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When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month.ⁱ Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation.

With the benefit of hindsight, some people may be regretting acting in haste. As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28 per cent in the year to June 2021 while global shares rose 37 per cent. Balanced growth super funds returned 18 per cent for the year, their best performance in 24 years.ⁱⁱ While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?

Lesson #1 Ignore the noise

When markets suffer a major fall as they did last year, the sound can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes. Yet as we have seen, markets and market sentiment can swing quickly. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations. One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on long-term investing is better for your wealth.

Lesson #2 Stay diversified

Another lesson is the importance of diversification. By spreading your money across and within asset classes you can minimise the risk of one bad investment or short-term fall in one asset class wiping out your savings. Diversification also helps smooth out your returns in the long run. For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the overall loss of balanced growth super funds to 0.5%. The following 12 months to June 2021 shares and property bounced back strongly, taking returns of balanced growth super funds to 18 per cent. But investors who switched to cash at the depths of the market despair in March last year would have gone backwards after fees and tax. More importantly, over the past 10 years balanced growth funds have returned 8.6 per cent per year on average after tax and investment fees.ⁱⁱ The mix of investments you choose will depend on your age and tolerance for risk. The younger you are, the more you can afford to have in more aggressive assets that carry a higher level of risk, such as shares and property to grow your wealth over the long term. But even retirees can benefit from having some of their savings in growth assets to help replenish their nest egg even as they withdraw income.

Lesson #3 Stay the course

The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so. Even if you had seen the writing on the wall in February 2020 and switched to cash, it’s unlikely you would have switched back into shares in time to catch the full benefit of the upswing that followed. Timing the market on the way in and the way out is extremely difficult, if not impossible.

Looking ahead

Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors and some older ones too, the coronavirus pandemic will be a defining moment in their investing journey. By choosing an asset allocation that aligns with your age and risk tolerance then staying the course, you can sail through the market highs and lows with your sights firmly set on your investment horizon. Of course, that doesn’t mean you shouldn’t make adjustments or take advantage of opportunities along the way. We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.

i https://www.forbes.com/sites/lizfrazierpeck/2021/02/11/the-coronavirus-crash-of-2020-and-the-investing-lesson-it-taught-us/?sh=241a03a46cfc

ii https://www.chantwest.com.au/resources/super-funds-post-a-stunning-gain

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: cars / 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 benefits include 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.

Superannuation

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 9.5% 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 $25,000 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.

^*Note: This example illustrates how salary sacrifice arrangements can work and does not constitute advice. You should not act solely on the information in this example. Source for all information in this article: https://www.ato.gov.au/General/Fringe-benefits-tax-(FBT)/Salary-sacrifice-arrangements/

   

   

As the new financial year gets underway, there are some big changes to superannuation that could add up to a welcome lift in your retirement savings. Some, like the rise in the Superannuation Guarantee (SG), will happen automatically so you won’t need to lift a finger. Others, like higher contribution caps, may require some planning to get the full benefit. Whether you are just starting your super journey or close to retirement, a member of a big super fund or your own self-managed super fund (SMSF), it pays to know what’s on offer. Here’s a summary of the changes starting from 1 July 2021.

Increase in the Super Guarantee

If you are an employee, the amount your employer contributes to your super fund has just increased to 10 per cent of your pre-tax ordinary time earnings, up from 9.5 per cent. For higher income earners, employers are not required to pay the SG on amounts you earn above $58,920 per quarter (up from $57,090 in 2020-21). Say you earn $100,000 a year before tax. In the 2021-22 financial year your employer is required to contribute $10,000 into your super account, up from $9,500 last financial year. For younger members especially, that could add up to a substantial increase in your retirement savings once time and compound earnings weave their magic. The SG rate is scheduled to rise again to 10.5 per cent on 1 July 2022 and gradually increase until it reaches 12% on 1 July 2025.

Higher contributions caps

The annual limits on the amount you can contribute to super have also been lifted, for the first time in four years. The concessional (before tax) contributions cap has increased from $25,000 a year to $27,500. These contributions include SG payments from your employer as well as any salary sacrifice arrangements you have in place and personal contributions you claim a tax deduction for. At the same time, the cap on non-concessional (after tax) contributions has gone up from $100,000 to $110,000. This means the amount you can contribute under a bring-forward arrangement has also increased, provided you are eligible. Under the bring-forward rule, you can put up to three years’ non-concessional contributions into your super in a single financial year. So this year, if eligible, you could potentially contribute up to $330,000 this way (3 x $110,000), up from $300,000 previously. This is a useful strategy if you receive a windfall and want to use some of it to boost your retirement savings.

