Written by Hudson Adviser Phillip McGann
The local and international markets are up strongly this calendar year after a very poor last quarter of 2018. The overall market movements for December Quarter 2018 make sombre reading for investors but the start of 2019 is very promising.
The US markets tend to lead markets around the globe and the past 4 months have been no exception.
The Dec quarter capped the worst year in a decade for the US markets and the December result of itself was the worst monthly performance since 1931.
So why did the market collapse so spectacularly last year and why has it now staged such a dramatic recovery?
As always there are many reasons with a few as follows;
China / US trade wars: President Donald Trump has confronted China about intellectual property rights theft and dumping practices that have led to a huge trading surplus with the US. This was a signature election promise and he has not backed down.
Trump has slapped large and escalating tariffs on many Chinese goods and the Chinese have reciprocated in a “tit for tat” fashion that has (almost) gotten out of hand.
A truce of sorts has been called with negotiators lined up to sort out the mess in the next month which has left many economists predicting dire consequences for both economies - and by extension - the rest of the world. Financial markets have reacted to the threat and the potential compromises in equal measure and now we wait for a final outcome in coming weeks.
Negative: If no resolution achieved will weigh heavily on the markets.
Positive: Self preservation likely to find out as both sides will see “something” needs to be done or both sides lose out
US government shutdown: Again President Trump is at the epicentre of this issue and (again) it is an election promise that he is following through on.
He promised to confront illegal immigration into the US by building a Wall at the southern border with Mexico and he has now called on the Congress to fund it (or else)!
He has held up government funding for other depts. in the process and hence the shutdown of some of these depts. over the past month.
The issue has now been resolved – temporarily – but it will come up again in three weeks. Financial markets have (slightly) reacted to this issue over the past few weeks and will likely do so in the near term if the shutdown returns.
Negative: We may be back here again in three weeks.
Positive: Trump is a pragmatic individual and this has hurt his standing with his base so likely will resolve the issue with a use of executive powers to declare an emergency and fund the wall with Defence funds.
US economic activity and projections: Many economists are worried about the state of the US expansion which has been in full swing for the best part of 8 years. How long can the cycle continue is the big question and financial markets are fluctuating on the answer.
Positive: Current reporting seasons shows on balance the economy is powering along so expansion continues albeit it at a slower pace.
US interest rates: This issue is tied to the previous one and will impact the expansion directly if rates are raised too soon too fast. The inflation outlook for the US is fairly benign but with an economy the size of the US growing at a very quick historical pace and un-employment falling to historically low levels many pundits are asking where will it all end?
Will it be in a burst of inflation? Which the Fed is vigilant to ward off with higher interest rates whilst not trying to kill the “golden goose” by increasing interest rates too soon A delicate balancing act is in play and the financial markets are second guessing the way it will “tip” everyday.
Negative: If Fed continues to rise to keep ahead of inflation may “cause” a recession and market rout.
Positive: Fed is making the right soundings about being conscious of the role of interest rates in the expansion and has indicated that it will take on the markets concerns.
Brexit: What a debacle! A mess that is getting messier as the end of March approaches and the UK has to leave the EU with or without a deal. This is on some levels a very UK focused issue but is one that has echoes around the world as it shows how democracy if struggling to reconcile the wishes of the populace with their leaders.
Interesting times await and markets – again – react day by day.
Positive: Likely the end game will not be the unmitigated disaster many have speculated but perhaps a shock to the economy that can be worked through.
Domestic issues in Australia centre on the economy and how our record long 27 year expansion will play out over the next couple of years. Interest rates are stuck at a very low level and appear destined to stay there for a while or maybe even drop lower if the economy slows further.
At the same time the economy is in the midst of a credit squeeze as banks run scared of pending adverse findings from the Banking Royal Commission – out next week - and regulators baying for blood after being shown up as “asleep at the wheel” on their duties to regulate the banks.
