It’s June, so it’s grand final time in the financial advice industry, as well as so many others
But amongst all the professional thunderbolts and lightning that are spraying around your workplace, you simply have to take time for yourself, even if its done on nights or weekends. You have to make sure that you’re looked after and you don’t get to July and think, “Damnit! I didn’t do a whole bunch of things that could have saved me money in June. But I did it all for my clients and customers
June, with about three weeks left, is the time when you get to make those last-minute adjustments that will either increase your tax refund (for employees, generally) or reduce the bag with $$$ signs on it that you’ll have to hand over the ATO in a few months (for the self-employed
Normally, the advice at this time of year is to spend money on things, so that you can get the equivalent tax deduction when you go to see your account in July or August. And, of course, that still makes sense. But this year, why not think about doing something a little more positive for your future? A little more long-term? Just to make your twilight years are that little bit more super? If it’s not obvious by now, read today’s Debt Man Investment Newsletter
The stock market’s tantrum in the last five weeks or so has meant that we can look forward to fairly dismal returns for our investments and super come the June 30 cut-off. But it could also be a great time to be making adjustments to those investment plans. Some things can be done anytime. For everything else, there’s always help at hand.
End-of-year super tips, but do it straight away!
It’s hard to get your super to soar like an eagle when it’s regulated by a bunch of turkeys.
And whether the gobblers pulling the strings in Canberra are politicians or public servants matters little. Super will be a lot less so from July.
Forget the recent market gyrations and their impact on your super. If you’re 30, 40 or 50, another 10 per cent fall doesn’t matter. You can’t touch your super for one, two or three decades.
There’s a far more important matter to worry about. How do I get enough money in to super? From July 1, it will be the harder to get money into super tax-effectively than at any time since compulsory superannuation began in 1992. Super, as a way to proactively save for retirement, is being cut off at the knees.
Remember the Black Knight in Monty Python and The Holy Grail? No arms. No legs. And still fighting.
(And that’s ignoring super’s catastrophic returns. The average five-year return, after fees, is now a poofteenth above zero.)
Herein, I’ll save you having to read legislative updates, fund manager sales pitches and the turgid rubbish your super fund sends you. With less than a month of this financial year to go, here’s how you help build your pot of super gold.
If you earn less than $31,920 and you have a spare $1000 to put into super, you’ll get a 100 per cent guaranteed return. The Government co-contribution will match you dollar for dollar up to $1000.
If you earn more than $31,920, but less than $61,920, they’ll match you on a sliding scale. That is, if you earn half way between those two figures (or $46,920), then you’ll get a maximum of $500.
From July 1, the maximum co-contribution falls from $1000 to $500. And it will also cut out at just $46,920.
Lower concessional contribution caps
A broken super promise to half-centurions is a big kick in the goolies. The over-50s, with lower super balances, were supposed to be able to continue to put in a higher amount to super. The government reneged on that deal at the Budget.
As a result, if you are over 50 now, you have three weeks to put in up to $50,000 at a concessional tax rate. (Be careful, the calculations include the 9 per cent from your employer. If you’re not sure, speak to a financial adviser or your pay office immediately.) For employees, this means salary sacrifice. For the self-employed, you can make a deductible contribution in one hit. But it needs to be before June 30.
From July 1, everyone will have the same concessional contribution limit of $25,000.
It used to be that when you hit 50, with the mortgage paid down and the kids almost ready to be kicked out, that you would load up your super.
Generation Xers (1960-1980) simply won’t be able to do that. The contribution limits are too low. From the age of 40, you need to start putting more into super.
For most people, that means salary sacrifice. If you have some spare cash to get you through to June 30, see your pay office immediately and see if you can sacrifice some/all of your salary before June 30. Even a few thousand dollars. Set up a plan to do more from July 1.
No tears shed here
The 1 per cent that earns more than $300,000 a year should load up on super this year also. Contributions they make from July 1 will be taxed at 30 per cent rather than 15 per cent. Understandably, there were few tears shed for this minority on Budget night.