More generous Total Super Balance and Transfer Balance Cap

Super remains the most tax-efficient savings vehicle in the land, but there are limits to how much you can squirrel away in super for your retirement. These limits, however, have just become a little more generous. The Total Super Balance (TSB) threshold which determines whether you can make non-concessional (after-tax) contributions in a financial year is assessed at 30 June of the previous financial year. The TSB at which no non-concessional contributions can be made this financial year will increase to $1.7 million from $1.6 million. Just to confuse matters, the same limit applies to the amount you can transfer from your accumulation account into a retirement phase super pension. This is known as the Transfer Balance Cap (TBC), and it has also just increased to $1.7 million from $1.6 million. If you retired and started a super pension before July 1 this year, your TBC may be less than $1.7 million and you may not be able to take full advantage of the increased TBC. The rules are complex, so get in touch if you would like to discuss your situation.

Reduction in minimum pension drawdowns extended

In response to record low interest rates and volatile investment markets, the government has extended the temporary 50 per cent reduction in minimum pension drawdowns until 30 June 2022. Retirees with certain super pensions and annuities are required to withdraw a minimum percentage of their account balance each year. Due to the impact of the pandemic on retiree finances, the minimum withdrawal amounts were also halved for the 2019-20 and 2020-21 financial years.

Age of retiree	Temporary minimum withdrawal	Normal minimum withdrawal
Under 65	2%	4%
65 to 74	2.5%	5%
75 to 79	3%	6%
80 to 84	3.5%	7%
85 to 89	4.5%	9%
90 to 94	5.5%	11%
95 or older	7%	14%

Source: ATO

But wait, there’s more

Next financial year is also shaping up as a big one for super, with most of the changes announced in the May Federal Budget expected to start on 1 July 2022. The Budget included proposals to:

• • repeal the work test for people aged 67 to 74 who want to contribute to super

 

• • reduce the minimum age for making a downsizer contribution (using sale proceeds from your family home) from 65 to 60

 

• • abolish the $450 per month income limit for receiving the Super Guarantee

 

• • expand the First Home Super Saver Scheme

 

• • provide a two-year window to commute legacy income streams

 

• • allow lump sum withdrawals from the Pension Loans Scheme

 

• relax SMSF residency requirements.

All these measures still need to be passed by parliament and legislated.

Time to prepare

There’s a lot for super fund members to digest. SMSF trustees in particular will need to ensure they document changes that affect any of the members in their fund. But these latest changes also present retirement planning opportunities. Whatever your situation, if you would like to discuss how to make the most of the new rules, please get in touch.

     

Investing in recovery

In his third and possibly last Budget before the next federal election, Treasurer Josh Frydenberg is counting on a new wave of spending to ensure Australia’s economic recovery maintains its momentum. As expected, the focus is on jobs and major new spending on support for aged care, women and first-home buyers with some superannuation sweeteners for good measure. With the emphasis on spending, balancing the Budget has been put on the back burner until employment and wages pick up.

The big picture

This year’s Budget is based on a successful vaccine rollout which would allow Australia’s borders to open from mid-2022. The Treasurer says he expects all Australians who want to be vaccinated could have two doses by the end of the year. So far, the economic outlook is better than anyone dared hope at the height of the pandemic just a year ago, but challenges remain. Unemployment, at 5.6%, has already fallen below pre-pandemic levels and is expected to fall sharply to 5% by mid-2022. But wage growth remains stubbornly low, currently growing at rate of 1.25% and forecast to rise by just 1.5% next year. This is well below inflation which is forecast to rise 3.5% in 2020-21 and 1.75% in 2021-22. The treasurer forecast a budget deficit of $161 billion this financial year (7.8% of GDP), $52.7 billion less than expected just six months ago, and $106.6 billion (5% of GDP) in 2021-22. Net debt is forecast to increase to an eye-watering $617.5 billion (30% of GDP) by June this year before peaking at $980.6 billion four years from now. The large improvement in the deficit has been underpinned by the stronger than expected economic recovery and booming iron ore prices. Iron ore prices have surged 44% this year to a record US$228 recently.ⁱ

Funding for aged care

The centrepiece of the Budget is a $17.7 billion commitment over five years to implement key recommendations of the Aged Care Royal Commission. This includes $7.8 billion to reform residential aged care and $6.5 billion for an immediate investment in an additional 80,000 Home Care Packages. In other health-related initiatives, the Treasurer announced additional funding of $13.2 billion over the next four years for the National Disability Insurance Scheme, taking total funding to $122 billion. And in recognition of the toll the pandemic has taken on the nation’s mental health, the Government will provide an extra $2.3 billion for mental health and suicide prevention services.

