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Bruce Brammall, The Australian, 1 January, 2023
Personal finances are, essentially, a never-ending Darwinian “survival of the fittest” struggle. So, how did you go in 2022?
If you reckon you were a winner, congratulations. Some pretty big beatings were handed out. Most investors, worldwide, will be licking wounds.
On average, it wasn’t a great year in investment markets. Share markets, property, fixed interest … all generally hammered. The average diversified portfolio – such as most super funds – is down around 10 per cent this year.
(And don’t worry too much if you haven’t heard much from any crypto-loving friends lately. They’re in a bad place. Let them be.)
As always, we’ve got a few choices. We can bitch and moan. Or we can accept that some years are crappy and move forward positively. After all, there are always opportunities.
Today is about encouragement to those in the latter camp. Those who want to progress their finances, who are feeling motivated and who have decided 2023 is “The Year”.
You’re probably a bit older, might not have seen it all the way to midnight last night, and who know that time (in their working life) is running out.
The good news: It’s never too late.
Not a NY resolution!
I don’t encourage New Year’s resolutions. Well, not on New Year’s Eve. Bubbly refreshments and public promises are a bad combination that set you up for failure.
But I do believe in doing them a little later in the month. When the rushed two weeks of Christmas and New Year’s are done. And you’re relaxed, possibly beachside, or enjoying some quiet time at home.
That there’s the right brainspace to be a little analytical.
Rack it up
Take stock.
Try to get all of your finances together on a few pages. Assets, liabilities, income, expenses. Include your super, your home loan or other debt, any shares or property you own.
Overall, is it where you want them to be? Probably not. Everyone knows they could be doing better financially, saving harder, investing smarter.
If you’re in your 50s or 60s and it’s recently dawned on you that your time left in the workforce – your time to accumulate assets – is limited, then pushing things back another year isn’t really a palatable soloution, is it?
Forget the past. Not much you can do about that. Just concentrate on the future. Which starts this month.
The choice is yours. If you’ve pulled together the important facts and figures into a small pile, you should have most of what you’ll need.
Start with super
Your super is where most people should start.
How healthy is your balance? Are you invested appropriately, given your personal risk tolerance? Have you been contributing extra to super? Should you?
Superannuation is, arguably, the best vehicle for saving for retirement.
Why? Simply, it’s a tax dodge. You pay less tax in super, on income and gains, than you would holding the same assets in your own name. It’s the government taxing you less to encourage you to save for your own retirement. Why wouldn’t anyone take them up on that offer?
Most contributions to super are taxed at 15 per cent on the way in. If you earned between $45,000 and $120,000 a year, you pay 34.5 per cent for every extra dollar you earn, while those earning more than $180,000 are paying 47 per cent.
Then, whatever your super earns from its investments is taxed at a maximum of 15 per cent, versus up to your marginal tax rate if the assets are in your own name.
But it gets even better. Eventually, when you retire, or turn 65, your super fund stops paying tax at all. (Investments in your own name, even after you retire, still create taxable income.)
The runup to retirement (the last 10-15 years) is a time when you can have a massive impact on your super balance with some adjustments, hugely improving the quality of your retirement lifestyle.
Getting money in
The trick for many is getting more into super in the runup to retirement. There are two main ways of doing that – salary sacrifice and personal deductible contributions – both with identical tax benefits.
Each year you can put in up to $27,500 tax effectively, which includes those two, plus your employer Superannuation Guarantee contributions of 10.5 per cent of your salary.
Let’s take someone earning $90,000 a year. Their employer is putting in $9450 into their fund. This leaves about $18,050 that could be contributed to your super fund.
If you’re taking that $18,050 as salary, after tax you’re only getting $11,823. If you put that salary into super instead, your super fund gets to keep $15,343.
You super fund picks up an extra $3520 than you would. Multiple that by 5, 10 or 15 years to retirement, plus investment earnings, and you’ve made a substantial difference.
Catching up
To those who know they have been neglecting their super, but want to give it a proper boost, get familiar with the “five-year catch-up” or “carry forward” provisions.
These rules allow you to take advantage of unused previous years’ concessional contribution limits that you didn’t max out, allowing for even bigger contributions and tax deductions. They can be good for, particularly, the self-employed, medium to high income earners, or those who have made a decent capital gain during the year.
There are some rules around carry forward contributions, including that you needed to have less than $500,000 in super at the start of the financial year. If this is potentially you, get professional advice.
Get invested smart
As you age and your super fund grows, the majority of returns for your super are going come from how its invested.
In general, the more aggressively you’re invested, over longer time frames, the better you’ll do. But not everyone will be comfortable with their super sitting all in property and shares, because that choice comes with more volatility.
So, you need to find out how much risk you’re prepared to take (there are many good, reasonably simple, risk profile questionnaires available online).
You also need to take into account how long your super is likely to be invested for. Take a 55-year-old, who is intending on retiring at 65. At 65, they would normally turn on a pension, where the pension is designed to be paid out to them for the next 20 or so years. Their superannuation is still a 30-year investment for them.
A couple in their early 50s came to see me recently. They had amassed a reasonable sum in super. The husband was in a very cheap balanced fund.
But while he was saving 0.5 per cent in fees in his fund, he was probably losing 2 per cent in longer-term average returns, by being invested in a balanced fund, rather than a high-growth fund (which suited his personal risk tolerance profile).
Ride the bike
It’s not all about super, however.
If you can’t lock up your money until near retirement (which super does), then getting started, or continuing, your investment journey is what’s critical.
Markets will do what they do. And over time, they’ll grow. I’m a massive fan of index funds – low-cost managed funds and exchange-traded funds – that give you access to particular markets, or a basket of markets, for a very low fee.
Find yourself some savings and start investing. Get professional help if you don’t know what you’re doing. But have as part of your commitment to improving your future, that you will add to those investments every month.
At first, that might be putting money into a high-interest savings account and getting reasonable interest, while you build an initial sum to invest.
But stay committed. Every month, you are adding to those investments, or those savings that will eventually become an investment. Make it an automatic direct debit.
It doesn’t have to be today. But if you’ve been putting this off for years, your moment to start your fitness survival campaign has to be this month. Best wishes for 2023.
Bruce Brammall is both a financial adviser and mortgage broker and author of books including Debt Man Walking. E: bruce@brucebrammallfinancial.com.au.