XL Planners December 2022 Newsletter

Welcome to our newsletter. This week’s passage of the controversial Secure Jobs, Better Pay Bill will be followed next year by another wave of industrial relations changes, this time to close what the government calls loopholes.

With Senate passage of the first tranche of changes guaranteed by the end of this week, Workplace Relations Minister Tony Burke confirmed next year’s agenda would include clamping down on the use of labour hire, regulating the gig economy, and moves to reduce the use of casuals.
The fear is this bill risks losing control and accelerating inflationary pressures. We can expect a wave of strike action starting with the fire fighter union risking all airline traffic from this week already.
We can also expect another rate hike in December which will start to affect peoples hip pocket and put pressure on consumer spending going into the Christmas season.

QUARTERLY SEPTEMBER GLOBAL MARKET UPDATE 2022

Australia: As of October 2022, the International Monetary Fund expects the Australian economy to grow by 3.8% in 2022 and 1.9% in 2023. The economic scorecard for Australia was broadly positive during the quarter. The unemployment rate remained stable at 3.5%. Retail sales and private sector credit continued to beat expectations during the quarter (despite weak consumer confidence in July, August and October). Building approvals were better than expected in June and August.

United States: As of October 2022, the International Monetary Fund expects the United States economy to grow by 1.6% in 2022 and 1.0% in 2023. The economic scorecard for the United States was stronger than expected during the quarter, particularly in September. The outlook for the manufacturing sector was mixed during the quarter, before moving into contractionary territory in October. The labour market remained strong with the unemployment rate falling to 3.5% (from 3.6%) during the quarter. Retail sales remained strong while consumer confidence was patchy. The housing market continued to deteriorate throughout the quarter.

China: As of October 2022, the International Monetary Fund expects the Chinese economy to grow by 3.2% in 2022 and 4.4% in 2023. The economic scorecard for China was weaker than expected during the quarter. The outlook for the manufacturing sector deteriorated while both exports and imports were also weaker than expected.

Japan: As of October 2022, the International Monetary Fund expects the Japanese economy to grow by 1.7% in 2022 and 1.6% in 2023. The economic scorecard for Japan was broadly positive during the quarter. The outlook for the manufacturing sector improved in August and October. The unemployment rate remained stable at 2.6%. Retail sales improved in July and August while consumer confidence was mixed.

Germany: As of October 2022, the International Monetary Fund expects the German economy to grow by 1.5% in 2022 and -0.3% in 2023. The economic scorecard for Germany was mixed during the quarter. The outlook for the manufacturing sector improved in August and September before deteriorating in October. The unemployment rate remained stable at 5.5%. Consumer confidence and economic sentiment deteriorated, while the business climate was mixed.

GLOBAL MARKET OUTLOOK
It has been a volatile year with investors focussed on inflation, interest rates and what this could mean for economic growth. To 30 September 2022, the Australian market has fallen 13% since the start of the year. Global markets, however, have fared worse, with the S&P 500 index in the United States down 25% since the start of the year.

Inflation has been stubbornly high and central banks have increased interest rates in response to this. In Australia, core inflation for the September 2022 quarter was 6.1% (from 4.9% in the June 2022 quarter), above the Reserve Bank of Australia’s target range of 2-3%. Similarly, in the United States, core inflation for September 2022 was above the Federal Reserve’s comfort level at 6.6% (from 5.9% in June 2022). The inflation we are currently experiencing is a combination of excess demand, including wage growth, as well as supply constraints caused by the Covid-19 global pandemic and the war in Ukraine. The strong economic conditions are best reflected in current low level of unemployment, which is 3.5% in Australia and 3.5% in the United States. Regarding interest rates, we have lifted from low levels up to 2.60% in Australia and 3.25% in the United States during the past few months, with economists predicting that interest rates will rise to 3.10% in Australia and 5.00% in the United States by early 2023. Inflation data and how global central banks react to this data will be critical to equity market performance over the next 3 to 6 months. We will continue to closely monitor global economic, political and equity market conditions, and keep you informed of events as they unfold.

