Key Discussion Points

August 2019

Key Discussion Points – August 2019 2019-09-12T09:59:59+10:00

 

FINANCIAL ADVICE & STRATEGY

How much capital do I need to retire comfortably?

Written by Michelle Bromley CFP® – Director of Strategy & Advice

I recently met with a client who had started thinking about their retirement, which is about 15 years away.  They were concerned that their future capital might not be sufficient to provide for their retirement income needs and asked me:

“How much capital does the average person need to retire comfortably?” 

While each individual situation is different, there is a useful rule-of-thumb published annually by the Association of Superannuation Funds Australia (ASFA) who analyse living costs to determine an average income budget for Australian retirees.

The June 2019 ASFA Retirement Standard shows that the median super balance at age 65 for males is $154,453 and just $122,848 for females. However, even combined with the Age Pension, the ASFA Retirement Standard suggests an average couple requires $640,000 in retirement savings to provide a comfortable lifestyle of $61,522pa for up to 5 years after their statistical life expectancy. 

Included in the ASFA comfortable lifestyle budget is basic ‘needs’ of around $40,054pa plus an extra $21,468 to allow for home repairs and improvements, the ability to buy new household items, operating heating and cooling year-round, good quality food and some dining out, domestic and occasional overseas holidays, top level health insurance, owning a reasonable car, and taking part in a range of regular leisure activities. Arguably, these expenses could be larger if you live in a capital city like Melbourne, Sydney or Brisbane compared to those residing in regional areas.

While the ASFA Retirement Standard is a useful ‘average’ across the Australian population, your needs are unique.  To determine the amount of capital you will need, we must define what you consider to be a comfortable income, adding a buffer for both planned and unexpected expenditures, and using some assumptions about the rate of return (after fees and taxes) earned by your portfolio. 

This article will help you to get an idea of what level of capital you might need, at a range of incomes at and above the ASFA Retirement Standard.

The Case

Fred and Mary are both 55 and want to spend the next 10 years planning for a comfortable retirement at age 65. 

“We currently spend around $80,000pa to live, we probably need about 75% of that in retirement at minimum, and we’d like to do some travelling, renovations and replace the car every 10 years so want to allow an extra $20,000pa.”

Fred and Mary want to understand how much capital they might need at retirement to provide a comfortable standard of living versus maintaining their current lifestyle, compared also to budgeting an extra $20,000 to meet their travel and capital expenditure objectives.

Assumptions

Fred and Mary’s portfolio is aligned to Prime’s ‘Balanced’ Risk Profile Model. We’ve published our Risk Profile Investment Performance to the end of July 2019 (pre-tax and franking credits):

Accounting and advice fees, less an adjustment for franking credits, reduce the expected long-term (5 year) returns in the above table by up to 1.5% to an average of 6%pa which is also what ASFA used for their calculations.  ASFA also assumed that long term inflation would be 2.75%pa, so we will use that figure to be consistent.

We will base our calculations on funding an income for at least their life expectancy plus an additional 5 years. Fred’s life expectancy is 86 and Mary’s is 89, so we’ll fund to Mary’s age 95. 

Finally, we will include an extra $50,000 of non-financial assets, to represent the fire-sale value of Fred and Mary’s home contents and vehicles for purposes of calculating Centrelink entitlements.  We’ve also assumed they would remain in their home for the rest of their retirement years and not need to downsize to release capital or fund Aged Care entry.

Range of Outcomes

Using the above assumptions and the objectives set by Fred and Mary, provides a results matrix showing the indicative capital required to fund various income levels.  The calculations take into consideration Age Pension entitlements and taxation.

Fred and Mary are surprised at the jump in capital required for each additional $20,000pa. 

“Why is there such a big difference in the capital requirement? Even between the ASFA Comfortable Retirement Standard to our current standard of living, that’s around double!”.

The difference is a combination of the increased expenditure and the decreased Age Pension entitlement.  Generally, the full Age Pension entitlement for a couple is equivalent to retiring with an additional ~$800,000 in financial assets that earn 5%pa after fees and taxes.