Focus on Women

After criticism that last year’s Budget did not do enough to support women’s economic engagement, this Budget works hard to restore gender equity. The Women’s Budget Statement outlines total spending of $3.4 billion on women’s safety and economic security. Funding initiatives include:

• • Funding for domestic violence prevention more than doubled to at least $680 million.

 

• • Funding for women’s health, including cervical and breast cancer and endometriosis and reproductive health, boosted by $354 million over the next four years.ⁱⁱ

 

• Increased subsidies for second and subsequent children in childcare from a maximum of 85% to 95%, while families with household incomes above $189,390 will no longer have their annual payments capped at $10,560.ⁱⁱⁱ

While childcare is of benefit to all parents, it is generally mothers who rely on affordable care to increase their working hours. As widely touted, proposed changes to superannuation and support for first home buyers also have women in mind.

Superannuation gets a boost

In a move that will benefit part-time workers who are largely women, the Treasurer announced he will scrap the requirement for workers to earn at least $450 a month before their employers are obliged to pay super. The Government will also expand a scheme allowing retirees to make a one-off super contribution of up to $300,000 (or $600,000 per couple) when they downsize and sell their family home. The age requirement will be lowered from 65 to 60. In addition, from 1 July 2022 the work test that currently applies to super contributions (when either making or receiving non-concessional or salary sacrificed contributions) made by people aged 67 to 74 will be abolished. Despite opposition from within Coalition ranks, Superannuation Guarantee payments by employers will increase from the current 9.5% of earnings to 10% on 1 July and then gradually increase to 12% as originally legislated.

Support for first home buyers

Housing affordability is on the agenda again as the property market booms. To help first home buyers and single parents get a foot on the housing ladder, the Government has announced^iv:

• • The Family Home Guarantee, which will allow 10,000 single parents to buy a home with a deposit of just 2%.

 

• • An extra 10,000 places on the First Home Loan Deposit Scheme in 2020-21. Now called the New Home Guarantee, the scheme gives loan guarantees to first home buyers, so they can buy a home with a deposit as low as 5%.

 

• An increase in the maximum voluntary contributions that Australians can release under the First Home Super Saver Scheme from $30,000 to $50,000.

Improvements to the Pensions Loan Scheme

In a move that will please cash-strapped pensioners, the Treasurer announced that the Pensions Loan scheme – a form of reverse mortgage offered by the Government – will allow people to withdraw a capped lump sum from 1 July 2022. Currently income must be taken as regular income, which makes it difficult to fund larger purchases or home maintenance. Under the new rules, a single person will be able to withdraw up to the equivalent to 50% of the maximum Age Pension each year, currently around $12,385 a year ($18,670 for couples). The Government will also introduce a No Negative Equity Guarantee which means the loan amount can never exceed the value of the home.

Tax cuts for low-and-middle-income earners

Approximately ten million Australians will avoid a drop in income of up to $1,080 next financial year, with the low-and-middle-income tax offset extended for another 12 months at a cost of $7.8 billion. Anyone earning between $37,000 and $126,000 a year will receive some benefit, with people earning between $48,001 and $90,000 to receive the full offset of $1,080.

Low and middle income tax offset

Taxable income	Offset
$37,000 or less	$255
Between $37,001 and $48,000	$255 plus 7.5 cents for every dollar above $37,000, up to a maximum of $1,080
Between $48,001 and $90,000	$1,080
Between $90,001 and $126,000	$1,080 minus 3 cents for every dollar of the amount above $90,000

Source: ATO

Job creation and training

With companies warning of labour shortages while the nation’s borders are closed, the Government has been under pressure to do more to help unemployed Australians back into work. So, the focus in this Budget is squarely on skills training with $6.4 billion on offer to increase workforce participation and help boost economic growth. This includes a 12-month extension to the Government’s JobTrainer program to December 2022 and an additional 163,000 places. The Treasurer also announced funding of $2.7 billion for 170,000 new apprenticeships. Job creation is also at the heart of an extra $15.2 billion in road and rail infrastructure projects, expected to create 30,000 jobs. This is on top of the existing 10-year $110 billion infrastructure spend announced previously.

