With the 30th of June distant in the rearview mirror, this week I thought I’d share a few ideas that you might be able to jump on in the new financial year.
Let’s start with salary sacrificing to superannuation. If you are in the camp who is already salary sacrificing to super, then you now need to factor in your employer contributions having increased to 12% of your salary. The annual contribution limit of $30,000 has not altered however. This means the amount of headroom you have for salary sacrificed contributions has shrunk. If you were maxing out your contribution cap last financial year, you will need to scale back your salary sacrificed contributions if you are to avoid exceeding your limit.
For those not currently salary sacrificing, or who are using this savings mechanism but have more headroom available, consider whether the new financial year is a time for you to take advantage of this opportunity. Money that you salary sacrifice to superannuation will be taxed at 15%, provided your annual income is under $250,000. For the vast majority of workers, 15% is a very attractive tax rate compared to what their normal marginal tax rate would be. Salary sacrificing Super therefore provides an opportunity to both save tax now, and provide for a more comfortable retirement later in life. Of course as with all superannuation contributions, you do need to balance out the fact that you will have lost access to your money until at least age 60. Ensure you have an emergency fund so as not to leave yourself short.
Commonly attached to superannuation, though it need not necessarily be, is personal insurance. This is life, total and permanent disability and income protection insurance. These covers get more expensive as we get older, whilst our need for these covers typically reduces over time. As we pay down our mortgage, our assets increase in value, and for those with children, years of dependency reduce, the need for personal insurance diminishes. It is important therefore to regularly review your levels of insurance as you age, in particularly once in your 50s, and consider whether there is room to scale back your cover to keep a lid on costs. Because these insurance premiums are paid via your super fund, they can be a bit out of sight, out of mind. Yet the cost of insurance has a very real impact on your ultimate retirement benefit, so it is important that you not pay for more than you need.
I’ve spoken about salary sacrificing to super, but of course there are plenty of instances where we would wish to save outside of the superannuation environment. Perhaps you want funds available to help the kids get into the property market, pay for school fees, or facilitate you taking a sabbatical or early retirement. The new financial year might be a good opportunity to review what is possible here with regard savings. Has your savings capacity changed? The two big items I normally see are people paying off their mortgage, or the kids moving out. In both instances, expenses go down quite meaningfully, freeing up cash that can be put to work. Perhaps you could start a regular savings plan into an investment portfolio to build wealth and give you financial security and resiliency.
An extension to this, for those with an aggressive streak, is to consider gearing, that is borrowing to invest. As I write this post, the Reserve Bank has cut interest rates twice so far this calendar year, and there are expectations that rates may come down further. If it does indeed come to pass that the cost of money falls this financial year, then it gets easier to make the maths work on a geared investment strategy. Most people, when they think about gearing to invest, would think about property, and that is certainly an option that is available. But don’t restrict yourself to property alone. Property has its challenges – the transaction size is large, and diversification problematic. It is possible to instead gear into stock market investments, which has the significant advantage of being far more flexible in terms of size of transaction, investments purchased, and the ability for partial sales should circumstances change. Borrowing to invest is about taking on extra risk. For those with the appetite, and an appropriate time frame, it can have a significant impact on your long term financial position.
If your superannuation is in the pension phase, particularly for those with a Self Managed Super Fund, get clear on what your minimum drawing requirement is this financial year. A pension that does not satisfy the minimum drawing requirement loses its pension status with the ATO, and will be taxed as though it were an accumulation fund, so this is important to get right.
Finally, if you haven’t yet had any financial modelling done to understand your current trajectory, consider whether this financial year is the time to undertake this project. Understanding what’s possible by evaluating different scenarios is enormously valuable in ensuring you squeeze the most out of both your balance sheet, and your life. Dying with millions of dollars in the bank, assuming you enjoy a long life, just means that there is more fun you could have had when you were younger that you missed out on. Understand your long term outlook, so that you can understand what you can do today.
Financial modelling is a key service we offer, so if you need help in this regard book a meeting here.
