June has arrived and so has the cold winter weather. Now that the federal election is behind us, we can move forward with a little more certainty – and a jam packed newsletter!
This month we’ve got 6 new articles linked below so make yourself a nice hot drink and enjoy the read.
And if there’s anything you’d like to know more about, please give us a call.
Skip to Articles:
How to manage rising interest rates
A super end to the financial year
Preparing for the next chapter
The road ahead for shares
Sowing the seeds of succession
Thriving on Social Connection
On the economic front the cost of living pressures, inflation and interest rates were major concerns in the lead-up to the May federal election. The Reserve Bank of Australia (RBA) lifted the cash rate for the first time in over 11 years from 0.1% to 0.35%, as inflation hit 5.1%. This followed the US Federal Reserve’s decision to lift rates by 50 basis points to 1.00%, the biggest rate hike in 22 years as inflation hit 8.5%. Global pressures are largely to blame, from war in Ukraine and rising oil prices to supply chain disruptions and food shortages.
As a result, the RBA has cut its growth forecast for the year to June from 5% to 3.5% and raised its inflation forecast from 3.25% to 4.5%. Adding to inflationary pressures, labour and materials shortages and bad weather saw building costs rise 2.8% in the March quarter, while retail trade rose further in April to be up 9.6% over the year. On the positive side, unemployment fell further from 4% to 3.9% in April, the lowest rate since 1974, while annual wages growth rose slightly in the March quarter from 2.3% to 2.4%, still well below inflation.
Reach out to us if you there’s anything you’d like to discuss further.
Neil and Martina
How to manage rising interest rates
Rising interest rates are almost always portrayed as bad news, by the media and by politicians of all persuasions. But a rise in rates cuts both ways.
Higher interest rates are a worry for people with home loans and borrowers generally. But they are good news for older Australians who depend on income from bank deposits and young people trying to save for a deposit on their first home.
Rising interest rates are also a sign of a growing economy, which creates jobs and provides the income people need to pay the mortgage and other bills. By lifting interest rates, the Reserve Bank hopes to keep a lid on inflation and rising prices. Yes, it’s complicated.
How high will rates go?
In early May, the Reserve Bank lifted the official cash rate from its historic low of 0.1 per cent to a still low 0.35 per cent. The reason the cash rate is watched so closely is that it flows through to mortgages and other lending rates in the economy.
To tackle the rising cost of living, the Reserve Bank expects to lift the cash rate further, to around 2.5 per cent.i Inflation is currently running at 5.1 per cent, which means annual wages growth of 2.4 per cent is not keeping pace with rising prices.ii
So what does this mean for household budgets?
Mortgage rates on the rise
The people most affected by rising rates are likely those who recently bought their first home. In a double whammy, after several years of booming house prices the size of the average mortgage has also increased.
According to CoreLogic, even though price growth is slowing, the median home value rose 16.7 per cent nationally in the year to April to $748,635. Prices are higher in Sydney, Canberra and Melbourne.
CoreLogic estimates a 1 per cent rise would add $486 a month to repayments on the median new home loan in Sydney, and an additional $1,006 a month for a 2 per cent rise.
The big four banks have already passed on the Reserve Bank’s 0.25 per cent increase in the cash rate in full to their standard variable mortgage rates which range from 4.6 to 4.8 per cent. The lowest standard variable rates from smaller lenders are below 2 per cent.
Still, it’s believed most homeowners should be able to absorb a 2 per cent rise in their repayments.iii
The financial regulator, APRA now insists all lenders apply three percentage points on top of their headline borrowing rate, as a stress test on the amount you can borrow (up from 2.5 per cent prior to October 2021).iv
Rate rise action plan
Whatever your circumstances, the shift from a low interest rate, low inflation economic environment to rising rates and inflation is a signal that it’s time to revisit some of your financial assumptions.
The first thing you need to do is update your budget to factor in higher loan repayments and the rising cost of essential items such as food, fuel, power, childcare, health and insurances. You could then look for easy cuts from your non-essential spending on things like regular takeaways, eating out and streaming services.
If you have a home loan, then potentially the biggest saving involves absolutely no sacrifice to your lifestyle. Simply pick up the phone and ask your lender to give you a better deal. Banks all offer lower rates to new customers than they do to existing customers, but you can often negotiate a lower rate simply by asking.
If your bank won’t budge, then consider switching lenders. Just the mention of switching can often land you a better rate with your existing lender.