A rare bonus
On a positive note … low-income earners will get a super bonus from July 1. Those earning less than $37,000 will get up to $500 tax repaid into their super fund, which equates to the tax paid on their employer contributions. Unfortunately, apart from bringing forward income from next year to this year, there’s not much planning you can do for that.
When people think of the end of financial year, it’s usually about buying stuff to save on tax. Isn’t that just a little bit backward? How about something a little positive – saving tax by paying less of it and investing in your super
End-of-year super tips
- If you’re earning less than $46,920, consider a $1000 after-tax contribution to get the government co-contribution.
- Consider salary sacrificing some or all of your last month’s pay. Contact your pay office.
- The over-50s should make the most of their last chance to make up to $50,000 of concessional contributions.
- Those earning over $300,000 a year will pay double the super tax from next. Contribute as much as possible this year.
$A about to go up? Or down? It will revert to average
You’d be daft not to stack up on your favourite wine when the local grog shop had a special on, wouldn’t you?
And who hasn’t purchased half-price duty-free booze, simply because they were passing through Customs?
If you’re sitting in Bali with some fellow bogans, it’s even harder to say no. Heck, what’s $2.80 for another large Bintang?
No, I don’t have an alcohol obsession. But I am sitting in Bali as I write this. And the “heck it’s cheap” factor is a constant here. This would include the bar bill for me and my bogan, pogan (a posh bogan), wogan (wog-bogan, my Portuguese colleague insists on being called) and grogan (growing-into-a-bogan) mates, if not for the quantum being consumed.
The fact that Bali – and pretty much everywhere actually – is cheap to travel to is predominantly a factor of the mightiness of our dollar. For years, the dollar has been floating higher than Cheech & Chong on a bender.
But in the last few weeks, it’s been wobbling. A simple tremor? Or is the ground about to open up and swallow it?
I wouldn’t have the foggiest. It could be about to go up. It could be about to go down.
I do understand something far more powerful. It’s the concept of “reversion to mean”. That’s where something that is too high, or too low, or above its “long-term” intrinsic value, or below, will eventually return to its average.
Remember those gloating English cricket fans during The Ashes in 2001-02? They had a ditty about getting three dollars for one of their pounds. Are they laughing now when they’re getting half that? They can’t afford to come here, so we don’t have to listen to them.
The long-term average of the Australian dollar is somewhere between $US0.65 and $US0.75.
It got as low as about $US0.47 in 2001 and as high as nearly $US1.10 in recent years. Anyone who doesn’t believe that the Australian dollar is above “par” at the moment is living in Neverland.
The dollar is not just for the world of high finance. It affects your life almost every day.
Petrol is cheaper because the Australian dollar is strong. If the dollar were sitting at $US0.70, we’d be filling up at closer to $2 a litre. Big-screen TVs are currently “stupendously” cheap. With a lower dollar, they’d be just “stupidly” cheap.
Anything that is imported will become more expensive, including foreign cars, food, computers, toys and clothes.
That’s out of your control.
What can you control? If the Aussie is about to “revert to mean”, how can you benefit from that? Even if it’s not about to revert to mean, how do you take advantage of the Aussie sitting at around parity with the US dollar.
Travel. Overseas. Now. (I’m practising what I preach.)
The strong dollar means that your hard-earned buys you more, better quality, care-free times overseas now than at pretty much any time in the last 25 years or so.
This is my fourth trip to Bali. All of them have been cheap. But the exchange rate has been wildly different each time. In 1998, it was about 6000 rupiah to the dollar. Six months later in early 1999, it was about 7500 rupiah. In 2010, it was around 8200 and in 2012, it has been around 9400.
Any inflation in pricing has been completely wiped out by our stronger dollar. It will be similar in most places Australians travel to.
Buying cheaper imported goods and cheaper overseas holidays are ways to take advantage of the strong dollar. (For investors, purchasing overseas assets with a strong dollar can also make sense, but get advice here.)
