Bottrell Financial Planning Newsletter – August 2022
It’s August and as winter draws to a close there’s snow in the Alps and the wattle is blooming. Many Australians will soon receive a sizeable tax refund, if they haven’t already, which should help ease those rising cost-of-living blues.
Rising inflation and interest rates were the focus of attention in July. The US Federal Reserve lifted its target rate by 75 basis points to 2.25-2.50% to tackle surging inflation of 9.1%. At the same time, the US economy contracted by 0.9% in the June quarter, following a 1.6% drop in the March quarter.
By contrast, Australia is performing relatively well. In his first economic statement, treasurer Jim Chalmers downgraded growth forecasts to a still solid 3.75% last financial year and 3% this financial year. Inflation jumped to 6.1% in the year to June and is forecast to peak above 7% in December. And the Reserve Bank lifted the cash rate by 50 basis points to 1.35% in July, with a similar increase tipped this month and more to come. Governor Philip Lowe said he expects rates to get to ‘at least’ 2.5%. Unemployment fell to 3.5% in June, but rising prices and interest rates dented confidence. The ANZ-Roy Morgan consumer confidence index sits at 82.4 points – below 100 is pessimistic. While the NAB business confidence index fell 5 points to +1.4 points in June.
The biggest hit to inflation has come from housing and construction prices and petrol. But the housing market is cooling due to rising interest rates, with national home values easing 0.6% in June and new dwelling starts down 6.5% in the March quarter. Petrol prices are also easing, down 19c to below $1.93 a litre in late July on falling global oil prices. The Aussie dollar gained a cent to finish the month around US70c.
Your investing style – as unique as you
As interest rates start to increase after a lengthy period of historical lows, it’s a good time to think about how your money is working for you and whether your investing style and strategy is still in line with your goals.
Higher interest rates don’t just send a ripple through the economy, aside from the obvious impact on the property market, they often impact stock prices. There are a myriad of other factors that contribute to market movement and portfolio performance and trying to navigate all the things that need to be considered can be challenging but being aware of your preferred investment style and having a considered and appropriate strategy can help.
The benefits of style and strategy
Just as we are all unique individuals, our goals and approach to investing will also be different to our family and friends and it pays to be familiar with your own style and preferences.
It can be common for those new to investing to take the plunge without any real plan, let alone an investment strategy that’s likely to align with their current circumstances, future requirements, and investment goals.
Even those who have been investing for some time can be guilty of a ‘set and forget’ approach that might mean hanging on to a strategy that does not meet their present or future needs.
Having the right investment strategy – the one that’s right for you – improves the likelihood of your investments meeting your goals and allows you to sleep at night.
Your tolerance for risk at the core of your style
While approaches to, and styles of investing are many and varied, your comfort with risk is often the primary driver of any approach you may choose to take. There is of course a trade-off between risk and return that needs to also be considered. Your comfort with risk will determine the right mix of asset classes in your portfolio.
An aggressive investor, commonly someone with higher risk tolerance, is willing to take on greater risk for the possibility of better returns than a conservative investor. This type of investor will be comfortable with a higher proportion of growth assets like shares or listed property that offer higher returns over the long-term that may come at the expense of less stable returns.
A conservative investor will employ a larger proportion of defensive assets in their portfolio to provide long-term stable returns with lower volatility and exposure to risk. Defensive assets are fixed interest investment options including fixed income bonds and cash investment options.
Hands-on vs hands-off approach
Investing strategies can be further separated into two distinct groups: active and passive. Passive investing, as the name implies, focuses on benefitting from the overall increase in market prices over time. One of the benefits of passive investing is that it minimises the mistakes investors can make when they react emotionally to stock market movement.
Active investing involves a more hands-on approach, with more frequent buying and selling to take advantage of short-term price fluctuations and is generally undertaken by a portfolio manager.
Changing your strategy over time
Most investors find that their investment style shifts as they age. Younger investors have a longer time horizon, so they may feel more comfortable making riskier investments as they have time for the market to recover from market falls. Mature investors may be more focused on preserving their savings for retirement, so they may be more interested in diversification and dollar-cost averaging.
For investors nearing or at retirement, a shift from asset growth and capital gains to a focus on income may be something worth considering and is often desired. The advantage of an income focussed strategy is that investments can produce some of the cash flows needed when you’re no longer working. Dividend stocks are a common way to achieve this goal, with companies showing stable and growing dividends providing the most value.
To ensure you are employing the right strategy to meet your objectives, it pays to be aware of your options and revisit your comfort with risk and your overall investment goals. We can ensure your investment portfolio meets both these elements throughout your various life stages.
If you are interested in exploring the options available to you, please get in touch. We can work closely with you to review your strategy or if you are new to investing, find the right mix for your unique circumstances.
Salary packaging – worth the sacrifice
The principle of ‘salary sacrificing’ may not sound very appealing. After all, who in their right mind would voluntarily give up their hard-earned cash. But it can have real financial benefits for some in terms of reducing your taxable income, which could see you pay less at tax time.
As we nudge ever closer to the end of financial year, it’s worth taking a look at salary sacrificing to see if it’s a worthwhile strategy to put into place for you.