Looking ahead

With an election due by May 21 next year, this is as much an election Budget as a COVID-recovery one. Although another Budget could be squeezed in before an election, it would have to be brought forward from the normal time. The Government will be hoping that it has done enough to provide funds where they are needed most to continue the job of economic recovery. If you have any questions about any of the Budget measures and how you might take advantage of them, don’t hesitate to call.

Information in this article has been sourced from the Budget Speech 2021-22 and Federal Budget support documents. It is important to note that the policies outlined in this publication are yet to be passed as legislation and therefore may be subject to change. i https://tradingeconomics.com/commodities (viewed 11/5/2021) ii https://www.health.gov.au/ministers/the-hon-greg-hunt-mp/media/354-million-to-support-the-health-and-wellbeing-of-australias-women iii https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-child-care-more-affordable-and-boosting iv https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/improving-opportunities-home-ownership

The recent sharp rise in bond rates may not be a big topic of conversation around the Sunday barbecue, but it has set pulses racing on financial markets amid talk of inflation and what that might mean for investors. US 10-year government bond yields touched 1.61 per cent in early March after starting the year at 0.9 per cent.ⁱ Australian 10-year bonds followed suit, jumping from 0.97 per cent at the start of the year to a recent high of 1.81 per cent. ⁱⁱ That may not seem like much, but to bond watchers it’s significant. Rates have since settled a little lower, but the market is still jittery.

Why are bond yields rising?

Bond yields have been rising due to concerns that global economic growth, and inflation, may bounce back faster and higher than previously expected. While a return to more ‘normal’ business activity after the pandemic is a good thing, there are fears that massive government stimulus and central bank bond buying programs may reinflate national economies too quickly. As vaccine rollouts gather pace, the OECD recently lifted its 2021 economic growth forecast for the global economy to 5.6 per cent, up from 4.2 per cent in December. Most of this is due to a doubling of its US growth forecast to 6.5 per cent, on the back of the Biden administration’s US$1.9 trillion stimulus package.ⁱⁱⁱ

US 10-year bond yields vs Australian 10-year bond yields

Source: Reuters, CommSec

The OECD now expects Australia to grow by 4.5 per cent this year, up from its previous estimate of 3.2 per cent.^iv

The risk of inflation

Despite short-term interest rates languishing close to zero, a sharp rise in long-term interest rates indicates investors are readjusting their expectations of future inflation. Australia’s inflation rate currently sits at 0.9 per cent, half the long bond yield. To quash inflation fears, Reserve Bank of Australia (RBA) Governor Philip Lowe recently repeated his intention to keep interest rates low until 2024. The RBA cut official rates to a record low of 0.1 per cent last year and also launched a $200 billion program to buy government bonds with the aim of keeping yields on these bonds at record lows.^v Governor Lowe said inflation- currently 0.9 per cent – would not be anywhere near the RBA’s target of between 2 and 3 per cent until annual wages growth, currently at 1.4 per cent, rises above 3 per cent. This would require unemployment falling closer to 4 per cent from the current 6.4 per cent. In other words, there’s some arm wrestling going on between central banks and the market over whose view of inflation and interest rates will prevail, with no clear winner.

What does this mean for investors?

Bond yields move in an inverse relation to prices, so yields rise as prices fall. Bond prices have been falling because investors are concerned that rising inflation will erode the value of the yields on their existing bond holdings, so they sell. For income investors, falling bond prices could mean capital losses as the value of their existing bond holdings is eroded by rising rates, but healthier income in future. The prospect of higher interest rates also has implications for other investments, normally tipping the balance away from growth assets such as shares and property to bonds and other fixed interest investments.

Shares shaken but not stirred

In recent years, low interest rates have sent investors flocking to shares for their dividend yields and capital growth. In 2020, US shares led the charge with the tech-heavy Nasdaq index up 43.6%. This was on the back of high growth stocks such as Facebook, Amazon, Apple, Netflix and Google – the so-called FAANGs – which soared during the pandemic.^vi It’s these high growth stocks that are most sensitive to rate change. As the debate over inflation raged, FAANG stocks fell nearly 17 per cent from mid to late February and remain volatile. That doesn’t mean all shares are vulnerable. Instead, market analysts expect a shift to ‘value’ stocks. These include traditional industrial companies and banks which were sold off during the pandemic but stand to gain from economic recovery.

