businesses with much stronger, sustainable earnings may sell for much higher prices. 

As I write this, on June 16th, 2019, the P/E ratio of the ASX 200 is 17.7 times earnings (source: Bloomberg) and the ASX is trading at 6,553 points.  The P/E is well above long term averages (although expensive markets can, of course, become more expensive). However, with numbers like these I would urge caution before investing. Particularly if you’re investing your life savings. You may wish to consider dollar cost averaging into the market. 

Another example is housing.  After the GFC the Noosa housing market dropped substantially. Many people from other parts of the country had holiday homes in Noosa. These were some of the first discretionary assets that people tried to divest themselves of which resulted in lots of sellers & few buyers = losses. In some cases by up to 50%! At the time it would have been a wonderful time to buy but when the headlines are screaming Armageddon, it’s psychologically hard to make the commitment.

Price to earning ratio
Source: Global Financial data, AMP Capital

4. Timing the markets – forget it!

It’s a ‘noisy’ world that we live in. There’s so much news, so many headlines. You’ve probably heard the adage ‘If it bleeds it leads’ from old school newspapermen, this is what sells papers.  When there’s a constant threat of a crisis, for example, Brexit, US-China trade wars, and so on, it makes it very difficult to make the decision. 

However, if the forecasters got it right they’d all be billionaires. If you had to wait for all of the crises in the world to end, then you’d be waiting for a potentially infinite period of time. Plus, you’d be earning lousy rates of returns over a very long period of time by holding cash.  Even Warren Buffett, the world’s most successful share investor says “I can’t time the market – and I don’t know anyone who can either.”

5. Investment markets don’t learn from past mistakes

One of the key lessons about investing we can take from the history of investment markets is that they don’t seem to learn. There’s always a fresh stream of newcomers to markets and in time collective memory dims and then history repeats itself again. 

6. Compound interest is MAGIC – Use this magic!

The average annual return on Australian shares is 11.8% pa. It’s just double that on Australian bonds (5.9% pa) over the last 119 years (source: AMP Capital). The magic of compounding higher returns leads to a substantially higher balance over long periods.

Yes, there were lots of rough periods along the way for shares as highlighted by arrows on the chart. But the impact of compounding at a higher long-term return is huge over long periods of time. The same applies to other growth-related assets such as property.

value of $1 invested in 1900
Source: Global Financial Data, AMP Capital

7. Optimists beat pessimists

Being positive is a great asset for any investor. Again, the more you look at those depressing headlines, the less likely it is you’ll ever make an investment decision. And, the more likely you’ll sell at the wrong times. This is why one of the most important lessons about investing is to try to be positive!

8. Keep it simple stupid (KISS)

Investing should be simple, but we have a knack for overcomplicating it. And it’s getting worse with more information, more apps, and more platforms, rules & regulations.   Think of the following to maximum ‘KISS’ value:

  • Spend less money than you make
  • Save the difference
  • Buy a diverse portfolio
  • Be patient

9. Know thyself for successful investing & get advice

We all suffer from the psychological weaknesses in regards to investing and lessons about investing. But smart investors are aware of them and seek to manage them. One way to do this is to take a long-term approach to investing.   

It takes effort, it takes a vigorous, disciplined approach, and it takes the ability to know yourself. How would you react if there was a GFC-style event and your portfolio were to drop 20% in a relatively short period of time?  

Rather be out spending time on the things you enjoy than focusing on the ins and outs and lessons about investing? Then your best investment decision would be to outsource all of this to your Sunshine Coast Wealth Manager and Financial Advisor, Mike Beal Financial Planning. Call Mike on 0409 799 279 or email: mike@mikebealfp.com.au

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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How to invest wisely – inheritance, bonus’, lottery wins https://www.mikebealfp.com.au/how-to-invest-wisely/ Mon, 08 Apr 2019 07:37:52 +0000 https://www.mikebealfp.com.au/?p=2357 How do I invest inheritance? How do I invest my bonus? How do I invest lottery winnings? The following information is general information only – all advice depends upon your individual circumstances. For customised financial advice please contact Mike Beal your Sunshine Coast Investment Specialist. 1. Debt Repayment You’ve probably heard of the ‘magic of…

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How do I invest inheritance? How do I invest my bonus? How do I invest lottery winnings?

The following information is general information only – all advice depends upon your individual circumstances. For customised financial advice please contact Mike Beal your Sunshine Coast Investment Specialist.

