HEALTH & LIFE’S BEST PRACTICE NEWS ALERT Current circulation:
6982
DATE: ISSUE NO:
31 July 2006 128
Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.
Writer in charge: Mr David Dahm CPA, BA Acc, FTIA, FFin, FAAPM,GLF.
Health and Life News 1. New Appointment - Maurice Nistico Dip FP GAICD – Certified Financial Planner & CEO of Health and Life Wealth Management As your practice has been growing so have the needs of ensuring appropriate personal financial planning strategies are in place. We are pleased to announce that Maurice Nistico has joined and is heading up our financial planning practice as its Chief Executive Officer. Maurice has been a financial planner since 1983, writes a regular newspaper column and publishes Money Matters. Maurice has prepared this news alert, and will prepare many more to address any personal financial planning issues you may have. Maurice is committed to the social and economic well being of his community, having served on various community groups, and is the founder of The Community Superannuation Plan - a public offer superannuation plan that not only provides excellent member benefits, but that also supports regional youth employment initiatives. Born in Port Augusta in 1964 of migrant parents, educated 'off the back of the railways', his other achievements include: • •
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Being the only regional Finalist in the 2003 Money Management Financial Planner of the Year Awards Founded the Community Superannuation plan, a public offer superannuation plan available to employers, employees, and the self-employed that shares profits from administration fees with Business Port Augusta to direct towards Youth Employment initiatives. Author of 'Money and You - an Introduction to Financial Freedom' - a self paced online financial learning tool.
His interests including community work, volley ball coaching and property development.
Cover Story - Why is Retirement My Biggest Debt!
Problem: Did you know that today you need $1.4 Million to Retire Comfortably?! Whether you are beginning or near the end of your career the biggest debt you will have to fund is not your mortgage, children’s education, or business purchase – it’s your retirement! We will show you how much you should have saved by now from ages 30 to 60! No matter how important your patients are to you, your own financial well being will always remain your number one priority - it is unavoidable. Ideally your retirement should be an option and work only exists because you enjoy it – this is the ultimate work life balance. Your number one source of income to fund your retirement is from your practice or employment income – making a healthy practice profit is the primary way of achieving this goal. If you are aged 60 today and want to generate an income of $100,000 per year indexed you would need a lump sum of $1,375,361 (invested at 7%) in your super fund. If you are not in a tax friendly structure you will need at least $2m. The proposed changes to superannuation tax means that you can reduce your retirement debt by hundreds of thousands of dollars. Many people work harder and not smarter and we will cover how you can overcome some of these hurdles. In this edition we cover: 1. Retirement - My Biggest Debt! 2. How Much Money Should I Have Saved Now? 3. Super vs Borrowing To Invest - Which Is Better? 4. Where to from here?
Why is Retirement My Biggest Debt!
1.1. Retirement - My Biggest Debt! The one question we are always asked is – ‘how much money is enough to retire?’ The answer is of course different for everyone. We find it most useful to start with the end in mind. The first question is how much income do you want in retirement? Working backwards from there we can work out how much capital you need at retirement to produce that income, and therefore how much you need to contribute from today to achieve that capital by your retirement age. For example, Dr Good is seriously contemplating his retirement since Treasurer Costello th announced as part of the 2006 Federal Budget on the 9 of May 2006 the abolition of tax on superannuation end benefits for those aged 60+ (effective 1 July 2007).
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If Dr Good was aged 60 today and he wanted to generate an income of $100,000 per year indexed by 3% (a loaf of bread and a litre of milk are going to cost more next year!) for say 20 years till age 80 he would need a lump sum of $1,375,361 invested at 7%. (This assumes he is happy at age 80 to have no capital left and be forced to rely on the goodwill of his elderly children and whatever welfare system still exists by then. He would need more than this if he wanted some capital left after age 80.) If Dr Good tried to generate this income outside of his super in a taxable environment of say 30%, he would need a lump sum of $1,647,390 to achieve the same result, 20% more! 2.2. How Much Should I have Saved Now?