Property market resilient

Against expectations, the Australian residential property market has also performed strongly despite the pandemic, fuelled by low interest rates. National housing values rose 4 per cent in the year to February, while total returns including rental yields rose 7.6 per cent. But averages hide a patchy performance, with Darwin leading the pack (up 13.8 per cent) and Melbourne dragging up the rear (down 1.3 per cent).^vii There are concerns that ultra-low interest rates risk fuelling a house price bubble and worsening housing affordability. In answer to these fears, Governor Lowe said he was prepared to tighten lending standards quickly if the market gets out of hand. Only time will tell who wins the tussle between those who think inflation is a threat and those who think it’s under control. As always, patient investors with a well-diversified portfolio are best placed to weather any short-term market fluctuations. If you would like to discuss your overall investment strategy, give us a call.

i Trading economics, viewed 11 March 2021, https://tradingeconomics.com/united-states/government-bond-yield ii Trading economics, viewed 11 March 2021, https://tradingeconomics.com/australia/government-bond-yield iii https://www.reuters.com/article/us-oecd-economy-idUSKBN2B112G iv https://www.smh.com.au/politics/federal/growth-prospects-for-australia-and-world-upgraded-by-oecd-20210309-p57973.html v https://rba.gov.au/speeches/2021/sp-gov-2021-03-10.html vi https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/ vii https://www.corelogic.com.au/sites/default/files/2021-03/210301_CoreLogic_HVI.pdf

After spending their working life building retirement savings, many retirees are often reluctant to eat into their “nest egg” too quickly. This is understandable, given that we are living longer than previous generations and may need to pay for aged care and health costs later in life. But this cautious approach also means many retirees are living more frugally than they need to. This was one of the key messages from the Government’s recent Retirement Income Review, which found most people die with the bulk of the wealth they had at retirement intact.ⁱ One of the benefits of advice is that we can help you plan your retirement income so you know how much you can afford to spend today, secure in the knowledge that your future needs are covered.

Making the most of super

According to the Review: “It appears (most people) see superannuation as mainly about accumulating capital and living off the return on this capital, rather than as an asset they can draw down to support their standard of living in retirement.” The figures back this up. The average super account balance on the death of a member in the year to June 2020 was $102,660.ⁱⁱ While not a huge amount, it is an indication that retirees may be able to withdraw more than the minimum amount from their super to live more comfortably without breaking the bank.

Minimum super pension withdrawals

Under superannuation legislation, once you retire and transfer your super into a pension account you must withdraw a minimum amount each year. This amount increases from 4 per cent of your account balance for retirees aged under 65 to 14 per cent for those aged 95 and over. (These rates have been halved temporarily for the 2020 and 2021 financial years due to COVID-19.) One of the common misconceptions about our retirement system, according to the Retirement Income Review, is that these minimum drawdowns are what the Government recommends. Instead, they are there to ensure retirees use their super to fund their retirement, rather than as a store of tax-advantaged wealth to pass down the generations. In practice, super is unlikely to be your only source of retirement income.

The three pillars

Australia’s retirement income system is built around three potential sources of income, known as the three pillars:

• • A means-tested Age Pension

 

• • Compulsory super, and

 

• Voluntary savings both in and out of super.

The Retirement Income Review, and the government, argue that the family home should be included with voluntary savings or as a fourth pillar, but more on that later. Most retirees live on a combination of Age Pension topped up with income from super and other investments. Despite compulsory super being around for almost 30 years, over 70 per cent of people aged 66 and over still receive a full or part-Age Pension. While the Retirement Income Review found most of today’s retirees have adequate retirement income, it argued they could do better. Not by saving more, but by using what they have more efficiently. Withdrawing more of your super nest egg is one way of improving retirement outcomes, but for those who could still do with extra income the answer could lie in the nest itself.

Unlocking housing wealth

Australian retirees are some of the wealthiest in the world, with median household wealth of around $1.4 million. Yet close to $1 million of this wealth is tied up in the family home. Studies have also shown that most people use a form of mental accounting which sets aside super for income, other financial assets for emergencies and the family home for future bequests.ⁱⁱⁱ That’s a lot of money to leave to the kids, especially when many retirees end up living in homes that are too large while they struggle to afford the retirement lifestyle they had hoped for. For these reasons there is growing interest in ways that allow retirees to tap into their home equity (see box). Of course, not everyone will want or need to take advantage of these options, but they are available if you would like some extra income.

