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Life's good. We're feeling more comfortable. The mortgage
is under control. We've always enjoyed keeping up with lots
of friends and now we can afford more nights out, trips
away. We've started to think about when we can swap work
for a bit more time out. What we'd really like is only ten
or so more, full time years on the job.
We want to make sure though that we can keep enjoying the
good life in retirement. The big question now is, are our
savings enough? How can we best build our wealth over the
next ten years for a comfortable future?
Now is the time for some clever financial planning!
Your financial adviser can help you maximize the potential
of your peak earning years to achieve the best increase
in your wealth. This will help you avoid 'financial futureshock'
and enjoy the lifestyle you want, not only today, but also
when you retire.
Is financial planning really necessary? Why not find a
good investment and go for it?
We all hear about get rich quick schemes. And sometimes
they work. Venture capital, property development, vineyards,
exotic crops, they can make some healthy returns. However,
schemes that offer very high profits often carry very high
risks.
These high risk strategies may not make good sense if your
time frame is ten years. If you decided to take on a high
risk strategy, you may want to make sure that you have plenty
of earning years left to recoup any losses.
Getting to the Heart of the Matter!
What then are the best investments to
grow wealth over a timeframe like ten years?
Your financial adviser can help you develop a sound
investment strategy with the potential for optimal growth
within your timeframe.
The mix of the strategy will depend on your particular
circumstances. It may include discussion and utilization
of these wealth building options - Paying Off Your Mortgage
Early, a Diversified Investment Portfolio, Superannuation
and Gearing.
Option 1 - Paying off your Mortgage Early
Repaying your mortgage faster allows you to save on your
repayment interest. Putting your money into an alternative
investment means that you'd first have to pay tax on the
returns you receive. For top marginal rate taxpayers, this
means that the alternative investment would need to nearly
double the mortgage interest rate to put you in a better
position. Very difficult unless the investment carries substantially
more risk. This option offers a good return at very low
risk.
Option 2 - A diversified Investment Portfolio
A diversified portfolio, especially with a substantial portion
in shares and property, should provide you with strong returns
while at the same time controlling your risks. The only
thing to note is that tax will be a greater burden on returns
than with the other options.
Option 3 - Superannuation
Superannuation is the most tax effective investment strategy
for retirement savings in Australia. You pay only 15% tax
on superannuation earnings. Additionally, if you have a
salary sacrifice arrangement, payments are taxed at a rate
lower than your marginal rate of tax. Superannuation invested
in a diversified portfolio may give you a better return
than paying off your mortgage faster. However, remember
that the investment risk will not be as low as paying off
your mortgage.
Option 4 - Gearing
Gearing involves borrowing money to invest in shares or
property. A profit is made when the return on the investment
is greater than the interest on the borrowing. If the cost
of borrowing in a year is higher than the investment income
(negative gearing) a tax deduction is allowed.
Gearing can substantially
increase returns over ten years but it is also the option
that carries the highest risk.
Your Financial Adviser can help you choose your best
options
Talk these options through with your adviser, together
with your special circumstances, preferences and needs.
Together you can come up with the best strategy to make
your money grow.
Investment Strategy |
How the Strategy Works |
Positives |
Negatives |
| Pay off the mortgage first |
To beat paying off the mortgage any
alternative investment would need an after tax return
higher than the mortgage rate. |
Medium return at very low risk. Tax
effective. Appropriate for short, medium and long term
time frames. |
"Return" limited by mortgage rate.
No access to higher performing investments. No diversification. |
| Investment in diversified portfolio |
A range of investments in cash, fixed
interest, shares & property. |
Access to higher performing investments
ie shares & property. Some tax advantages from shares
(franking) and property. Risk characteristics of investments
can match risk profile of investor. Investments are
accessible. |
Greater tax advantages in other strategies. |
| Superannuation |
Tax advantaged investment. |
Extremely tax effective investment.
Tax on investment returns only 15%. Tax on salary sacrifice
contributions - 15% (or more for higher income earners).
Access to higher performing investments ie shares &
property. Risk characteristics of investments can match
risk profile of investor. |
Time frame: Not generally accessible
until retirement after 55 years of age (increasing incrementally
to 60 for those born after 1.7.1960). |
| Geared Investments |
Borrowing money to invest. Profit is
made when return from investment is greater than cost
of borrowing. |
Magnifies potential returns. Tax deduction
allowed when cost of borrowing higher than investment
income (called 'negative gearing'). Both shares & property
appropriate for gearing strategy, either direct or through
managed funds. |
Higher Risk strategy as potential losses
are also magnified. Time frame for this strategy is
5 years plus. |
The above material contains comments of
a general nature only and should not be relied upon as giving
any specific or general investment or financial advice of
any nature.
| How
Gearing Works |
| Amount to be
invested |
$100,000 |
Please
note that this is an illustration of the concept
of gearing (sometimes called leveraging).
It shows how both profits and losses can be magnified.
It does not take into account taxation (which
would in effect reduce both potential profits
and potential losses), fees or inflation. |
| Own capital |
$10,000 |
| Amount to be borrowed |
$90,000 |
| Interest rate on borrowings |
7.0% |
| Scenario
1: Investment return = 10.0% |
Scenario
2: Investment return = - 10.0% |
|
| Profit |
= change in
value of investment
- cost of borrowing
= $100,000 x 10.0% - $90,000 x 7.0%
= $10,000 - $6,300
= $3,700 profit |
Profit |
= change in
value of investment
- cost of borrowing
= $100,000 x 10.0% - $90,000 x 7.0%
= - $10,000 - $6,300
= $16,300 loss |
| Return |
= profit / investment
= $3,700 / $10,000
= 37% profit |
Return |
= profit / investment
= $16,300 / $10,000
= 163% loss |
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