The overall financial sector makes up 40 odd % of the local market and has proven very soft over the pat 12 months impacting portfolios.
Oh and also we have a looming federal election with the Labour opposition providing a huge target with promises of a huge tax increase on the back of a clamp down on investors through negative gearing changes on property investments, a reduction in the capital gains tax discount and a rescinding or franking credit refunds for certain tax payers.
Currently Labour is ahead in the polls but the government is closing and Australian Federal Elections are usually very close run affairs.
Positive: Australian has survived many changes of government over the past 27 years and the expansion has continued.
So there you have it A “wall of worry” everywhere you look but share markets continue to rise higher around the globe as investors sense “too much bad news” has been baked into already very low prices from late last year and are eager to dive in when only a few weeks ago they cowered on the sidelines.
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Written by Hudson Adviser Ivan Fletcher
Are you looking to sell your house and make a massive lifestyle change in Retirement.
There are many pros and cons to consider in making such a significant move.
The Benefits of Downsizing
- Potential Cash Windfall to build your retirement kitty and improve your retirement lifestyle with a higher income capacity. As a simple rule of thumb an extra $100,000 invested with a diversified and balanced approach could increase your income by $5,000 p.a. through the majority of your retirement.
- You can now even put up to $300,000 each into Super from a home downgrade provided you meet the criteria (mainly that you have owned your home for at east 10 years ad are above age 65). Refer previous Hudson article on this subject - Retiree Home Downsizers
- Reduced work load in maintaining the home– including everything from household cleaning to outside maintenance (from roofs to lawns).
- Reduced Cost of home related expenses – including rates, electricity bills (smaller space to cool or heat).
- More appropriate living space for your needs including the exclusion of stairs or the inclusion of an internal garage.
- Opportunity to change location – whether it is to be closer to water or the trees or family members (younger or older family). Of course you need to factor in whether the family you are moving to are stable in their own location (ie not following career changes etc).
Disadvantages of Downsizing
- Loss or reduction of Centrelink entitlements. An increase in your investment base conversely means a reduction in any age pension entitlements via the Assets and Income Tests. In some cases this could also impact entitlement to the Seniors Health Care Card.
- Reduction in your Estate planning assets. The family home is a significant piece of your estate planning. By converting some of it to investment for spending in retirement, you will likely be reducing what is left in your estate after you have gone. This is amplified if you have reduced your centrelink entitlements and having to live more off of your own assets. The government will applaud you for this, your children may not.
- Loss of Community - Leaving your existing community that’s been developed over a lifetime can be a traumatic experience for some and not a consideration to be taken lightly. As we age, there can be a tendency to retreat from being actively social and making new friends. Traditionally we have already made a social network of friends through our jobs, our own sports and hobby interest, our kids schooling and sporting associations and our community groups (example church or charitable organisations). As we age, the prospect of starting over and making new friends in a new location can be more challenging with many of those outlets no longer relevant to our lifestyle. Whilst moving to the bush or the beach presents wonderful images for retirement (promoted by just about every financial institution on the TV), it is worth giving some careful consideration that you may be moving to a place that is away from your established community as the importance of community is possibly even greater in retirement.
- Downsizing within your existing community can deliver the best of both worlds with financial gains without the social impact of lost community.
- If making a major location shift, a strategy to consider is maybe renting out the family home and renting in the place you’re thinking about moving to (try before you buy and sell) allowing ample time to get to know the area and ingratiate yourself in the community to see whether it truly meets your needs. Experiencing a full year in the area first thought the highs and lows of the seasons could save you some heartache. A move North may make the winters more bearable, but the heat may present the same issue in reverse in the summer.
The above matters are for thought provocation to approach such life changing decision with eyes wide open. We all have different values and priorities. Financial freedom as well as location choices are important in retirement, but so are our social connections.