The big picture

Discussions about retirement in the media and around the kitchen table often focus on how much super you have and whether it’s enough. Super is important, but it’s not the only source of retirement income. If you would like to discuss your retirement income needs and how to make the most of your assets, give us a call.

i Retirement Income Review, https://treasury.gov.au/sites/default/files/2020-11/p2020-100554-complete-report.pdf ii APRA, https://www.apra.gov.au/sites/default/files/2021-01/Annual%20superannuation%20bulletin%20-%20June%202015%20to%20June%202020%20-%20superannuation%20entities_1.xlsx iii https://householdcapital.com.au/third-pillar-forum/retirement-insights/prof-hazel-bateman/

 

  It was a year most of us would like to forget. And yet, some of the toughest lessons of 2020 had a silver lining. We weathered bushfires, floods, a pandemic that’s not over yet and a recession that is. Through it all we emerged a stronger community. Many of us also learned some useful financial lessons that we can put to work in 2021 and beyond to help create a more secure future. So what were the money lessons of 2020? Along with frequent hand sanitizing and social distancing, one of the big take-homes of 2020 was a renewed appreciation of the benefit of saving for a rainy day.

Check your safety net

Faced with the shock and uncertainty of the economic shutdown, and the first recession in almost 30 years, we initially snapped shut our wallets. When the government’s stimulus payments began landing in bank accounts, followed up with tax cuts, those who could squirreled some away. In the June quarter 2020, the ratio of household savings to income jumped to 22 per cent, compared with a mere 4 per cent in the same period the year before. ⁱ This was highlighted in a recent survey asking people what they intended to do with the personal income tax cuts that were brought forward in last year’s Budget. While saving was the most popular goal for 57 per cent of respondents, this rose to 66 per cent for people aged 18-34.ⁱⁱ Not only had younger people never experienced a recession, but they were also more likely to be affected by job losses and insecure work. As general rule of thumb, it’s a good idea to have the equivalent of around three months’ income in cash so you can ride out life’s curve balls. You could put your savings in a bank savings account or, if you have a mortgage, in a redraw or offset account linked to your loan.

Diversify and stay the course

While cash in the bank is a relief if you receive an unexpected bill or your income fluctuates from month to month, it won’t build long-term financial security. Once you have a saved enough for short-term emergencies, you need to channel some of your savings into investments to fund your future goals and retirement income needs. Another positive lesson from 2020 was the power of a diversified investment portfolio to ride out short-term market shocks. Actually, that’s two lessons. While having a mix of investments helps cushion the blow when one asset class or investment goes through a rough patch, it’s equally important to stay the course. The performance of diversified superannuation funds last year is a good example of these two principles in action. For example, Australian and international shares plunged 27 per cent and 20 per cent respectively in the three months to March last year as the economic impact of the pandemic became clear. But losses for members of diversified super funds were limited to 11.7%. By the end of June returns were down just 0.5% on average and have bounced back strongly since then.ⁱⁱⁱ People who sold in March would have missed the recovery that followed.

Insure against loss

While savings and a diversified investment portfolio provide a degree of financial security, there may be times when more financial support is needed. One sobering lesson from the pandemic, fires and floods was that life is fragile and material comforts such as your family home can’t be taken for granted. That’s where insurance comes in. Sadly, many of those who lost their homes and other belongings during the summer bushfires and floods were not insured, or inadequately insured. While homes are precious, there is nothing more precious than life itself. Having an appropriate level of life insurance and total and permanent disability (TPD) insurance will provide financial support for you and/or your family to continue your lifestyle if you were to become critically ill, injured or pass away. As a new year beckons and you make a list of your goals and wishes, take some time to reflect on the lessons of the past. If you would like to discuss ways to build financial security in 2021, contact us now.

i https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release#key-statistics ii https://www3.colonialfirststate.com.au/content/dam/colonial-first-state/docs/about-us/media-releases/20201124-media-release-tax-cuts-final.pdf iii Returns for median superannuation Growth fund, Chant West.

Just as we were recovering from the long drought and the worst bushfires on record, the global coronavirus pandemic took hold and changed everything. Suddenly, simple things we took for granted, like going to the office or celebrating special occasions, were put on hold. While life is still not back to normal, Australia is in better shape financially than many people expected at the height of the economic shutdown. Take superannuation. Far from being a wipeout, the average superannuation growth fund is on track to finish 2020 with a positive return of 3 per cent.ⁱ But it’s been a wild ride along the way.