The challenge for savers
Older Australians and young savers face a tougher task. Bank savings rates are generally non-negotiable, but it does pay to shop around.
By mid-May only three of the big four banks had increased rates for savings accounts. Several lenders also announced increased rates for term deposits of up to 0.6 per cent.v
High interest rates traditionally put a dampener on returns from shares and property, so commentators are warning investors to prepare for lower returns from these investments and superannuation.
That makes it more important than ever to ensure you are getting the best return on your savings and not paying more than necessary on your loans. If you would like to discuss a budgeting and savings plan, give us a call.
A super end to the financial year
As the end of the financial year approaches, now is a good time to check your super and see what you could do to boost your retirement nest egg. What’s more, you could potentially reduce your tax bill at the same time.
There are a handful of positive changes to super due to start next financial year, but for most people, these will not impact what you do before June 30 this year.
Among the changes from 1 July, the superannuation guarantee (SG) will rise from the current 10 per cent to 10.5 per cent.
Another upcoming change is the abolition of the work test for retirees aged 67 to 74 who wish to make non-concessional (after tax) contributions into their super. This will allow eligible older Australians to top up their super even if they are fully retired. Currently you must satisfy the work test or work test exemption. This means working at least 40 hours during a consecutive 30-day period in the year in which the contribution is made.
But remember you still need to comply with the work test for contributions you make this financial year.
Also on the plus side, is the expansion of the downsizer contribution scheme. From 1 July the age to qualify for the scheme will be lowered from 65 to 60, although other details of the scheme will be unchanged. If you sell your home that you have owned for at least 10 years to downsize, you may be eligible to make a one-off contribution of up to $300,000 to your super (up to $600,000 for couples). This is in addition to the usual contribution caps.
While all these changes are positive and something to look forward to, there are still plenty of opportunities to boost your retirement savings before June 30.
For those who have surplus cash languishing in a bank account or who may have come into a windfall, consider taking full advantage of your super contribution caps.
The annual concessional (tax deductible) cap is currently $27,500. This includes your employer’s SG contributions, any salary sacrifice contributions you have made during the year and personal contributions for which you plan to claim a tax deduction.
Claiming a tax deduction is generally most effective if your marginal tax rate is greater than the 15 per cent tax rate that applies to super contributions. It is also handy if you have made a capital gain on the sale of an investment asset outside super as the tax deduction can offset any capital gains liability.
Even if you have reached your annual concessional contributions limit, you may be able to carry forward any unused cap amounts from previous years if your super balance is less than $500,000.
Once you have used up your concessional contributions cap, you can still make after-tax non-concessional contributions. The annual limit for these contributions is $110,000 but you can potentially contribute up to $330,000 using the bring-forward rule. The rules can be complex, especially if you already have a relatively high super balance, so it’s best to seek advice.
Government and spouse contributions
Lower income earners also have incentives to put more into super. The government’s co-contribution scheme is aimed at low to middle income earners who earn at least 10 per cent of their income from employment or business.
If your income is less than $41,112 a year, the government will contribute 50c for every after-tax dollar you squirrel away in super up to a maximum co-contribution of $500. Where else can you get a 50 per cent immediate return on an investment? If you earn between $41,112 and $56,112 you can still benefit but the co-contribution is progressively reduced.
There are also incentives for couples where one is on a much lower income to even the super playing field. If you earn significantly more than your partner, ask us about splitting some of your previous super contributions with them.
Also, if your spouse (or de facto partner) earns less than $37,000 a year, you may be eligible to contribute up to $3000 to their super and claim an 18 per cent tax offset worth up to $540. If they earn between $37,000 and $40,000 you may still benefit but the tax offset is progressively reduced.
As it can take your super fund a few days to process your contributions, don’t wait until the very last minute. If you would like to discuss your super options, call now.
Preparing for the next chapter
Retirement means starting a new chapter of your life, one that gives you the freedom to create your own story, as you decide exactly how you want to spend your time. While retirement may not be part of your immediate plans, there are advantages to giving some thought as to what retirement looks like for you and how to best position yourself, well before you leave the workforce behind.
A time of profound change
Even setting aside the huge financial implications of leaving a regular salary behind, retiring from work represents one of the biggest life changes you can experience.