At higher asset levels Age Pension commencement is delayed and the amount payable is reduced, meaning a larger proportion of the overall retirement income must be funded by available capital.

Planning for your Retirement Lifestyle

Generally, as people age their spending patterns change as they find it more difficult to travel, or require a higher level of assistance at home, or eventually move into Aged Care.

As part of our retirement planning, we are able to incorporate some individualised assumptions about the timing and continuation of certain expenditures. 

This can provide a more individualised assessment of your capital need in retirement.

What to do?

Talk to your adviser about what you would like your retirement plan to look like.  Things you might want to think about include:

  • Creating a budget for ‘needs’
  • Annual holidays & overseas travel
  • Home renovations & new vehicles
  • An emergency fund
  • Will you downsize your home
  • Exploring Centrelink benefits.

Source:

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL No. 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in this article before making any decision to acquire it. Please refer to our FSG (available here) for contact information and information about remuneration and associations with product issuers.

Case Study: Stewart & Karen

Written by Garry Frizzo – Director

Some time ago I received a referral from a JV Accountant for one of their Salary & Wage clients, who had received a WorkCover payout of $898,136.

Stewart had acquired a brain injury as a result of a workplace incident and was in a coma and was considered unlikely to ever recover. Cost of care was approximately $2,100 per fortnight.

Stewart was 36 years old.

His wife, Karen, had previously been employed by Queensland Health, but had taken time off work to care for their 2 children, aged 10 and 6, who were obviously going through a very difficult time. However, she was now, easing back into work, but would likely only earn enough to cover day-to-day living expenses.

She wanted to know how she was going to afford the care as well as home loan repayments.

During the initial meeting, we gathered the following information:

  • Debts, including home loan, were approx. $398,000
  • Stewart had superannuation in 7 different industry funds, totaling only $40,794
  • 5 of the super funds, had TPD cover, totaling $740,441.

Karen had been nagging Stewart for years, to combine his super accounts – best result for a man ignoring his wife, ever!

Superannuation assets

Personal Risk Insurance

Providing Stewart met the definition of Totally and Permanently Disabled (he was in a coma and unlikely to ever recover), and once the TPD insurance was claimed, we estimated that he would have an aggregated taxable component of $165,000. (Tax on the taxable component prior to preservation age is 22%, which includes the Medicare Levy).

A after paying the tax on the taxable component of $36,300, Stewart, and his family, would have available funds totaling approx. $1,204,141. Not a bad outcome in what were very difficult circumstances.

Karen’s Objectives

Karen’s had 2 objectives:

  • Pay down debt
  • Get enough income to pay for Stewart’s care.

I added a third objective, which was to pay as little tax as possible, both with the TPD payout, or on an income stream. When a member becomes permanently incapacitated it is possible to trigger a tax concession which results in some of the member’s taxable component being turned into tax free component.  This is achieved by paying a ‘disability superannuation benefit’.

Strategy Points

  • Pay out all loans immediately
  • Maximise the tax-free component on the payment of a disability superannuation benefit
  • Roll all of the super accounts together into a single superannuation fund* and commence paying a tax-effective disability superannuation pension
  • Ensure that Karen was made a reversionary beneficiary of Stewart’s member balance, so that she, and the children, continue to receive a tax-effective income stream should Stewart die prematurely.

* To qualify for a ‘disability superannuation benefit’, Stewart needed to either take the benefit as a lump sum benefit or roll his benefits to another fund ie commencing a pension in one of Stewart’s existing funds would not trigger the concession.

Strategy Detail

  • Debts were paid out immediately, which left approx. $500,000 of the WorkCover payout remaining
  • We used the remaining $500,000 to make the following payments to each of the super funds.

*Contributions for Personal Injury do not form part of the non-concessional cap, but must be made within 90 days of the WorkCover payment being received.