1. Debt Repayment

You’ve probably heard of the ‘magic of compound interest’, whereby interest earns interest on interest.  Here’s a superannuation example: 45-year-old accountant, Johnathon has $100k in his super.  He contributes $10k p.a. for 20 years @ 7% p.a. Johnathon ends up with around $862k.  Pretty good right? 

But Mikey, who is well educated, an independent financial planner on the Sunshine Coast who knows about the ‘magic of compound interest’ starts 5 years earlier – Mikey ends up with $1.22m.  Mikey has an additional $358k and the only difference was saving $10k a year for 5 more years – but wait?  How can this be? 

The extra $50k & 5 years turns into 7 times as much as the $50k invested! This is why it’s called the magic of compound interest.  However, the opposite is also true. 

If you’ve ever had a credit card and feel like a hamster getting nowhere it’s also because of the magic of compound interest – in reverse – but at even higher interest rates! This really is magic for the banks that you have your credit cards or personal loans with.  Therefore, if you have ‘bad’ debt, i.e. debt that is not tax deductible, for example, credit cards, personal loans, vehicle loans etc.– you need to get rid of this as soon as you can.

Also included in ‘bad debt’ would be your home loan – in most cases I would be inclined to pay off the home loan, although in same cases it is good to also diversify into other investments such as superannuation, a small home loan will not hurt too much and in many cases the repayments can be a compulsory savings scheme and can be somewhat taken care of by inflation over the longer term, e.g. a $100k home loan in 1985 might have been considered a very large loan – now of course a $100k home loan is peanuts. 

If your windfall is less than your debts, then consider toppling the debts one by one using the ‘domino effect’.  For example, let’s say you have 2 x credit cards with $5k outstanding on one with an interest rate of 19% p.a. and another with a balance also of $5k but with an interest rate of 14% p.a., and finally 1 x personal loan with $10k outstanding with an interest rate of say, 12% p.a., however, your after-tax bonus is say, $7k, then you should clear the $5k credit card with the higher interest rate first (and then close the account and cut up the credit card), then the next $2k should be paid off the next highest interest rate, the credit card with the 14% p.a. interest rate, and then the personal loan. 

The great thing about paying off the first credit card is that, if the minimum repayments were say, 3% per month, or $150 – you now have another $150/mth to help pay off your next debt, and on it goes, like dominoes. 

2. Have an emergency fund

Typically you’d want at least 3 x months income to give you peace of mind should an unexpected emergency arise.  This can also enable you to reduce other costs, for example, having a 3 month waiting period on your income protection insurance instead of a 2 or 4 week waiting period. 

The 90 day waiting period can be half the cost or less of a 2 or 4 week waiting period.  Invest the funds in a high-interest savings account at another bank – so it’s not visible or transferable via internet banking.

3. Reduce your tax, contribute to super

You can claim a tax deduction for contributing to superannuation.  So not only will you increase your super but you’ll also decrease your tax.  If you earn over $37k p.a. you’re taxed at roughly a third of your income on any money earned in excess of $37k p.a.. If you earn over $87k p.a. you’re taxed at almost 40% (including Medicare).  Contributions to superannuation are taxed at 15%. 

So, if you’re on $47k p.a. and you dump $10k into super, your earnings, for tax purposes you now earn only $37k meaning you’ll get all the tax back that you paid on the income you earned from $37k-$47k ($10k x 1/3 = $3.3k).  Likewise, if you earned $97k p.a. and contributed $10k to super, for tax purposes you have now earned $87k, therefore you’ll receive roughly 40% back on the $10k you contributed to super, almost $4k as a tax refund – great! 

There’s lots of ways you can get money into the super environment.  Remember, super has such a low tax rate, the more you can get into super, the better.  The other great thing about super is that it’s locked away until age 60, thus it’s much harder to fritter away if you don’t have access to it.

4. Invest in shares or property

Your windfall might be enough for you to start a shares/managed funds portfolio or alternatively purchase a rental property – see my blog on property investment as to what may be the better option for you – https://www.mikebealfp.com.au/sunshine-coast-retirement-planning-should-i-invest-in-property-or-shares/

5. Consider investing for your children’s education

With private schooling costing around $20k/year, investing in an investment bond can be a great option – especially if you’re on a higher tax rate as these bonds are tax-paid at 30%, these bonds are long term options as there are tax implications if you withdraw the money within 10 years of establishing the bond.