Australian Key Indices December 2020		Share Markets (% change) Jan – Dec 2020
Economic growth*	-3.8%	Australia All Ordinaries	0.71%
RBA cash rate	0.1%	US S&P 500	16.37%
Inflation	0.7%	Euro Stoxx 50	-5.14%
Unemployment	6.8%	Shanghai Composite	13.87%
Consumer confidence	112.00	Japan Nikkei 225	16.01%

* Year to September 30, 2020 Sources: RBA, Westpac Melbourne Institute, Trading Economics as at December 31

The big picture

Globally, the US presidential election and Joe Biden’s victory removed a major element of uncertainty overhanging global markets. As did the UK finally signing a post-Brexit agreement on trade and other matters with the European Union just before Christmas. However, trade tensions with China remain an ongoing concern. The pandemic dragged an already sluggish global economy into recession, and we were not immune. In Australia, drought, bushfires, storms and the health crisis took their toll as we entered recession in for the first time in 28 years. The economy contracted 7 per cent in the June quarter alone, the biggest fall since World War II, before rebounding in the September quarter. Even so, in the year to September our economy contracted 3.8 per cent.ⁱⁱ Final figures for 2020 are not in yet but an annual fall of 2.8 per cent is forecast, putting us in a better position than most developed nations.ⁱⁱⁱ This is due in part to Australia’s relative success at containing COVID-19, and massive financial support from Federal and State Governments and the Reserve Bank.

Interest rates lower for longer

After starting the year at 0.75 per cent, the official cash rate finished the year at an historic low of 0.1 per cent. The Reserve Bank has indicated it will keep the cash rate and 3-year government bond rate at this level for three years to encourage businesses to invest and individuals to spend.^iv It seems to be working. Consumer confidence bounced back to a decade high of 112 points in early December as Australia eased restrictions.^v Business confidence also hit an almost three-year high in November, but unemployment remains at 6.8 per cent after peaking at 7.5 per cent.^vi,vii While low interest rates make life difficult for retirees and others who depend on income from bank deposits, they gave share and property markets a boost in 2020 as investors looked for higher returns than cash.

Shares rebound strongly

In February/March when the scale of the health and economic crisis became evident, sharemarkets plunged around 35 per cent. As borders and businesses closed and commodity prices collapsed, investors rushed for safe-haven investments such as bonds and gold. But it soon became apparent that there were economic winners as well as losers, with global technology and health stocks the main beneficiaries. By the end of 2020, US shares were up 16 per cent, with the tech-heavy Nasdaq index up 48 per cent.^viii Closer to home, Australian All Ordinaries index was up 0.7 per cent, or 3.6 per cent when dividends are included. Some of the best performers were small tech stocks, which helps explain why the ASX200, which is top heavy with banks, resources and property trusts, fell 1.5 per cent. Elsewhere, European markets were mostly lower reflecting their poor handling of the pandemic. While China and Japan performed strongly, up 14 per cent and 16 per cent respectively.

Commodities boost the Aussie dollar

China’s economic rebound was another factor in the Australian market’s favour, with iron ore prices jumping 70 per cent.^ix Rising iron ore prices and a weaker US dollar pushed the Aussie dollar up 10 per cent to close the year at US77c.^x Gold prices hit a record high in August against a backdrop of ballooning government debt worldwide, but prices eased as sharemarkets surged, finishing 25 per cent higher at US$1,898.^ix At the other end of the scale, oil was one of the biggest losers as economic activity and transport ground to a halt. Oil prices fell more than 20 per cent despite OPEC producers restricting supply.^ix

Property surprises on the upside

Despite dire predictions of a property market collapse earlier in the year, residential property values rose 3 per cent in 2020 and 6.6 per cent when rental income is included.^xi Melbourne was the only city to record a price fall (down 1.3 per cent), with combined capital cities up 2 per cent. The real action though was in regional areas where average prices lifted 6.9 per cent. While regional markets lagged over the past decade, 2020 saw more Australians embrace working from home and the possibility of living outside crowded cities.

Looking ahead

As 2021 gets underway, Australia is inching back to a new normal on growing optimism about the global rollout of vaccines to contain the spread of the coronavirus and allow more movement of people and goods. Our economy is forecast to grow by 5 per cent this year, but there are bound to be bumps along the way, with the potential for new waves of the virus and ongoing trade tensions with China.^xii In the meantime, the Federal Government and Reserve Bank stand ready to continue stimulus measures to support jobs and the economy. After the year that was, a return to something close to normal can’t come quick enough.

i https://www.chantwest.com.au/resources/november-surge-drives-funds-into-black-for-2020 ii https://tradingeconomics.com/australia/indicators iii https://www.commsec.com.au/content/dam/EN/ResearchNews/2021Reports/January iv https://www.rba.gov.au/ v https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20201209BullConsumerSentiment.pdf vi https://business.nab.com.au/monthly-business-survey-november-2020-43972/ vii https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release viii https://tradingeconomics.com/stocks ix https://tradingeconomics.com/commodties x https://tradingeconomics.com/currencies xi https://www.corelogic.com.au/sites/default/files/2021-01/CoreLogic%20home%20value%20index%20Jan%202021%20FINAL.pdf xii https://tradingeconomics.com/australia/gdp-growth-annual

Democrat Joe Biden is pressing ahead with preparations to take the reins as the next President of the United States. Despite legal challenges and recounts, the early signs are that markets are responding positively. In fact, the US sharemarket hit record highs in the weeks following the November 3 election as Biden’s lead widened.

