Archive for July 2017

The Power of Cashflow and Asset Modelling

 

Our clients will know that we love preparing cash flow and asset models for them, updating and discussing these can often be the central topic of our review meetings. Used properly with reasonable assumptions, these models can provoke great discussions on the impact in the future of decisions made (or being considered) today. They often provide our clients with the confidence to make life changing decisions they may have not otherwise considered to be possible.

This is perhaps best explained with a case study, which is real but of course the names have been changed to protect the innocent. 65 year old Mike is retired with a 57 year old partner, Sally who continues to work full time. They both have superannuation and an investment property in Subiaco. Mike is bored in retirement and would love to buy a property in Dunsborough, but does not see how he can afford to do this.

We modelled the scenario of him selling the Subiaco property and buying a holiday house in Dunsborough. He would then lose the $25,000 in rent from the Subiaco property, so he did not think this was at all feasible. However, the equation is more complex than just subtracting $25,000 from his cash flow. Taking rent from his cash flow also impacts his tax and government entitlements both now and in the future. To supplement this income, he can easily increase the annual pension from his superannuation, probably only $15,000 is required. Taking more out of his superannuation reduces investment returns on this asset, this now means his superannuation is estimated to run out in his eighties. This is of no concern to Mike as he does not see himself driving back and forward between Dunsborough and Perth at 85, he is likely to sell one of these properties and top up his investment assets. By this age he would not be able to add the proceeds back to super, another assumption we can model the impact of. The result is he can now sell the property with more confidence, he now considers it to be one of the best decisions he has made.

Fast forward a few years and now Sally is missing out on the action down south and has not been enjoying her work as she has a new boss with different ideas to her. Can she afford to retire? Surely not she thinks. But when we model the projections of her starting a pension from her superannuation ahead of schedule, her early retirement looks entirely feasible. She also noted it is extremely likely she will receive an inheritance in the next ten years from her brother, so we added a conservative amount for this into their cash flow in ten years’ time. Now they can both see they should have no concerns and the conversation switches, now to estate-planning, what will happen to these funds when they die as they have no dependants? Well that is conversation to be had next time!

Examples such as the above is why we feel the ability forecast multiple assumptions, such as tax, inflation, age pension, investment returns, spending, tax structures and earnings assumptions can be very powerful in the hands of an experienced operator who has a good understanding of what you are trying to achieve. It can simplify complex decisions in a format you can understand.

We have found them to be very engaging and thought provoking for our clients, providing them with the confidence to commit to strategies and investments that are required to make life changes they may never have thought possible. Seeing this happen is the greatest part of this job.  1 Life, there is no dress rehearsal!

Reduction in Concessional Super Contribution Limits from 1st July 2017

As you may well be aware from 1 July 2017 there have been a number of changes to superannuation. One change that may impact you is the reduction in the concessional contribution limit to $25,000. Concessional contributions include superannuation guarantee contributions from employers (the compulsory 9.5%), salary sacrifice contributions and personal contributions you make and intend to claim as a tax deduction. If you have exceed $25,000 in past years and not reviewed/reduced your contributions since 1/7/2017 I suggest you do this.
If you are salary sacrificing from an employer to your superannuation another change to note is that from 1/7/2017 you are allowed to make personal contributions (instead of a sacrifice) and claim these in your tax return. This is another change you may wish to consider. The advantage of a salary sacrifice is that you receive an immediate tax benefit via a reduction in tax deducted from your pay, it ensures regular contributions are made and not forgotten and there is no addition paperwork to be completed in your tax return. Note that in order to be able to claim a personal super contribution a form must be completed and returned to the super fund and you must remember to claim this in your tax return. 
In my opinion a salary sacrifice remains the preferred way to contribute if you are employed. However in some situations a personal contribution may be preferable. These situations may include where you receive irregular income from employment such as bonuses or commissions. For example if you were a real esate agent. Another situation in which a personal contribution may be preferrable is if your employer has an irregular pattern of contributions. We have seen this as a problem where for example super is deducted from your pay in April but not paid to the fund until July. A personal contribution gives you more control over the monitoring and timing of these contributions. 
One final word on these changes from a strategic and retirement perspective, in the past you have been able to delay further contributions to your super until you are closer to retirement. This helps reduce the legislative risk of changes to the superannuation system. Given the changes delaying contributions to super may now mean you are unable to build a sufficient balance in your super for retirement. It must be remembered that despite the changes superannuation is by far the most preferrable vehicle for retirement savings, due to the significant tax advantages. This is the reason behind the restrictions on contributing to it.  The government has also now set a limit of $1,600,000 per person where some of the tax advantages are removed. However in most cases contributions of $25,000 per annum from your mid forties will not be enough to get you anywhere near this limit. If you feel you may need to review your plans or receive further advice on these changes feel free to make contact.

New Cycling Kit

We are pleased to announce our new 1Life cycling kit has arrived. We will be in touch to deliver these over the coming weeks. We do plan another batch in the future so if you are interested please get in touch with us. Thanks for the picture Nat !