An Australian Perspective: Well publicised over the last 5 months, the Reserve Bank of Australia began increasing the cash rate from the historically low target point of 0.10%. The recent increase of 25 basis points at the Reserve Bank of Australia’s October meeting has brought the target cash rate to 2.60%. Although the recent interest rate increases have been substantial and swift, the current interest rate levels in historical context provide a different perspective:

Based on the 32 year cash rate an optimist can argue that interest rates at current levels mean we are better off than we have been historically and far better off than we were in 1990. However, as of January 2022 the average loan size for an owner occupier dwelling rose to $618,729 compared to an estimated $65,000 in 1990. Pessimists may therefore argue that even small increases in the cash rate will place too much financial pressure on households.

The key question though is how does this impact various demographics and what mechanisms do we have available to us to navigate these uncertain times.

Wealth Accumulators
Repaying your mortgage before accumulating any other wealth has become the obsession of Australian’s and a common barrier to entry for investing and saving. Although the repayment of non-deductible debt is an important milestone, the strategy generally disregards the broader implications and reality for Wealth Accumulators.
From children entering the family dynamic to the propensity for those to continually feel the need to improve the Primary Residence through renovations and other expenditure, the biggest mechanism that wealth accumulators can take advantage of to prepare for uncertain times, is time.

Time
A mortgage is a large financial burden on any household. Standard 30 year mortgage loans will eat into any young wealth accumulators prime earning years. This is also where time can be utilised. Saving small amounts over an extended period of time allows for the power of
compounding.

In addition to compounding the utilisation of small regular savings allows the wealth accumulator to balance between lifestyle, savings and paying off debt to assist in bridging the ‘retirement funding gap’.

Retirees
A common assumption for retirees is that as the primary residence has been repaid and they are generally debt free, interest rates have a diminished impact on their lifestyle. The reality is that interest rates apply as much to retirees as to wealth accumulators as interest rates affect the entire economy, from the stock market to consumer spending and superannuation funds.

As interest rates rise, economies respond in manners which affect equity and bond markets. This can greatly increase the level of volatility in the share market. During this time, interest rates can increase on savings accounts and fixed interest options become more attractive whilst borrowing becomes more expensive. In both rising and falling interest rate environments asset allocation of a retiree’s portfolio becomes critically important in sustaining longevity of the asset they’ve built whilst they were a wealth accumulator.

Asset Allocation
Asset allocations of a retiree’s portfolio can benefit from an increase to defensive exposure in the face of rising interest rates. As rates rise it becomes more attractive to hold money where better yields come from bonds and fixed interest asset classes. Increasing the defensive allocation of retirement assets can allow investors to benefit from the increased returns on the defensive allocations whilst achieving capital protection of the portfolio from pressure on the share market. When interest rates rise and costs of servicing loans can increase it becomes difficult for businesses to grow, in turn causing impacts on share prices and dividends paid.

What can you do?
The answer lies in the cash flow. At the point where rising interest rates impacts living costs and the ability to achieve financial goals, cash flow reviews with your adviser can assist in affirming comfort in uncomfortable times. No matter the stage in life, the following steps can be taken to help counter the impact of rising interest rates:

Take Inflation into account
When forecasting cash flow, it is important to understand the impact of inflation on your budget and factor this into the model. This means accounting for potential increases to your cost of living on an ongoing basis.

Build in sufficient buffers.
Ensure there is an adequate emergency fund that can assist with unexpected cost increases in the same manner emergency buffers are introduced to protect against events such as unemployment or a health scare.

Take a Financial Health Check
Day to Day expenses can build without any real thought as to what this looks like on a monthly or annual basis. It is always important to ensure that you receive assistance to review insurance premiums, home loan interest rate arrangements or the possibility for retirees to utilise an alternative savings account to garner more interest.

Hold regular reviews
Regularly reviewing personal and financial circumstances can bring to light incorrect assumptions and conditions that may need to change. Reviewing your cash flow for areas to improve will always have a positive impact on your long-term financial goals and will also allow you to quickly and efficiently alter course in the event of veering off track.

Conclusion
Interest rate movements will remain front of mind in the near future and regardless of your stage in life there are opportunities to create value or protect your financial circumstances. This may be through developing an additional savings plan into a high interest savings account whilst paying down your mortgage, or increasing your defensive exposure as a retiree to garner a higher income level.