**Please note that notice as to the status of the contribution must be given to the superannuation fund on the same day as or before the contribution is made. 

  • Roll all super accounts into a separate superannuation fund and commence a disability superannuation pension.

The net result of making the Personal Injury Contributions was that the aggregated taxable component  of the TPD payout was reduced from $165,000 to $0, a tax saving of $36,300.

Outcome

  • Tax on the TPD payout was eliminated
  • Stewart received a disability superannuation pension up until his death
  • Karen continues to receive a tax-free Reversionary Pension, and will do as long as she is alive and the capital lasts.

 

INVESTMENT ADVICE & MANAGEMENT

Property Opportunities for Wholesale Investors

Written by Mark Johnson – Partner

Prime has recently expanded on some strong relationships with boutique investment managers in the property space.

For wholesale investors, there are some exciting opportunities in the pipeline that will enable clients to invest in projects previously only available to institutional funds and ultra-high net worth family offices. These projects can provide an annualised return of over 10%, a highly attractive offering for sophisticated clients seeking a premium yield in what is currently a record-low interest rate environment.

What is a Wholesale Investor?

Essentially, everyone is a retail client unless they satisfy one of the requirements to be classified as a wholesale client under the Corporations Act 2001 Act (Corporations Act).

You are considered a wholesale client if you have satisfied the following criteria:

A person that has obtained a qualified accountant’s certificate stating they have net assets of at least $2.5 million, or a gross income for each of the last two financial years of at least $250,000. The certificate lasts for two years before it needs to be renewed.

The tests for wholesale clients are aimed at financially savvy, informed and confident investors with experience in protecting their interests.

Where the assets of a SMSF are at least $2.5millon:

  • Joint individual trustees of the SMSF would be considered a wholesale client in respect of that SMSF entity
  • Any director of a corporate SMSF trustee who exercises sole practical control over the decisions of the SMSF (i.e. where there is only one member of the SMSF) would satisfy the Individual Wealth Test and is therefore a wholesale client
  • Any two or more directors who practically control the decisions of the SMSF in a joint capacity (e.g. in a husband/wife situation) would satisfy the Individual Wealth Test and is therefore a wholesale client (but only in their joint names).

Please speak to your adviser if you feel that you may wish to have a further discussion regarding the wholesale investor criteria.

Lucent Capital

Lucent is a boutique property manager that offers tailored investment solutions. Lucent endeavours to find unique development opportunities that can offer value to private investors.

Prime recently worked with Lucent on a project in Brunswick East. Several wholesale clients of Prime supported the project, making their investment in March 2018.

The project has proceeded on time, and on budget, with the settlement happening in September 2019. Clients will receive a return of 12% p.a.

Prime clients recently undertook a tour of the finished development and were impressed at being able to see first-hand the quality of the project.

We look forward to working with Lucent to provide our wholesale clients with similar future opportunities, as and when they should arise.

CVS Lane Capital Partners

CVS Lane is a specialist property finance and investment business established in 2011 with the support of the Josh Liberman Investment Group.

The Josh Liberman Invest Group is a private investment house that operates across a wide spectrum of industries, chaired by Joshua Liberman who is a director of CVS Lane and member of its investment committee.

CVS work with property groups seeking third party capital with a national and offshore network of sophisticated investors that are seeking exposure to Australia’s property sector.

Currently, CVS have active involvement in transactions in Victoria, New South Wales and Queensland.

CVS provide capital ranging from first mortgages, second mortgages, preferred equity and equity and have invested in land subdivisions, residential and commercial development.

The CVS Lane First Mortgage Fund was established in July 2017 with $72m of capital raised. As at 30 June 2019 the fund had delivered an investor IRR of 8.5% (net of fees) since inception.

CVS Lane has announced that they intend to open the fund to new investor capital from September/October 2019. CVS Lane will be providing further information shortly on the terms by which investors can invest in the fund.

The fund is targeting a 10% p.a. IRR, investing in first mortgages with a maximum LVR (Loan to Value Ratio) 65%.