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Written by Hudson Adviser Michal Park
A looming Federal Election can only mean one thing – CHANGE. Specifically change to the superannuation system – though proposed changes the ALP have been somewhat under the radar so far, playing second fiddle to the more sensationalist headlines of negative gearing and franking credits. For those who need a recap:
A two fold proposal – halving the capital gains tax discount and confining negative gearing to new properties. The former somewhat justified given the decline in the inflation rate (as it was initially established to take into account the effects of inflation) but the latter likely to have an as yet unknown impact on an already unstable property market.
Labor plan to abolish cash refunds on franking credits which will impact low taxpayers who rely on them to boost income (think self funded SMSF retirees).
Now regarding super, having only just gotten our heads around the Coalitions changes (some of which only came into effect 1 July 2018), Labor has also announced the following proposed changes in this space – which may very well become law if they are to be our next Government:
A reduction in the non-concessional contribution cap to $75K
Currently set at $100K per annum (since 2017/2018), down from $180K per annum in 2016/2017 and prior. So essentially, the non-concessional super cap is set to be reduced by nearly 60% within the last two years.
One of the more beneficial uses of the non-concessional cap has been the ability to “bring forward” three years worth of non-concessional contributions and get a lump sum into super in one hit (generally from the sale of an asset or inheritance etc). With the proposed changes, this means an individual can only get up to $225K into super under this strategy.
The cessation of ‘catch-up’ concessional contributions
The idea of catching up on concessional contributions was to allow individuals with lower superannuation balances (under $500K), having temporarily left the workplace (eg maternity leave) to carry forward their cap and make higher contributions to “catch up” upon their return to work.
This came into effect 1 July last year and is likely to be scrapped under the ALP.
The cessation of deductibility of personal contributions within the concessional cap
This is likely to have the biggest impact with many individuals jumping on board when Turnbull, only last year, relaxed the restrictions around who could claim deductions on personal contributions up to the concessional cap. The concessional cap is currently set at $25K per annum and includes employer contributions, salary sacrificed contributions and personal contribution on which an individual can claim a tax deduction.
The cessation of borrowing within SMSFs
The plan is to adopt previous recommendations made by the David Murray Financial System Inquiry to prohibit SMSFs from borrowing to purchase investment assets.
Higher income tax lowered to $200K
This is a blatant tax grab. Division 293 tax is currently levied on the concessional contributions of individuals earning in excess of $250K per annum (was $300K prior to 1 July 2017). Essentially this means individuals earning above $200K per annum pay 30% tax on concessional contributions, rather than the standard 15%.
Employer superannuation contributions to rise to 12%
The phasing of SGC from 9.5% to 12% has always been on the cards, though Labor are proposing to do it over a shorter period. The current timetable is as follows:
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Many of us would like to think that ‘older’ means ‘wiser’, but when it comes to money that isn’t always the case. The complexity of Australia’s Superannuation and Pension systems doesn’t help. The upshot is that there are a number of common mistakes that retiring and retired Australians make.
What are those mistakes and how might you avoid them?
1. Underestimating how much you need
There is no set amount you need to retire on as it is specific to the individual/couple in question. That said, it is very important to know if you have enough in the lead up to retirement, so as not to be caught out. Review your situation with your Hudson adviser if you are concerned you do not have enough to create the income you desire.
2. Retiring too early.
Australians retiring today can expect to live until their mid-80s. For retirees in their mid-50s, that means finding a way to pay for a further 30 years of life.
The obvious solution to retiring too soon is to work longer. This provides a double benefit: it extends the savings period allowing a greater sum to be saved, and delays the point where withdrawals start to eat into accumulated funds.
Many people may also overlook the social benefits of work. They end up bored, and then could face the challenges of trying to re-enter the workforce as an older worker, or taking an extra risk by starting a business.
3. Not topping up Super.
Making additional contributions into the tax-favoured Superannuation environment can really boost Super savings. Strategies involving salary sacrifice, spouse contributions and Government co-contributions should all be in play well before retirement, within the allowable limits of course.