6. Don’t be a Mug!

Don’t be a mug – self-explanatory right?  I’ve been a financial planner for over 25 years.  I’ve worked at two of the big four banks.  I’ve seen several lottery winners. The most ‘successful’ lottery winner did not inform their friends or even their children regarding the win.  This meant there was no pressure on them – if people know about the win they are more likely to lean on mum and dad for assistance. 

I have also seen one lottery winner win several million and fritter away all of the money – and I mean all of the money. It’s not as hard as you might think!  (they ignored my advice incidentally).  So you need a plan – a roadmap – and that’s where your financial planner comes in.

Call your Sunshine Coast Investment specialist, Mike Beal on 0409 799 279 or send me an email: mike@mikebealfp.com.au

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Royal Commission Recommendations Summary https://www.mikebealfp.com.au/royal-commission-recommendations-summary/ Mon, 18 Feb 2019 11:55:14 +0000 https://www.mikebealfp.com.au/?p=2350 Mortgage Brokers Commissioner Hayne recommended the borrower, not the lender, should pay the mortgage broker. Hayne proposed that commissions be banned for mortgage brokers. There is an irony that the big banks, if this is enacted, will not have to pay brokers and therefore will become stronger and competition will be reduced. The commission rates…

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Mortgage Brokers

Commissioner Hayne recommended the borrower, not the lender, should pay the mortgage broker. Hayne proposed that commissions be banned for mortgage brokers. There is an irony that the big banks, if this is enacted, will not have to pay brokers and therefore will become stronger and competition will be reduced.

The commission rates paid to brokers, like life insurance commissions are the same. The brokers I have dealt with go out of their way to obtain the best deal for their clients – if you say to an Australian: “I’ll shop around to find you the best deal – but can you pay me a $3k upfront fee”, my view is Australians just don’t like paying fees.

The report recommended that mortgage brokers be subject to and regulated by the same law that applies to financial advisers. The reason for this, Hayne explained, is that consumers go to mortgage brokers for home loan advice, so they should be treated in the same way as financial advisers.

Financial Advice

One of the biggest scandals uncovered by the banking royal commission was the charging of fees for no financial planning service to clients.

Notably, the Commonwealth Bank of Australia subsidiary Count Financial was found to have charged fees to a customer who had been dead for over a decade.

Off the back of this, Commissioner Hayne recommended that ongoing fee arrangements be renewed annually by the client and that clients be told each year what services they’ll be entitled to receive and the total fees that will be charged.

People want greater transparency in their dealings with financial institutions. Therefore fee only financial planning I think is the most transparent way to achieve this, you know exactly what you’re paying on an annual basis.

Life Insurance

The report recommended commissions be reduced to zero. I use these insurance commissions to subsidise the cost of advice for lower balance customers whereby it’s not practical to charge a fee for super advice.

I think this will also mean that Australians will be under-insured, like the mortgage broking example, Australians just don’t seem to want to pay an upfront fee for good advice relating to personal insurances.

Also, the insurance commissions paid by insurers are identical so I don’t think there is a particular conflict of interest in this regard, I will go out of my way to find the best, most cost-effective insurer for my clients.

In the UK, similar rules were enacted in 2013, the result was financial planning fees increasing to such an extent that only the wealthy can afford to pay for financial advice.

According to Adviser Ratings, post-RC, advice costs are likely to increase by around 74%, hence the people who most require financial planning advice are least likely to receive it.

Superannuation

Addressing Australia’s $2.6 trillion super industry, the report has recommended banning MySuper accounts from charging advice fees and limiting advice fees for choice accounts.

In his report the Commissioner said he agreed with the Productivity Commission that default super accounts should only be created for new workers or those who don’t have an existing super account and noted that around 40% of Australians held more than one account as at June 2017.

To combat this, the report recommended that each person should only have one default super account and a mechanism should be developed to ‘staple’ a person to a single default account. If you want to review your superannuation investment options please feel free to drop me a line.

Regulators

ASIC and APRA were heavily criticised during the investigation for failing to punish misconduct and impose penalties. The final report has referred 24 cases of misconduct to the regulators for further investigation, with all major banks except Westpac being named.

Commissioner Hayne has recommended that the current “twin peaks” financial regulation model be maintained but said there should be a clearer distinction between the roles of the two regulators.

Banning of grandfathered commissions

These commissions were banned from July 2013, however, for some inexplicable reason they remained (grandfathered) if they were in place prior to July 2013.

This meant financial advisers may not have been so inclined to move these customers to a more competitive product if they were getting paid for doing…nothing.