OCTOBER 2022 BUDGET OVERVIEW
25 October saw Labor produce their first Federal Budget. The budget was referred to as sensible, solid and suitable for the times. It was not a budget that was inclusive of large cash handouts or tax cuts, rather one that focussed on inflationary pressures and the ancillary impact of interest rates over the long term. From a planning perspective, a largely stable budget was produced with the impacts restricted to the following announcements:

Downsizer Eligibility
Downsizer contributions allow eligible individuals to contribute $300,000 as an after tax contribution to superannuation per person from the sale proceeds of the family home. The budget introduced measures to reduce the minimum age requirement from 60 to 55 years of age. The change should allow for greater flexibility of older Australians and encourage them to downsize sooner in a more suitable home fit for purpose.

Self-Managed Superannuation Fund Residency Tests
The previous federal governments former announcement relaxed rules around residency tests for SMSF by the following:  Extending the central management and control temporary absence period for members of SMSFs from two years to five, and;  Removing the active member test. Changes from the October budget now defer these arrangements from the original start date of 1 July 2022 to the income year commencing after the date of Royal Assent.

Commonwealth Seniors Health Card (CSHC) Income Threshold Increase
The income test for recipients and claimants of the CSHC will increase to $90,000 for a single person (currently $61,284) and to $144,000 for a couple (currently $98,054). These changes will allow more than 50,000 additional claimants of the CSHC. Also to note that the current threshold of $122,568 for couples separated by illness will increase to $180,000. The concession card provides concessional co-payments for medicines on the PBS and the potential for bulk billed visits to a GP.

Centrelink Assessment of the sale of the Primary Residence
The Government will aim to increase the duration of the asset test exemption that applies to the proceeds of the sale of a former principle residence which are intended to be used to purchase, build, renovation or repair another principle home by an additional 12 months. This will bring the exemption period to 24 months and can be 36 months in exceptional cases when an extension is applied.

General Overview
In addition to the four main concerns, the government introduced other changes that may affect different demographics:
1. Freezing of the deeming rates – The government committed to freezing deeming rates for Centrelink Payment recipients through to 30 June 2024.
2. Enhancement of the Paid Parental Leave scheme – The government will combine the Parental Leave Pay and the Dad and Partner Pay into one scheme providing up to 20 weeks flexible and shared arrangements for parents. This will increase to 26 weeks by the 2026/2027 Financial Year.
Please contact us to discuss if you believe any of the above is a consideration for you currently, or you wish to review your current circumstances to ensure you remain on track with your financial and personal goals.

Disclaimer – The information in this newsletter is general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information in this newsletter, you should consider the appropriateness of it having regard to your objectives, financial situation and needs. In particular, you should seek financial advice prior to acting on any of the information.

How much super do I need to retire?

Working out how much you need to save for retirement is a question that keeps many pre-retirees awake at night. Recent market volatility and fluctuating superannuation balances have only added to the uncertainty.

So it’s timely that new research shows you may need less than you fear. For most people, it will certainly be less than the figure of $1 million or more that is often bandied around.

For most people, the amount you need to save will depend on how much you wish to spend in retirement to maintain your current standard of living. One way of doing that is to look at how much you spend now.

When Super Consumers Australia (SCA) recently set about designing retirement savings targets they started by looking at what pre-retirees aged 55 to 59 are actually spending.

Retirement savings targets

As you can see in the table below, SCA estimated retirement savings targets for three levels of spending – low, medium and high – for recently retired singles and couples aged 65 to 69.

Significantly, only so-called high spending couples who want to spend at least $75,000 a year would need to save more than $1 million. A couple hoping to spend $56,000 a year would need to save $352,000. High spending singles would need $743,000 to cover spending of $51,000 a year, and $258,000 for medium annual spending of $38,000.ⁱ

Table: Savings targets for current retirees (aged 65-69)

If you will own your home when you retire and you live:	And you’d like to spend about this much in retirement:		Then you need to save this much by the time you are 65, on top of income from the Age Pension
	Per fortnight	Per year
By yourself	$1,115 (Low)	$29,000	$73,000
	$1,462 (Medium)	$38,000	$258,000
	$1,962 (High)	$51,000	$743,000
In a couple	$1,615 (Low)	$42,000	$95,000
	$2,154 (Medium)	$56,000	$352,000
	$2,885 (High)	$75,000	$1,021,000

Source: Super Consumers Australia

While these savings targets are based on what people actually spend, there is a buffer built in to provide confidence that your savings can weather periods of market volatility and won’t run out before you reach age 90.

