Article:

Make a cool $10k for an hour’s work!

10 September 2018

Morgan Papi, Associate Wealth Adviser |

If you’re reading this article, then you’ve just been had by a classic clickbait title (of course you knew this before jumping in, but who doesn’t love easy money?). There may be some deception at play in the wording, but through a combination of the First Home Super Saver Scheme (FHSSS) and a little bit of due diligence, any working couple looking to purchase their first home can save more than $10,000 in tax (we’ve covered off on this previously). Just don’t let ‘superannuation’ in the scheme’s name scare you off.

The key term here though is due diligence, because Australians are disengaged from their superannuation, cash flow structuring, insurances and their life-admin in general. Many of us are living day-to-day without any kind of plan for the future, whilst being scarily under-insured or conversely, paying our utilities/mobile/internet providers and health insurers’ excessive prices and often for benefits we either do not use or have no need for.

The stock standard, apathetical response to this by someone in their 20s is, “But I don’t have any money now, why would I get financial advice?”. Consider this though, a professional golfer doesn’t start out as a pro, they were a rookie once and had a coach train them into a master of their craft. Engaging with your finances tells exactly the same story and getting tailored and appropriate advice now will set you on a path to a strong financial future, whilst allowing you to avoid pitfalls and take advantage of individual strategy opportunities along the way – such as the FHSSS. 

Here’s a thought for the older generations - think back to some of the tough financial lessons you’ve learnt the hard way since your 20s. Now think about how your children can benefit from making the right call on their first go. That’s where we step in.

The chart below compares the hypothetical accumulation of wealth between two individuals, both aged 25 and each earning an income of $80,000 p.a. + super, with living costs of $40,000 p.a. (increasing with inflation). One maximises their tax-deductible super contributions to the cap of $25,000 (the super saver) whilst the other saves and invests in their personal name (personal investor).

Total Net Asset Comparison

*Assumed gross investment return is 6% p.a. (2% growth and 4% income with 10% franking).  Inflation is 2.5%.

The key observation to take note of here is that to age 65, the super saver enjoys the exact same lifestyle as the personal investor, but accumulated over $1,000,000 more by retirement because they implemented a strategy.

This is just the tip of the iceberg and it all sounds well and good in theory, but if you’re only around 25 now, 65 seems a long way off and anything could happen, right? You might be asking yourself, “I’m healthy, why do I need life insurance?”, or “I’ve got plenty of time to worry about saving later”. In this case, here are some cold hard facts to keep you grounded (we’re moving from clickbait to scare tactics now):

  • At current rates, it is expected that 1 in 2 Australians will be diagnosed with cancer by the age of 85 and an estimated 134,174 new cases of cancer will be diagnosed in Australia this year. (Cancer Council, 20181)
  • On average, households affected by cancer can expect to lose $47,200 in out-of-pocket costs and loss of income. For a working-age man, this increases to $203,600 - ask us about Trauma cover. (Paul, Fradgley, Roach, Baird, 20172)
  • If you’re 25 and an accident/illness leaves you permanently unable to work, you could need a lump sum payment of $2,200,000 in order to meet your living needs for the rest of your life. Mum and Dad may not be able to foot the bill - ask us about Total and Permanent Disability cover and fully tax-deductible Income Protection.

(Assumptions include no income protection, home ownership, repayment of $500,000 mortgage, no other debt, living costs of $50,000 p.a., upfront medical costs of $200,000, 4.5% return from investment of lump sum claim benefit, life expectancy to age 90.)

  • Given that as we grow older we become more at risk of making a claim, new life insurance policies also become more expensive to put in place over time. Therefore, it can be beneficial and affordable to lock in comprehensive cover at a cheaper price now, for the life of the policy. Importantly, any health concern you have between now and when you take out your policy is likely to be excluded from your cover, in which case you’ll want to hope that lightning doesn’t strike twice.
  • Up to 40% of Australian workers are forced into retirement before they are ready. This is due to illness, injury, and any number of other factors. Yet, many of us live our lives without asking the question, ‘What if?’. (R. Behan, 20173)
  • Your ability to earn an income is your single greatest asset.
  • The average super balance at retirement age for men is $271,000 and for women is $157,000. The Association of Superannuation Funds of Australia (ASFA) deems that a comfortable retirement (i.e. holidays, a reasonable car, private health cover, good clothes, modern electronics) costs approximately $60,000 p.a. Meanwhile, the Centrelink Age Pension becomes less accessible each year as the Government ‘encourages’ Australians to self-fund during a retirement which now lasts approximately 20 years on average. When you consider that a realistic long-term investment return from a diversified portfolio is approximately 6% p.a., the maths isn’t favourable. (R. Clare, 2017)
  • Up to 95% of Australians never achieve financial independence. This is primarily attributed to a lack of planning for the future and having a short-sighted strategy, if at all. Often it’s not until it’s too late that we realise our mistakes. (R. Behan, 20174)

As Private Wealth advisers, we consider our approach to be educational, collaborative and truly holistic. You might initially approach us for advice on life insurance, but you’ll walk away with a deeper understanding of your current position, lifestyle options, career potential and 'what the money means' in terms of your current and future goals. This ultimately allows for a better sense of control and more informed decision making, so that you can live your best life.

If you’re a parent of someone aged 25-35 then share this article with them, or better yet, get them to give us a call. And if you haven’t already sought advice yourself, we’d love to chat.

References:

  1. Cancer Council, 2018, FAQ: How many Australians get cancer?, Cancer Council, accessed 17 August 2018 from https://www.cancer.org.au/about-cancer/faq.html.
  2. C. Paul, E. Fradgley, D. Roach, H. Baird, 2017, Impact of financial costs of cancer on patients – the Australian experience, Cancer Council, accessed 17 August 2018 from https://cancerforum.org.au/forum/2017/july/impact-of-financial-costs-of-cancer-on-patients-the-australian-experience/
  3. R. Behan, 2017, The Alarming Facts as to WHY Most Australians Will Retire With Not Enough Money in the Bank, Think & Grow, accessed 17 August 2018 from https://thinkandgrowgroup.com.au/retirement/alarming-facts-australians-retire-not-enough-money-bank.
  4. R. Clare, 2017, Superannuation account balances by age and gender, The Association of Superannuation Funds of Australia, accessed 17 August 2018 from https://www.superannuation.asn.au/ArticleDocuments/359/1710_Superannuation_account_balances_by_age_and_gender.pdf.aspx.

Disclaimer:

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.

The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.