For most people, the freedom of being able to do whatever you want to do, whenever you want to do it, is pretty enticing. However, it is quite common to have mixed feelings about retiring, particularly as you get closer to retirement. What we do for a living often defines us to some extent and leaving your job can mean a struggle with how you perceive yourself as well as how others view you. Coupled with the desire for financial security in retirement and the need to make your retirement savings last the distance, you have a lot to be dealing with.
So, let’s look at the things you need to be thinking about sooner rather than later, from an emotional and practical perspective, to ensure your retirement is everything you want it to be.
Forge your own path
Don’t be tied to preconceptions of what retirement is all about. Retirement has evolved from making a grand departure from the workplace with the gift of a gold watch to a more flexible transition that may unfold over several years. Equally, if the idea of a clean break appeals to you then that’s okay too and you just need to plan accordingly.
The same applies for your timeframe for retirement. The idea that you ‘have’ to retire at a certain age is no longer relevant given advances in healthcare and longer lifespans. If work makes you happy and fulfilled, then it can make sense to delay your departure from the workforce.
Planning how to spend your time
It sounds obvious but you’ll have more time on your hands so it’s important to think about what you want to devote that time to. A study found that 97 per cent of retirees with a strong sense of purpose were generally happy and satisfied in retirement, compared with 76 per cent without that sense.i Think about what gives your life meaning and purpose and weave those elements into your plans.
If you are part of a couple, it’s critical to ensure that you are both on the same page about what retirement means to you. This calls for open and honest communication about what you both want and may also involve some degree of compromise as you work together to come up with a plan that meets both of your needs.
There’s a myriad of practical considerations once you have started to plan how you’ll spend your time.
Here are a few things you may wish to consider:
- Where do you want to live? Do you want to be close to a city or are you interested in living in a more coastal or rural area? Are you wanting to travel or live overseas for extended periods?
- What infrastructure and health services might you need as you age? Are these services adequate and accessible in the area you are thinking of living in?
- What hobbies and activities do you want to be involved in. Do you need to start developing networks for those activities in advance?
- Who do you want to spend time with? If you have children and grandchildren, think about what role you’d like to play in their lives upon retirement.
The best laid plans…
Of course, with all this planning it’s also important to acknowledge that the best laid plans can go astray due to factors beyond your control. It’s important to keep an open mind and be adaptable. While redundancy or poor health can play havoc with retirement dreams, it’s still possible to make the best of what life throws at you.
And of course, we are here to help you with the financial side of things to ensure that retirement is not only something to look forward to, but a wonderful chapter of your life once you start to live out your retirement dreams.
The road ahead for shares
Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.
At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.
Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?
So what lies ahead for shares? The recent Federal Budget contained some clues.
The economic outlook
The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.
Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii
However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year.
Commodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.
Share market winners and losers
Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.
Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.
Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.
Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers.
But there are other influences on the horizon for investors to be aware of.
Rising inflation and interest rates
With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank has recently raised the official cash rate after 11 1/2 years of no increases.
Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively.iii
Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.
While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.
Putting it all together
In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.
For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.
If you would like to discuss your overall investment strategy don’t hesitate to get in touch.
Sowing the seeds of succession
Succession planning can be difficult at the best of times without dealing with the added pressures farmers have recently faced with droughts, fires and floods.
And that’s why it is even more important to plan early and get it right when you are on the land. You are not just dealing with a business, but invariably also with a home.
Some 99 per cent of the 134,000 farms in Australia are family owned with the average age of farmers being 52.i It is believed that farmers are five times more likely than other Australians to be working beyond the age of 65. There are a variety of reasons for this, from a reluctance to relinquish control, to a lack of family willing to take over the reins and financial necessity.
Given the physicality of farming, it would seem to make a lot more sense to start thinking about succession planning well before that stage.
Often such planning is put into the too hard basket because there are so many variables to consider. But this will not solve the problem, so it’s better to get good advice and get it early.
The first thing you need to do is open the doors of communication. Arrange a time to talk with your family to discuss:
- Who wants to inherit and work on the farm and who wants to leave the property
- Whether they agree each child should be treated equally or accept that the one inheriting the farm should receive preferential treatment
- How everybody feels about splitting the property between siblings, or
- The way forward if none of your children wants to stay on the land.
These are all considerations that need to be addressed and revisited over time to ensure they meet with everybody’s wishes.
If just one of the children wants to remain on the property, will they need to find the finance to pay out the other siblings? If so, then the next decision is how that finance will be found.