They assume you own your home outright and will be eligible for the Age Pension (which is reflected in the relatively low savings targets for all but wealthier retirees), and also make assumptions about future inflation and investment returns.^*

Retirement planning rules of thumb

The SCA research is the latest attempt at a retirement planning ‘rule of thumb’. Rules of thumb are popular shortcuts that give a best estimate of what tends to work for most people, based on practical experience and population averages.

These tend to fall into two camps:

• A target replacement rate for retirement income. This approach assumes most people want to continue the standard of living they are used to, so it takes pre-retirement income as a starting point. Once you have an income target you can work out the savings required to generate that level of income for the time you expect to spend in retirement. The government’s 2020 Retirement Income Review suggests a target replacement range of 65-75 per cent of pre-retirement income would be appropriate for most Australians.ⁱⁱ
• Budget standards. This approach estimates the cost of a basket of goods and services likely to provide a given standard of living in retirement. The best-known example in Australia is the ASFA Retirement Standard which provides ‘modest’ and ‘comfortable’ budget estimates updated quarterly for changes in the cost of living.

SCA sits somewhere between the two, offering three levels of spending to ASFA’s two, based on pre-retirement spending rather than a basket of goods. Interestingly, the results are similar with ASFAs ‘comfortable’ budget falling between SCA’s medium and high targets.

ASFA estimates a single retiree will need to save $545,000 to live comfortably on annual income of $46,494 a year, while retired couples will need $640,000 to generate annual income of $65,445. This also assumes you own your home outright and will be eligible for the Age Pension.

Limitations of shortcuts

You may think these spending levels and targets are too low, or out of reach, depending on your personal circumstances and retirement goals. You may also query some of the underlying assumptions, especially if you rent or don’t own your home outright and expect to retire with a mortgage or other debts.

The big unknown is how long you will live. If you’re healthy and have good genes, you might expect to live well into your 90s which may require a bigger nest egg.

If for whatever reason you think your super nest egg is too small for comfort, it’s never too late to give it a boost. You could:

• Ask your employer to put a salary sacrifice arrangement in place or make a personal super contribution and claim a tax deduction, being mindful to stay within the annual concessional contributions cap of $27,500.ⁱⁱⁱ
• Make an after-tax super contribution of up to the annual limit of $110,000, or up to $330,000 using the bring-forward rule.^iv
• Downsize your home and put up to $300,000 of the proceeds into your super fund (up to $600,000 for couples).^v

Thanks to new rules that came into force on July 1, you may be able to add to your super up to age 75 even if you’re no longer working. As with everything to do with super, strict rules and eligibility hurdles apply so ask us about the most appropriate strategies for your situation.

While retirement planning rules of thumb are a useful starting point, they are no substitute for a personal plan. If you would like to discuss your retirement income strategy, give us a call.

*Assumptions include average annual inflation of 2.5% in future, which is the average rate over the past 20 years, and average annual returns net of fees and taxes of 5.6% in retirement phase and 5% in accumulation phase.

i https://www.superconsumers.com.au/retirement-targets

ii https://treasury.gov.au/publication/p2020-100554

iii https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions—too-much-can-mean-extra-tax/

iv https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions—too-much-can-mean-extra-tax/?page=5

v https://www.ato.gov.au/individuals/super/growing-your-super/adding-to-your-super/downsizing-contributions-into-superannuation/

The challenges of market timing

When markets fall, it’s natural to want to take action to prevent further losses. Doing so however can do more harm than good. Here’s why timing the market to buy low and sell high is not as easy as it sounds.

If you’re invested in the financial markets and also keeping up with the news, you’re probably wondering if you should do anything to insulate your portfolio from incurring further losses alongside rising interest rates and inflation.

In times like these, reminding investors to “maintain discipline” and “stay the course” – in other words, stay invested and here’s why:

Reacting to the here and now

Most market commentary are about the events of the day, with a focus on the here and now. However, the ‘today’ is not as significant to financial markets as they’re generally forward looking and more concerned about what will happen in the future. Thus, using daily developments to make constant adjustments to your portfolio is unlikely to help you accumulate wealth over the long term as the market will have already priced it in.