A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. In essence, a salary sacrifice arrangement is when you agree to receive less income before tax, in return for your employer providing you with benefits of similar value. You’re basically using your pre-tax salary to buy something you would normally purchase with your after-tax pay.
How does salary sacrifice work?
The main benefit of salary sacrificing is that it reduces your pre-tax income, and therefore the amount of tax you must pay. For example, if you’re on a $100,000 income, you may agree to only receive $75,000 as income in return for a $25,000 car as a benefit.
Doing this would reduce your taxable income to $75,000 which could lower your tax bill because you’re essentially earning less as far as the tax office is concerned.*
This arrangement must be set up in advance with your employer before you commence the work that you’ll be paid for and it’s advisable that the details of the agreement are outlined in writing.
What can you salary sacrifice?
According to the Australian Tax Office (ATO), there’s no restriction on the types of benefits you can sacrifice, as long as the benefits form part of your remuneration. What you can salary sacrifice may also depend on what your employer offers.
The types of benefits provided in a salary sacrifice arrangement include fringe benefits, exempt benefits and superannuation.
Fringe benefits can include:
- property (including goods, real property like land and buildings, shares or bonds)
- expense payments (loan repayments, school fees, childcare costs, home phone costs)
- Your employer pays fringe benefit tax (FBT) on these benefits.Exempt benefitsinclude work related items such as:
- portable electronic devices and computer software
- protective clothing
- tools of the trade
Your employer typically does not have to pay fringe benefits tax on these.
You can also ask your employer to pay part of your pre-tax salary into your superannuation account. This is on top of the contributions your employer is already paying you under the Superannuation Guarantee, which should be no less than 10% of your gross (before tax) annual salary, though this may rise in the near future.
Salary sacrificed super contributions are classified as employer super contributions rather than employee contributions. These contributions are called concessional contributions and are taxed at 15 per cent. For most people, this will be lower than their marginal tax rate.
There is a limit as to how much extra you can contribute to your super per year at the 15 per cent tax rate. The combined total of your employer and any salary sacrificed concessional contributions cannot exceed $27,500 in a single financial year. If you exceed the cap, you could be charged additional tax on any excess salary sacrifice contributions.
Most employers allow employees to salary sacrifice into super, but not all employers will allow salary sacrificing for other benefits.
Is salary sacrifice worth it?
Salary sacrifice is generally most effective for middle to high-income earners, while there is little to no tax saving for people who are already in a low tax bracket.
If you are a middle to high-income earner, then it may be worth considering salary sacrifice to reduce your taxable income and to take advantage of some of those benefits.
Before you do, make sure you talk to us so we can help ensure it is an appropriate strategy for your circumstances.
Investing to achieve your goals
What do you want out of life?
While it’s great to have a vision of what we want our lives to be like, without clear goals and a plan to achieve them our dreams for the future are likely to remain just that.
The good news is that it’s not too late to turn your ambitions and plans into achievable goals. You give yourself the best chance of kicking goals if you focus on the process and break your long-term objectives into a series of steps.
Most meaningful goals require a change in behaviour that can’t be achieved overnight. If you’re a couch potato who dreams of running a half marathon, you need to learn to walk before you run. To develop the exercise habit, you may need to rise an hour earlier each day and team up with a buddy to encourage you to keep going. You may also need expert advice to create a detailed, personalised exercise plan and help measure your progress.
Financial goals require a similar approach. Take the long-term goal of saving for retirement. The traditional approach is to simply save as much as possible between now and then, with a focus on maximising investment returns after assessing your risk tolerance. Depending on your risk profile your money would be invested in an aggressive or defensive portfolio.
By comparison, a goal-based approach to investing aims to align your investments with your personal objectives. By asking where you want to be in 5, 10 or 20 years you can work out how much you need to save to achieve your goals and create savings habits to help you get there.
Rather than simply saving for retirement, you might aim to retire at 55 with enough money to live comfortably with regular overseas travel. To fund this lifestyle, you decide you need to generate income of $5000 a month for up to 40 years, bearing in mind that more of us will be living into our 90s.
Then you can begin to join the dots. Given your current age and income, you can work out how much you need to save each month and how much risk you need to take to reach your goal. If the risk required is out of your comfort zone, or your goal is financially out of reach, it’s time to adjust your plans. You could delay retirement, look for savings in your budget or modify your aspirations.
The typical approach to investing uses investment returns aligned to your risk profile to measure success. If you beat the relevant market benchmark you’re doing well. But it’s not much consolation to know you beat the ASX 200 index by 2 per cent if the market was down 20 per cent. It’s also not conducive to sleeping at night.
Success in goal-based investing is about being on track to fund your goals. You still need to monitor returns, but if you decide you want $60,000 a year in retirement, success is saving enough to get you there.
In practice, most of us have multiple goals that require extensive planning. You may want to buy a home, save for the kids’ education or an overseas holiday adventure as well as saving for retirement. Each goal has a different time horizon, which may call for a different investment strategy.
Generally speaking, you can afford to be less conservative with long-term goals because time is on your side. But if you’re saving to buy a home in two years’ time, your money needs to be accessible and not at risk of short-term market volatility.
Any time is a great time to think about what you would like to achieve. If you would like some help with strategies to turn your dreams into reality, give us a call.