So this is a good result for consumers and emphasises the more desirable and transparent fixed fee service for financial planning services so that you know exactly what you are paying your financial adviser.

In Summary

In Summary the Hayne recommendations will likely mean there will be a large number of financial advisers that will exit the financial planning industry, however in my opinion this will lead to much greater professionalism for financial planners in Australia.

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The Barefoot Investor Book Review https://www.mikebealfp.com.au/the-barefoot-investor-book-review-2/ Thu, 10 Jan 2019 02:51:44 +0000 https://www.mikebealfp.com.au/?p=2345 The Barefoot Investor Book Review (barefootinvestor.com) The author has a cult-like following so I thought I better have a read. The concepts in the book are very good and it is a simple, enjoyable read, I can now see why the book is so popular. Here’s some of my takeaways: Budgeting: Budgets don’t work. Agreed.…

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The Barefoot Investor Book Review (barefootinvestor.com)

The author has a cult-like following so I thought I better have a read. The concepts in the book are very good and it is a simple, enjoyable read, I can now see why the book is so popular. Here’s some of my takeaways:

Budgeting:

Budgets don’t work. Agreed. I try all the time to get my clients to do a budget but for the most part, people hate them, hence, the author, Scott Pape, advocates figuring out what your expenses are and then having 4 separate bank accounts split between a ‘main account’ (‘Blow account) where all your income goes and daily bills etc. come from – this represents 60% of your income, a second transaction account for ‘splurging’ 10% of income (‘splurge account’), this money can be spent but only up to the limit of the 10% – once it’s gone, no more spending! Another 10% goes to a savings account for shorter term savings (a ‘smile’ account), for holidays etc., and the final 20% goes to a bank account called your ‘Fire Extinguisher’ fund which is an emergency fund/pay off debt/long-term savings fund. He also recommends a ‘Mojo’ account at a different banking institution (so you can’t get it easily).

Superannuation:

Superannuation rocks, he loves super. Agreed. Minimisation of fees is a large component of his advice here. Agreed. Don’t pay big fees to evil financial planners – agreed! For clients with smaller balances I can operate off an ‘ad hoc’ advice arrangement so you’re only paying a fee as required. Find the lowest cost super fund you can. Increase your contributions to super when you can. Once you start, you won’t notice and this will be the simplest plan to create wealth (my opinion).

Self Managed Super Funds:

Do not have a Self Managed Super Fund. Mostly agree. For most people they’re not suitable vehicles, in fact I spend a great deal of time winding up inappropriate SMSF’s where there’s no point having them – why have an SMSF if you only own shares and managed funds? You’ll not only have more paperwork and hassle – and believe me the hassle is significant – but you’ll also have higher fees for accountancy, audits, and other levies. However, if your super fund is large enough and you can afford to diversify into a range of investments, spcifically direct property, then SMSF’s can work very well due to the leverage, which can magnify returns, it can also magnify losses of course.

Reduce Insurance Costs:

Only use insurance for the BIG things, reduce premiums where possible. Agreed. For my income protection, I prefer to have a longer waiting period in order to reduce my premiums. E.g. for someone like me, a 46 year old, non-smoker, in a sedentary occupation, $5,000 per month of income protection with a 30 day waiting period, payable to age 65, will cost $140 per month. If I ‘self-insure’ the first 90 days, i.e. have enough in savings to cover me for the first 3 months of sickness/injury, then the reduction in premiums is around 45%. Same goes for other insurances such as health insurance – insure for the bigger, greater impact events, for example, having hospital-only policies rather than all the bells and whistles extras, and having larger excesses for other types of insurances, for example home and contents insurance. This all assumes you have sufficient savings to be able to do this.

Be More Frugal:

Buy less stuff. Agreed. People spend a fortune on ‘stuff’. Live more frugally. This is a consistent message from other books such as ‘The Millionaire Next Door’ and something I can back up from observing successful customers. The people with the flash cars and big homes in attractive postcodes often have matching debt. The Millionaire Next Door revealed that many millionaires live in relatively modest homes so they have room to invest rather than paying all their money to their bank. They often drive modest cars. Be more frugal!

Domino your Debts

‘Domino’ your debts. Agreed. Do a table showing your debt, the minimum monthly repayments, the interest rate. Negotiate the interest rate where possible by calling the institution and (bluffing) saying you intend to move. Banks make a lot of money from apathy. It’s surprising the number of people that can be paying 22% on a credit card even though the same bank has other cards with only say, 13% p.a. rates, it can be quite easy to transfer these cards and save a small fortune. As each debt is eliminated it is easier to continue to ‘domino’ the debts. Also, get rid of your car loan. You’re paying a loan for a depreciating asset of course.