We feel that this is an exciting opportunity for wholesale clients of Prime. Please get in touch with your adviser if this is of interest to you.


Monthly Commentary

Prime SMA

Global equity markets advanced further in July as investors shrugged off the ongoing concerns of the Trade War.

The MSCI World Index added +0.50% in USD terms whilst emerging markets reversed last month’s strength.

The US equity market outperformed with the S&P 500 climbing +1.3% and trading through 3000 points for the first time ever.  

The Federal Reserve cut interest rates by -25bps to a range of 2%-2.25% labelling it an ‘insurance cut’ and reversing the interest rate hikes that began in late 2015.

Meanwhile US reporting season kicked off with results mixed – Netflix was a notable miss falling -10% as subscription growth added 2.7 million members against forecasts of 5 million.

The ASX200 Accumulation index advanced for the seventh consecutive month rising +2.94% in July and the RBA mirrored the Federal Reserve cutting interest rates to 1%.

Australian bond yields continue to tighten with the 10-year Corporate Government bonds yielding an all-time low of 1.18% at July 31st.

Oil was largely flat during the July with WTI trading $58/barrel and Brent oil trading $64/barrel.

Iron ore continued to climb higher trading north of $120/tonne for the first time in 5 years.

Contributors to performance in July were Nufarm (NUF) and IOOF (IFL) which added +19% and +12% respectively. NUF announced a placement of $97.5m of preference securities to its largest shareholder and strategic partner Sumitomo. This eased investor concern that NUF were going to raise equity in the market thereby diluting existing shareholders. IFL bounced as its quarterly Funds Under Management and Advice (FUMA) showed June quarter inflows to be the strongest recorded since June 2018 with $150bn under advice.

Amcor (AMC) underperformed falling -4% in July on no specific news. Having endured a sustained period of rising cost inputs we believe this headwind it starting to become a tailwind as falling resin prices and raw materials continue to boost margins. We continue to hold AMC believing the shares are worth closer to $17.

The Growth SMA used the proceeds from the MHOR Small Cap redemption to invest in the OC Premium Small Companies Fund which has outperformed its benchmark by 5% p.a since its inception in 2000. We also added to Oil Search (OSH) given we thought the market overreacted to its Q2 production numbers. The Defensive SMA increased its allocation in Ardea and the International equity SMA added to existing weights in the WCM Quality Global Growth Fund and the MFS Concentrated Global Equity Trust. The Diversified Income SMA went unchanged. On a risk profile performance basis our 5-year numbers continue to perform well against their respective benchmarks.

Risk Profile Portfolio Performance Figures as at 31 July 2019

Pre-Franking Credits:

Prime SMA – Model Portfolio Performance Figures as at 31 July 2019

Pre-Franking Credits:

 

SMSF

How reliable are data feeds and why are they important?

Written by Olivia Long – Managing Director, Strategy & Operations, SMSF

In recent years, data feeds have completely changed the way accountants and auditors work. The days of manually entering transactions via journal entries have been replaced with a new process – matching transactions on an exceptions basis for those which cannot be automatically allocated.

Data feeds are now the linchpin of any cloud-based accounting platform, automating processes like data entry and reconciliation of transactions. This saves time, reduces the risk of errors and improves productivity in self-managed super fund (SMSF) accounting and auditing.

Further, the July 2018 introduction of an event-based reporting (EBR) framework for SMSFs by the Australian Tax Office (ATO) makes us wonder how accountants not using cloud-based software and data feeds are able to meet their real-time reporting obligations. It is safe to say that data feeds have become the driving force in efficient SMSF administration.

How is the SMSF data accessed?

The customer owns their own data, so they must consent in writing for information to be transferred from the source provider to a third party. This is still a manual form filling process.

Who is responsible for SMSF data security?

Service providers are responsible for the safe electronic storage and transmission of customer data. The Privacy Amendment Act 2012 deals with the security of personal information and requires organisations (individuals, bodies corporate and partnerships) to abide by certain rules when managing individuals’ data.