4. Investing too conservatively.
A common view is that retirees should dial back on their investment risk by allocating more of their savings to the likes of Cash and Bonds, and less to shares and property. However, even 10 years is a long-term investment horizon, let alone 20 or 30. Cutting too far back on growth assets early in retirement may see savings dwindle too quickly.
5. Withdrawing Super as a lump sum.
Superannuation can be withdrawn as a lump sum after retirement, and if you are over 60 it’s all tax-free.
But what then?
Common choices are to take that big trip or renovate the home.
Of course you’ll want to celebrate your retirement, but if you’re thinking of dipping into your savings in a big way, make sure you understand the potential implications for your future lifestyle.
Another option is to invest outside of Super. This may be entirely appropriate. However, don’t forget that if you are over 60 and your super is in the pension phase, earnings and capital growth will be tax-free. Investing outside of super may see you paying more tax than you need to.
6. Expecting too much age pension.
Just because you’ve decided to retire doesn’t mean the government is ready to give you an age pension. To begin with you need to reach pension age, which is between 65 and 67 depending on your date of birth. If you haven’t yet reached your pension age, you’ll need to fund your lifestyle until you do.
Then there is an assets test and an income test. Too many assets (not including the family home) or too much income and the amount of pension you can receive will start to fall, eventually to nothing. It’s important to remember that these tests apply to the combined assets and income of a couple. If your partner is still working you may receive little or no pension.
7. Forgetting to plan your estate.
If you don’t have a current Will, haven’t granted someone you trust an enduring power of attorney, or made a binding death benefit nomination for your superannuation, you’re likely to leave a big headache for whoever will manage your affairs if you become incapacitated or die. The solution? Talk to a lawyer who specialises in estate planning matters sooner rather than later.
8. Overlooking preservation age and conditions of release.
You can retire any time you like. You may even be able to access some of your Super if you have an unrestricted, non-preserved component. Otherwise you need to meet a condition of release. This usually requires reaching preservation age, which is between 55 and 60, again depending on date of birth. If you’re under the age of 60 it also means ceasing gainful employment with no intention to being gainfully employed again. Between 60 and 65 it is sufficient just to cease an employment arrangement. All funds can be accessed from age 65, regardless of employment status.
One way to access Super after reaching preservation age but without retiring is to start a Transition to Retirement pension. However, this must be paid as an income stream. Lump sum withdrawals are not allowed.
9. Carrying debt into retirement.
It can be hard enough keeping up mortgage, car finance or credit card interest payments even when you’re working. It can become a real burden in retirement.
Where possible, do your best to pay down debt. It may help to consolidate debts and pay off one loan at the lowest possible interest rate. Downsizing your home may also allow you to start retirement debt-free.
10. Paying for unnecessary insurance.
Free of debt and without financial dependants, you may not need to maintain the same level of life and disability insurance you once required. Also, premiums can become expensive as you get older. The run up to retirement is an ideal time to review your insurances, a task best done under the guidance of your Hudson insurance adviser.
While the expectation may be that life should get less complicated as you get older, this short list reveals that’s not always the case. Many of these mistakes come with a high price tag but can be avoided by seeking professional advice.
Your Hudson financial planner will be able to assess your specific circumstances and help you develop a plan for your retirement. But don’t wait until you actually retire. As you can see, it’s never too early to start planning.Read in full + comments 1 Comments
- It has been a Happy New Year thus far, after a harrowing last quarter in 2018. For the three months October to December the Australian sharemarket fell 9.7% to land at 5,709 on 31st December. Since then it has risen 4.6% to 5,972 at the time of writing, with just 6 negative trading days throughout the month.
- The US has experienced a very similar story with even more inflated figures, falling 11.8% in the last quarter of 2018 but rising 7.2% for January 2019.
- The Aussie $ is currently buying 72.5c (US), and in fact has been between the 71c and 73c range for the better part of 4 months, after having fallen from the 80c mark during the first 9 months of 2018.
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