Buy your own home.

Agreed.

Learn about Shares:

Agreed. There’s not that many investment options – shares, property, cash, and bonds. Shares and property are the assets that are most likely to outperform inflation in the long term. I’m a fan of both. The more you learn about investments the better.

Figure out your ‘Retirement Number’

Agreed. The more the better of course but Mr Pape suggests that a lower figure is required than most advisers (like me) would advocate, to do this, for people with lower superannuation balances, you could consider working part-time for a lot longer to help supplement a private super pension and government age pension.

Estate Planning:

The book has a very good, simple recommendation for recording everything that is relevant in relation to estate planning, it’s something I hadn’t done myself and have done since reading his book.

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How to choose a Financial Planner https://www.mikebealfp.com.au/how-to-choose-a-financial-planner/ Tue, 20 Nov 2018 05:50:21 +0000 https://www.mikebealfp.com.au/?p=2334 Find a local Financial Planner Find a local Financial Planner using the industry’s professional association, The Financial Planning Association, https://fpa.com.au/.  Members of the FPA must adhere to professional standards and the FPA’s code of ethics. Check the Financial Planner’s Qualifications and Experience The minimum qualification your adviser should have is an Advanced Diploma in Financial Planning.  A…

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Find a local Financial Planner

Find a local Financial Planner using the industry’s professional association, The Financial Planning Association, https://fpa.com.au/.  Members of the FPA must adhere to professional standards and the FPA’s code of ethics.

Check the Financial Planner’s Qualifications and Experience

The minimum qualification your adviser should have is an Advanced Diploma in Financial Planning.  A relevant degree is a higher qualification level than a diploma.  Like any discipline, the more experience the better.  Advisers with more experience have been through more market cycles and will be more familiar with different types of investments.  In most cases I’m dealing with people’s life savings and I feel that my 20 years + experience is highly beneficial.

Check the Financial Advisers register

https://www.moneysmart.gov.au/investing/financial-advice/financial-advisers-register

Advisers must be operating under a licence – if they are not, they are breaking the law and there will be little or no protection for  you if poor advice is given.  The register will also identify the advisers licensee, any disciplinary action taken against them, their experience, qualifications, and membership of professional bodies.

Do you have rapport with the Financial Planner?

Ideally you’ll want to meet the financial planner several times before committing to the ‘Statement of Advice’, much like going on a date – you want to know you’ll be comfortable with your adviser because, in many cases, this is a relationship that is not for a few months, it’s likely to be a decades-long relationship, so choose someone you like!

How does the Financial Adviser charge fees?

There are two main phases of advice – constructing a ‘Statement of Advice’ (SOA) and ongoing management.

Ask the financial adviser how much the initial fee will be for the SOA (generally between $1,000 and $3,000 depending on complexity) and how much they charge to manage your funds on an ongoing basis. The most transparent fee structure is a flat fee rather than a percentage-based fee of the funds invested, so you know exactly what you’re paying.  Generally, due to increasing compliance and regulatory burdens, an adviser would have to charge a minimum of $2,000 p.a. to warrant an ‘ongoing advice’ relationship.

A Financial Services and Credit Guide will identify the fees the adviser charges.

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How much does it cost to see a Financial Advisor on the Sunshine Coast? https://www.mikebealfp.com.au/cost-to-see-a-financial-advisor/ Tue, 16 Oct 2018 16:15:19 +0000 https://www.mikebealfp.com.au/?p=2322 First Meeting   Generally, advisers won’t charge you anything for the first appointment.  This is a good opportunity to see if you and the planner are a good fit.  After the first meeting, once I have summarised your goals and objectives and completed the required research, I will prepare a one or two page summary…

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First Meeting
 
Generally, advisers won’t charge you anything for the first appointment.  This is a good opportunity to see if you and the planner are a good fit.  After the first meeting, once I have summarised your goals and objectives and completed the required research, I will prepare a one or two page summary of what my advice will likely look like, if this scope of advice is agreed upon, then we will begin to prepare the ‘Statement of Advice’ (SOA).
Statement of Advice
 