The state of play

As things stand, Joe Biden has 306 electoral college votes, comfortably ahead of the 270 he needs to win. He also leads the popular vote. With 99 per cent of votes counted, Biden has 80.1 million votes to Donald Trump’s 73.9 million.ⁱ As well as voting for President, Americans also voted for the US Senate. While Democrats will control the House, it appears likely that Republicans will retain control of the Senate if they win at least one of the two Senate seats up for grabs in Georgia in January as expected. The upshot is that come inauguration day on January 20, the US will most likely have a Democratic President and House with a Republican Senate which would act as a check on Biden’s more contentious policies. So what can we expect from a Biden Presidency?

Biden’s key policies

The policies Joe Biden took to the election which stand to have the biggest impact on the US economy and global investment markets include the following:

• • Corporate tax increases. The biggest impact on corporate America would come from Biden’s plan to lift the corporate tax rate to 28 per cent. This would partially reverse President Trump’s 2017 cut from 35 per cent to 21 per cent. Biden is also considered more likely to regulate the US tech giants to promote more competition. These plans may face stiff opposition from a Republican Senate.

 

• • Stimulus payments to households. Biden supports further fiscal stimulus to boost consumer spending. While there were hopes that this could be delivered before the end of the year, action now seems unlikely until after January 20.

 

• • Infrastructure program. Biden has promised to rebuild America’s ageing public infrastructure, from roads, bridges, rail and ports to inland waterways. This would stimulate the construction and engineering sectors.

 

• • Climate policy. Biden is expected to rejoin the Paris Climate Accord and join other major economies pledging zero net carbon emissions by 2050. To achieve this, he would likely promote renewable technologies at the expense of fossil fuels.

 

• • Expand affordable healthcare. Biden wants to create affordable public health insurance and lower drug prices to put downward pressure on insurance premiums.

 

• Turn down the heat on trade. Biden will continue to put pressure on China to open its economy to outside investment and imports. But unlike President Trump’s unpredictable, unilateral action, he is expected to take a more diplomatic approach and build alliances with other countries in the Asian region to counter China’s expansionism.

While a Republican Senate may oppose measures such as higher corporate taxes and tougher regulation of industry, it is expected to be more open to some of Biden’s other policy initiatives.

The outlook for markets

The general view is that further stimulus spending should support the ongoing US economic recovery which will in turn be positive for financial markets. While Biden is committed to heeding expert advice in his handling of the coronavirus, a return to lockdown in major cities may put a short-term brake on growth. Longer-term though, recent announcements by pharmaceutical company Pfizer and others have raised hopes that vaccines to prevent COVID-19 may not be far off. This would provide an economic shot in the arm and continued support for global markets. However, as sharemarkets tend to be forward looking, the US market appears to have already given Biden an early thumbs up with the S&P500 Index hitting record highs in mid-November.

Lessons of history

Despite the Republicans’ more overt free market stance, US shares have done better under Democrat presidents in the past with an average annual return of 14.6 per cent since 1927. This compares with an average return of 9.8 per cent under Republican presidents (see graph). While the past is no guide to the future, it does suggest the market is not averse to a Democratic president. What’s more, shares have done best during periods when there was a Democrat president and Republican control of the House, the Senate or both with an average annual return of 16.4 per cent.ⁱⁱ

US share market returns by political configuration

Source: AMP

Implications for Australia

Australian investors should also benefit from a less erratic, more outward-looking Biden presidency. Any reduction in trade tensions with China would be positive for our exporters and Australian shares. While a faster US transition to cleaner energy might put pressure on the Morrison government and local companies that do business in the US to do the same, it could also create investment opportunities for Australia’s renewables sector. Ultimately, what’s good for the US economy is good for Australia and global markets. If you would like to discuss your overall investment strategy as we head towards a new year and new opportunities, don’t hesitate to contact us.

i https://www.abc.net.au/news/us-election-2020/ ii https://www.amp.com.au/insights/grow-my-wealth/joe-biden-on-track-to-become-us-president-implications-for-investors-and-australia