To better protect data security, you should implement a cybersecurity plan that addresses:

  • Risk mitigation and response policies
  • Breach identification frameworks
  • Strategies for reporting thresholds and informing clients of issues.

A cyber-incident response plan needs to be tested against industry best-practice and your own internal business objectives.  

How reliable is a data feed?

Once you have received data from your software provider, you need to check how reliable the recorded transactions really are. Data quality defined by completeness and accuracy should be the number one goal for any end-user.

A common term used by data aggregators for direct data feeds is ‘accounting-grade data’. This means users can rely on data without needing to check paper-based statements issued from the source. ASAE 3402 is an Auditing and Assurance Standards Board regulation that provides users of data-fed transactions and balances with reasonable assurance that the necessary controls are in place to provide quality data feeds.

What do data feeds mean for SMSF accountants and auditors?

Many accountants and auditors have moved away from using hybrid checklists and now embrace varying degrees of automation offered by the major SMSF software platforms. In doing so, they are becoming over-reliant on data-fed transactions being entirely accurate without the appropriate checks.

With an ASAE 3402 type 2 report, SMSF auditors should be able to substantially reduce the amount of manual testing required for balances and transactions. Ultimately though, with or without this document, accountants and auditors need to decide on their own method for checking data reliability and ensure that there are systems in place to verify that reliability.

Automation in SMSF software is the key to making the super accounting and audit process more efficient. Because of that, further automation is coming.

As more exceptions reporting is developed, SMSF accountants will use this information to move away from doing full-scale workpapers to simply reviewing results and proving value-added insights. This change will fundamentally shift how our industry works.

CONTACT OLIVIA LONG CONTACT KAREN DEZDJEK

 

CLIENT SERVICE & EXPERIENCE

NPS Survey

As a part of continuously improving our service, advice and value, we will be sending a Client Satisfaction Survey to all existing clients on Monday 16th September. The survey will be open till 4th October and should you receive any calls from clients, it would be extremely valuable if you would encourage them to complete this 7 minute survey.

If you would like to test out the survey for yourselves, please click here.

Note: this is only a test link so please avoid sharing with any clients.

If you have any questions please email Angelina Rigoli:

EMAIL ANGELINA RIGOLI

 

ACCOUNTING SUPPORT

R&D and EMDG Updates

Written by Brendan Brown, Partner – Accounting & Business Advisory

R&D

R&D tax incentive applications for the tax year ended 30 June 2019 can now be lodged.
The last date for lodgement is 30 April 2020.

Eligible applicants can potentially obtain a cash rebate of up to 43.5% of eligible expenditure where their grouped annual turnover is less than $20m.

Legislation has also re-entered parliament to potentially reduce the cash rebate in some instances. We will closely monitor and advise on the potential outcome as we get more clarity.

EMDG

Export Market Development Grant (EMDG) applications for the tax year ended 30 June 2019 can now also be lodged.

The last date for lodgement is 28 February 2020 using Prime’s extended lodgement approval.

Eligible applicants can potentially obtain a grant of 50% of eligible expenditure.

The maximum grant is $150,000 and is subject to a tranching system.

The first tranche has been set at $40,000 and applicants go into a pool for the remainder of their entitlement.

Last year the 2nd tranche payout factor was approximately 26% but we are hoping to see this increase with an additional $20m committed to the EMDG pool by the government.

The September quarter is a busy period for both of the above programs. Generally the quicker you get your claim in the quicker you get paid!

For any enquiries or support:

CONTACT BRENDAN BROWN CONTACT SIMONE QUIN

 

 

CONTACT US

Disclaimer: This information on this page contains general advice and is been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (‘Prime’) . Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. You should obtain and read the relevant Product Disclosure Statement (PDS) of any financial product discussed in any articles mentioned before making any decision to acquire it. Prime is bound by the Australian Privacy Principles for the handling of personal information.