Typically the cost of an SOA for my clients is $1,200 + GST (the average for most financial planners is around $2.5k+, however I have lower overheads).  The fee reflects the amount of work involved.  The fee, if related to superannuation, can, in most cases, be paid from your superannuation account so does not need to affect your personal cash flows.  For complex advice, for example, establishing a Self Managed Super Fund to purchase property using borrowing, this fee can be up to $5,000 + GST.  Much of this fee is paid to ‘paraplanners’ who assist in the preparation of the SOA in a compliant format.
Implementation Fee
 
Some planners will charge a fee to implement advice, this is often a percentage of the funds being invested – I do not charge implementation fees.
Ongoing Advice Fees
 
Ongoing advice fees are paid for regular reviews, reports, newsletters, portfolio re-balancing and so on.  For smaller superannuation or investment balances I do not charge ongoing advice fees as there is not a great deal of work involved as an ‘index’ fund may be recommended which does not require much maintenance, however for more complex investment structures the ongoing advice fee will be around $2,500 p.a. for portfolios of $500,000, $3,750 p.a. for portfolios of $750,000 and $5,000 p.a. for a $1,000,000 portfolio.  Larger portfolios will be negotiated on a case-by-case basis, again depending on the complexity of the constructed portfolio.
Life insurance commissions
 
If the advice is only related to your personal insurances, in most cases I won’t charge a fee as the insurance company pays me a commission.  The rate of commission (in 2018) is 80% of the first year’s premium and 20% p.a. of the premium, for example, a $1,000 p.a. premium will pay an initial commission to the adviser of $800 and $200 p.a. Due to regulatory changes these commissions are being reduced progressively to 60%..

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Investment rules for success by Mike Beal, your Sunshine Coast Financial Planner https://www.mikebealfp.com.au/investment-rules-for-success/ Thu, 30 Aug 2018 21:49:09 +0000 https://www.mikebealfp.com.au/?p=2299 Here are my top seven investment rules for success based on over twenty years working with clients as their financial planner: 1. Spend less money than you make. Save the difference.  Invest in good quality, low cost investments.  Be patient. 2. Compound interest. These days I cringe to think of all the money I’ve wasted…

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Here are my top seven investment rules for success based on over twenty years working with clients as their financial planner:

1. Spend less money than you make.

Save the difference.  Invest in good quality, low cost investments.  Be patient.

2. Compound interest.

These days I cringe to think of all the money I’ve wasted in the past that could have been invested and compounded.  Take a look at the graph which shows the value of $1 invested in the year 1900.  A bank deposit would now be worth $236 yet the same $1 invested in Australian shares would now be worth over $559 thousand   The magic of compound interest – start now, no matter how small.
Graph of compound interest results for Mike Beal Financial Planning blog

3. Don’t put all your eggs in one basket.

This one is self-explanatory.  It’s fairly common to come across an SMSF that has only a few investments.  For example, Australia’s share-market is dominated by financial shares and mining shares and makes up less than 2% of the world’s stock markets.

4. Turn down the noise.

Like every trough, in the middle of the GFC when the markets had plummeted shares were absolute bargains – but it’s difficult to invest when every headline is screaming doom and Armageddon – this is the noise – but of course, these are the best times to invest.  Have a strategy and stick to the strategy.

5. Invest long-term.

This comes back to the other rule relating to compounding.  Even for people about to retire you need something that’s going to fight inflation.  Investing your life savings of $1m now at term deposit rates of 2.5% will give you $25,000 p.a., however, if inflation’s running at 2.5%, your ‘real return’ is nil.  And of course the $25,000 income this year is not going to buy as much as the $25,000 you receive next  The great thing about shares and property is that the income increases over time, e.g. dividends increase and rents increase allowing you to fight inflation.

6. Be a contrarian.

When you go to the supermarket and baked beans are on special for $1 you might buy two cans.  If they’re not on special you might only purchase the one.  The opposite occurs with shares, in the middle of the Global Financial Crisis, nobody was interested in purchasing shares – of course, this was the best time to be purchasing shares – when they were on special.  When shares do particularly well, after they have risen substantially in price, this is often when people want to buy shares – when they’re not on special, when they’re at the highest point in the cycle.

7. Super

Superannuation is like a giant illegal tax haven – which is completely legal!  For a couple, you can have $3.2m in super at retirement without paying a single cent in tax.  The challenge is getting enough money into the super environment before you retire.  Successive governments have made it harder and harder to get money into the super environment by restricting the contribution limits.  Get as much as you can into super!

If you’d like any more information please give me a buzz or drop me an email.

Kind regards, Mike Beal, your local Sunshine Coast Financial Advisor, 0409 799 279 or mike@mikebealfp.com.au.

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