The Aussie will eventually revert to mean. It has to. And Australians really need our dollar to fall.
It’s as dangerous for the long-term health of the economy as a ride with a narcoleptic taxi driver.
If it’s cheap to travel overseas, then it’s expensive to travel to Australia. Australia’s tourism sector desperately wants a lower dollar. The same applies for anything Australia exports, particularly our farmers.
Is this the “last call for drinks” on the Australian dollar before it reverts to its mean? If it is, then consider taking advantage of it.
I don’t know. I don’t care. But hey, look at that! It’s Bintang o’clock!
Organise your future by thinking about your super
Q: Tax time is less than three weeks away. What should people be doing to make it less painful
A: A wise man (Daniel be his name) once told me: “Accountants organise what’s already happened. Financial advisers organise the future.”
And that, dear readers, is today’s exercise. Three weeks until June 30? Plenty of time.
Okay, there’s the short-term “purchasing” advice. Some are able to claim items that are tax deductible for their employment. Buying before June 30 can qualify for a deduction in July rather than waiting another year to claim. (Consider it a shoe sale – you were going to buy them anyway.)
Depending on your job, this can include stationery, work clothes, sunscreen, newspapers, magazines, car expenses, etc. Check the ATO’s website for claimable items for your occupation.
When it comes to investments, pre-paying investment loan interest can make sense.
For those with property, some spending might qualify for immediate tax deductions. Items that are more expensive might need to be depreciated over several years.
But for some real forward planning, think about your super.
Gen Xers older than 40 should consider salary sacrificing some of their income before June 30 into super. (Salaried employees can only salary sacrifice income that hasn’t yet been earned.)
Governments are constantly restricting how much money can be contributed to super. Last month’s Budget was no exception.
It’s becoming increasingly important for Gen Xers to contribute a little more into their super from their early 40s. We simply won’t be able to get as much in as previous generations. Speak to your pay office about salary sacrifice. A few thousand dollars before June 30 can make a big difference.
Buying v renting is not a fair
Q: Falling property prices have renewed the debate about renting versus buying a home. What are your views?
A: Listen up: If rent money is “dead” money, it’s no more “dead” money than mortgage interest.
So, that is what you compare. Short term, renting is far cheaper. Long term, however, buying … kicks … ass.
Let’s assume two identical houses, side by side. One is up for rent, the other for sale. The rent is $1670 a month. The mortgage (assuming 7 per cent, 25-year loan) is $3280 a month, or nearly double.
The mortgage will bounce around with interest rates. Rent will rise with the value of the property (assumed 5 per cent). Now, let’s compare the “dead” money.
After 25 years, the total rent bill will have been $954,000. The buyer has paid about $458,000 in interest.
After maintenance, let’s say the buyer is ahead $400,000. But she also owns an asset worth $1.7 million. The benefits are exponential from there.
“If you decide not to buy, you will rent until you die.” Catchy tune, hey?
In year 26, the renter will be paying $67,000 a year. The buyer will be paying … nothing. Well, some rates and maintenance.
I’m a fan of buying when you can afford to. Whether prices are high, or low, is less important than starting the mortgage habit.
If you’re the sort of person who thinks beyond your next few pay cheques, the buying versus renting argument isn’t a fair one.
Nationally, prices have fallen around 5 per cent in the last year. Add inflation and they’re down 8 per cent.
Low home prices are just a bonus. But a bonus worth taking.
Not all debt is the Devil. But get rid of dumb debt
Q: What are some of the biggest mistakes people make when it comes to paying off their debts?
A: Not all debt is the Devil. There are actually three kinds of debt: “dumb”; “okay”; and “great” debt. To categorise them, you need to ask two questions.
One: Will the purchase increase in value? Two: Is the interest tax deductible?
Dumb debt answers “no” to both. These assets fall in value and the interest is NOT tax deductible. For example, cars, furniture, electrical goods, etc.