Additionally, to successfully time the market, investors need to get all five of these investment factors right including precisely timing exit and re-entry – a near impossible feat for even the most experienced of investors.

Locking in your losses

When markets fall, it’s natural to want to sell riskier assets (i.e. equities) and move to cash or safer assets like government securities. But exiting the share market now means locking in your losses permanently and not giving your portfolio the opportunity to benefit when markets recover. Research found that 80 per cent of investors who panicked and moved to cash during the 2020 sell off would have been better off if they had stayed invested¹.

Investing at the peak

While we all want to “buy low and sell high” so our portfolios can outperform the market average, in reality, it is extremely hard to execute perfectly every single time. Analysis of the last 5 decades reveals that even in the worst-case scenarios – where investors bought into the market at its peak, just before a dip – as long as investors stayed invested instead of moving to cash, they still benefited from positive annual returns of almost 11%.

If the recent market volatility is keeping you up at night, take a moment to reflect on whether your emotions are short-term reactions to the current conditions, or something you really need to act on. If you feel like you cannot stomach temporary losses, consider if your asset allocation is right for your overall investment goals and risk appetite.

A well-diversified core portfolio, aligned to your risk appetite will help spread your risk and afford you a margin of safety over the long term. Get this right and you will probably sleep better at night.

Contact us if you would like to discuss this further.

Source: Vanguard

1 https://corporate.vanguard.com/content/dam/corp/research/pdf/Cash-panickers-Coronavirus-market-volatility-US-CVMV_072020_online.pdf

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2022 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

The advantages of investing early

You may have heard it said, “No risk, no reward.” But did you know that time can actually decrease your risk while increasing your reward? 

Investing: Risky business?

When some people think of investing, they focus on the potential for great rewards—the possibility of picking a winning share that will increase in value over time.

Other people focus on the risk—the possibility of losing everything in a market crash or on a bad stock pick.

Who’s right? Well, it’s true that all investing involves some risk. It’s also true that investing is one of the best ways to build your wealth over time.

In fact, there’s typically a direct relationship between the amount of risk involved in an investment and the potential amount of money it could make.

Different types of investments fall all along this risk-reward spectrum. No matter what your goal is, you can find investments that could help you reach your goal without taking on unnecessary risk.

Time is on your side

Here’s the secret ingredient that can make investments less risky: time.

But there’s a caveat.

If you invest in just a handful of investments or only within the same industry, time won’t necessarily make your portfolio any safer.

The reason it works for diversified investment portfolios that incorporate a range of asset classes (i.e. bonds), regions and markets is that over time, there tend to be more “winners” than “losers.” And the investments that gain money offset the ones that don’t do as well.

The more time you have, the more you benefit from compounding

Not only can the passage of time help lower your investment risk, it can potentially increase the rewards of investing.

Imagine you place one checker on the corner of a checker board. Then you place two checkers on the next square and continue doubling the number of checkers on each following square.

If you’ve heard this brainteaser before, you know that by the time you get to the last square on the board—the 64th—your board will hold a total of 18,446,744,073,709,551,615 checkers.

While there’s no guarantee you can double your money every year, the principle behind this – known as “compounding” – is important to understand that when your starting amount is higher, your increases are higher too. And over time, it can add up to be a material increase.

For example, if you earn 6% on a $10,000 investment, you’ll make $600 in the first year. But then you start the second year with $10,600—during which your 6% returns will net you $636. This is a hypothetical example that does not take into consideration investment costs or taxes.

In the 20th year of this example, you’ll earn more than $1,800—and your balance will have increased more than 200%.

A caveat: reinvesting is key

If you take your earnings out of your account and spend them every year, your balance will never get any bigger—and neither will your annual earnings. So instead of making more than $20,000 over 20 years in the hypothetical example above, you’d only collect your $600 every year for a total of $12,000.

If you instead leave your money alone, your “earnings on earnings” will eventually grow to be larger than the earnings on your original investment – and that’s the power of compounding!

Understanding long-term investing can be confusing, that is why we are here to help. Contact us today on |PHONE| to find out more. 

Source: Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2022 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.