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Dr Good’s enthusiasm for his upcoming retirement has caused his younger colleagues to wonder if they are on track with their retirement planning. Using super as an example, the following matrix gives Dr Good’s younger colleagues a snapshot of what they should have in super now assuming they either contribute 10% or 20% of their current earnings of $100,000 pa.
Age now
Balance required now if contributing 10% of salary/net income ($10,000 pa +cpi)
Balance required now if contributing 20% of salary/net income ($20,000pa + cpi)
Capital required at age 60 to produce $100k in today’s $ + 3% pa till age 80
Dr G, aged 60 now $1,375,361 Dr A, aged 55 now $1,097,360 $1,057,921 $1,594,420 Dr X, aged 50 now $867,580 $795,543 $1,848,370 Dr B, aged 45 now $677,656 $578,675 $2,142,768 Dr N, aged 40 now $520,675 $399,424 $2,484,055 Dr J, aged 30 now $283,677 $128,803 $3,338,362 assumes 7% net return on investment, 3% cpi, 15% tax on super contributions. 3. Super vs Borrowing To Invest - Which Is Better? A couple of Dr Good’s younger colleagues have been negative gearing investments (borrowing to pay investments) and with the budget announcements are re-examining their strategies. Let’s assume Dr N, who has a marginal tax rate of 41.5%, borrows an amount of $114,313 at 8% (to invest in shares or property for example) (gross interest expense $9145, net interest expense after tax of $5350). Dr N can either use the $9145 gross salary per annum to make a tax deductible contribution to super, or use the $5350 after tax salary amount to pay for the net cost of the gearing (borrowing) strategy. The following table shows three ways of making the investment. Option 1 is to pay for the shares/property outright in cash (debt free), Option 2 to is to borrow money (gearing) to pay for the shares/property and Option 3 is make deductible super contributions. The results are as follows: Gross Return on Investments Yr
Option 1 - Outside
Marginal Tax Rate 41.5% Option 2 - Outside
Option 3 -
super (no gearing) Super (gearing) Deductible Super 5 32,665 44,338 49,713 10 78,394 108,828 124,282 15 143,124 202,631 236,770 20 235,493 339,070 407,109 Assumptions: • The outside super investment has a gross income return of 3% and capital growth of 5.5% • RBL issues no longer relevant as super tax free after age 60 • All income re-invested • At the end of the period, investment is sold, capital gains tax (CGT) paid, and loan repaid. The balances are then compared with after tax results via deductible super alternative. Based on the assumptions above, Dr N concludes that the gearing option will provide a better result than the non-gearing option. But when compared to deductible super, the super alternative produces a better result over all periods. This was not the case in the past when tax applied to lump sums. The super option is the best option if you have a surplus of cash and you are not concerned it is locked away until your retirement. Other less tax effective options includes holding assets in a family trust and income splitting to family members who are paying lower marginal rates of tax or having your family trust distribute to a corporate beneficiary which pays tax at the maximum tax rate of 30c in the dollar. 4. So where do you go to from here? 1. Given the Budget changes announced recently, re-examine your retirement investment strategies. Should you be investing inside or outside super? Should you be borrowing to invest? Should you be running your own super fund? 2. Calculate how much you need in retirement. Start with the end in mind. How much in today’s dollars would you like as a retirement income? How much do you currently have invested for your retirement? How much should you be investing from now to achieve your retirement income goals? 3. Consult your adviser to discuss these issues. If you require retirement income calculations or more information about any issues raised in this article. Call us on 1800 077 222 or email Maurice Nistico on mauricen@healthandlife.com.au . We are happy to receive any feedback and will provide a free initial telephone consult. 4. New online service - Maurice can also provide you with a “Personal Financial Snapshot” from the comfort of your consulting room or home. An example of this report can be downloaded by clicking here. 5. New National Product Release - Also check out our “Personal Financial Affairs Portfolio” which covers areas that your personal Will does not cover in the event of a death or serious illness. An example of this can be downloaded by clicking here. This is a MUST READ and you will know why after reading the contents of this document. At Health and Life we can construct this for you or you can do it yourself. Which topics would you like to be covered? If there is a particular topic that you would like covered in one of our future News Alerts, please email pa@healthandlife.com.au and let us know what it is. We will then endeavor to cover your requested topic.
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