Okay debt is either generally going to appreciate in value, or be a tax deduction. For example, your home is likely to increase in value, but it isn’t a tax deduction. Work cars are “same, same, but different”. If your car is a business expense, then it qualifies as a tax deduction, but it is falling in value.
Then there’s “great” debt, which answers two yeses. Appreciating assets with tax deductibility? What is this magical debt? Investment debt, predominantly shares and property.
With the single-mindedness of a Dalek, you should “EX-TER-MI-NATE” dumb debt. Pay off the highest interest rate rubbish first.
Next comes okay debt. If you’re dumb-debt free, turn your excess cashflow towards your home loan.
And great debt can be a powerful wealth-creation strategy, particularly for Gen Xers. It often makes sense to pay interest only.
But the biggest mistake I see regularly is by those with $10,000 in savings and $10,000 on the credit card. They’re paying $1800 a year interest on the card and earning $500 a year on their savings, which becomes about $330 after tax. They are literally throwing away nearly $1500 a year, or $30 a week. That’s a lot of beer money!
Promise yourself: a personal budget surplus every year
Q: What can a householder learn from how the Federal Government manages its Budget?
A: “Oooh, ooh! Me, sir, me! I know this answer! Please sir!”
“Ye-e-es, Debt Man,” the teacher says hesitantly. (He always hesitates when I raise my hand.)
“That you shouldn’t get cornered into making promises that, deep in your heart, you really don’t want to keep?”
Prime Minister Julia Gillard promised at the last election that this Budget would be in surplus. Then she handed a hospital pass to Treasurer Wayne Swan, who had to deliver in the Budget.
Neither wants to do it. Making deep cutbacks during tough economic times just ain’t the Labor way. The only certainty was that Wayne would upset countless tens of thousands.
Gen Xers have budgets as tough to balance as anyone. But while Xers have generally rising incomes (says Census data), it’s also when expenses are highest, with monster mortgages and massive costs for the midgets.
So, assuming Wayne can deliver a surplus at the end of the coming financial year, the lesson to learn is how to live within our means. The main difference? Wayne can raise taxes. We can’t, without resorting to Robin Hood antics.
Delivering regular budget surpluses in a household can be really tough. But it’s absolutely critical. That’s how you develop savings, pay down the home loan faster, or afford the school fees without imploding on debt.
Sure, you want to give the kids things. And you want to reward yourselves. But some years (like this year for Julia and Wayne) a “budget surplus” is more important for the message it will send.
“We can keep a promise to live within our means.” It’s a promise Xers need to make to themselves EVERY year.
Super ain’t a one-size-fits-all investment, baby!
Q: Super funds have been criticised for holding too many shares and not enough conservative assets. What do you think?
A: Bunkum, bollocks and bulltish. But let me explain.
That proposition was made forcefully recently by former Treasury head Ken Henry.
Uncle Ken’s comments were aimed at default “balanced” super funds, which traditionally have 55-70 per cent of their investments in “growth” assets – shares and property. His concerns have merit for retirees and Boomers, whose super funds were crunched during the GFC.
But, to channel Austin Powers for a second, “Super ain’t a one-size-fits-all investment, baby!”
I’m a believer in what’s generally called “lifestage” super investing. The younger you are, the more of your money should be invested in shares and property, which are more volatile, but tend to perform better over the longer term.
If you’re 30 and have 35 years until retirement, you should have your super working harder for you, to make it grow to something worthwhile when you hit retirement. That is, more shares and property than the average.
Similarly, if you’re 60 and retiring soon, as Uncle Ken says, you should have more money in “defensive” assets, such as cash and fixed interest. The older you are, the less risk you should take.
Gen Xers are in between. Even the oldest Xers have about a decade to hitting retirement age. But that means you have at least one, two, even three decades of growth to benefit from before you start drawing on your super.
So, take responsibility for your own super investments. If you don’t know what you’re doing, see a knowledgeable financial adviser, who can demystify super investments for you.