Perhaps the answer is to transfer the property before you die. If that is the case, then where will you live in retirement and what will be your source of income once you retire? Again, you need to examine the options. Perhaps you may receive an ongoing income from the property, or maybe find income from other investments. Importantly, you also need to revisit these options over time to ensure they still work for you.
One danger of not having a succession plan and working well beyond your best years, is that you can run the farm into the ground and make it a far less attractive property to sell.
Structure your plans
There are so many questions to ask and what is right for one family, may not be right for another.
But once you determine how you want to move forward, you then need to examine the best structures to put in place to make the process as efficient as possible. Some of the key advice you may need is on tax, trusts and land ownership and the intersection of all three.
Tax is particularly important as you want to avoid or at least minimise capital gains tax (CGT).
If you are 55 years of age or more and retiring and have owned your property for at least 15 years, then you may qualify for the small business 15-year CGT exemption on your entire capital gains. Other concessions may apply if you don’t qualify the 15-year exemption.
For couples where the family farm is held in their own name, perhaps you might want to consider a joint tenancy agreement as it leads to automatic transfer of ownership if one dies.
Or you might consider putting the farm into a family trust or perhaps holding it as an asset in your self-managed super fund.
There are so many what-ifs to consider when it comes to rural properties. If you want to discuss how to move forward on your estate and succession planning and what will work best for you, then give us a call.
Thriving on social connection
The phrase ‘no man is an island’ is from a poem written by John Donne and expresses the idea that humans need to be part of a community to thrive. That’s certainly true, by nature we are social creatures and connection is a core human need. So why do some many of us feel alone and what can we do to feel more connected?
The last few years have highlighted the importance of social connection on our mental health and physical well-being, as our movements were restricted to varying degrees. The need to connect socially is as basic as our need for food, water, and shelter, with studies showing that it reduces the incidence of heart disease and stroke.i
You’re not alone in feeling alone
While we all need social connection, so many of us are feeling that it’s lacking in our lives. Feeling isolated is pretty common and happens to us all at one time or another, although loneliness appears to be particularly prevalent at the moment. A 2018 survey revealed that one in four of us are lonely and this increased to around half of us during the pandemic.ii,iii
So, what measures can we take to feel more connected?
Think about what you need
Everyone has different social needs. If you’re used to spending a lot of time with colleagues, friends and loved ones, you might feel isolated or lonely with just a few interactions per week, while for someone who likes their own company that might be simply fine.
On that note, it’s important to be able to enjoy your own company and sometimes periods of being alone can provide inner peace and time for introspection, making those moments of connection all the more precious.
Your social needs also change over time and under different circumstances. A life change like becoming a parent or retiring from the workforce can prompt a shift in your need to connect with others.
Quality can be more important than quantity
It’s important to consider the significance of meaningful connections rather than just social interaction, for the sake of it. Often the intimacy of a deep and meaningful discussion with a close mate can be much more enjoyable than a dinner with people you barely know.
Foster good social skills
Social connection is a two-way street so there are things you can do to improve the quality of your social interactions. You can forge deeper connections by talking about things that matter to you and to the other person, developing good listening skills and demonstrating real interest in what they have to say.
Seek out new people and experiences
It can be hard to foster new social connections. One effective way is to join a group to be with people who have similar interests. This growing need has led to apps being built for this purpose, with one of the most popular being meetup.iv Meetup has groups for everything, whether you are interested in bike riding, cinema, salsa dancing or dining. If you can’t find a group that’s of interest you can always create your own.
When looking to meet new people, try to open yourself up to try new experiences. Not everything you try your hand at will open doors to friendship, but you can always learn from the experience and hopefully have some fun along the way.
Dust off old friendships
Friendships need nurturing and many of us have been guilty of neglecting old buddies – particularly of late. Have a think about the people in your life and the relationships that may have fallen by the wayside and reach out, even if it’s just to grab a coffee.
It can take a little time and effort, but it’s always possible to reach out and strengthen existing connections or forge new ones. The benefits of having those social connections in our lives are profound. Keep in mind that you’re not the only one out there in search of connection and your efforts are not just helping yourself but also benefitting those you are reaching out to.
Streamline Wealth Pty Ltd (AR 1299307), Neil Sonneveld (AR 1251279) and Martina Sonneveld (AR 297377) are authorised representatives of Nextplan Financial Pty Ltd (AFSL 452996). This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.