As part of this process, the adviser may need to refer you to other professionals, such as solicitors for estate planning matters, stockbrokers for buying shares/equities, and accountants for setting up business structures and tax advice.
The following discussion examines the popular investment categories and strategies that an adviser will explore with you.
It's important to look at whatever investments you choose as a long-term investment venture, and avoid becoming fixated on short-term performance.
The table below shows how various asset classes have fared over a 10-year period, based on an initial investment of $10,000. The key takeaway is that they all grew over this period, even though there were peaks and valleys along the way.
Performance of various asset classes over 10 years
The purpose of holding a cash reserve is to reduce the likelihood that longer-term growth investments will need to be sold at unideal times to meet short-term capital requirements.
Share investing is generally a long-term exercise, typically for at least seven years. Historically, shares have outperformed all other asset classes over the medium to long term. While values may have risen over the long term, they often experience periods of short-term volatility, causing share prices to fluctuate.
When you invest in a managed fund, you don't own the underlying assets directly. Instead, you own "units" in the fund. Managed funds allow investors to pool their money with an investment manager who has extensive research resources and experience. This allows you to take advantage of growth investments, such as Australian and international shares through the power and scale of pooled funds.
A regular savings plan and managed funds
A regular savings plan using a managed fund would enable you to invest your surplus income on a flexible basis and allows you to benefit from buying units of investment at different prices to help reduce the risk of mistiming the market.
An ETP is a type of managed fund investment option that allows investors to access a portfolio of securities that are traded on a stock exchange. They can also be called exchange-traded funds (ETFs).
Gearing your investments simply means borrowing money to invest. Gearing may be used to accelerate the wealth-creation process by allowing you to make larger investments than would otherwise be possible. The borrowed money can be invested in a number of ways, including shares, property and managed investments.
Caution! You may have to deal with a margin call
A poorly performi ng market generally means losses, which will be magnified by gearing. Losses can result in margin calls. A margin call is a situation where the lender will contact you to add money or securities to your account. Generally, this happens if the value of your portfolio falls below an agreed percentage of the loan.
Investment bonds (sometimes referred to as "insurance bonds") allow you to avoid the annual tax return associated with many investments because tax is paid on the earnings by the investment fund itself. If these bonds are held for 10 years or more, you are able to withdraw the value of the bond with no further tax payable. Each year, contributions can be up to 125% of the previous year's contribution without restarting the tax-free period.
If the investment is withdrawn before 10 years, you will receive a tax rebate that can be used to offset any additional tax payable. Insurance bonds are frequently used to help pay for children's education.
A managed account or separately managed account (SMA) is a portfolio of assets that is administered by a professional manager to achieve specific income and/or growth objectives on behalf of you, the investor.
Superannuation is one of the most tax-effective ways to accumulate wealth and save for retirement. Superannuation aims to maximise the growth and tax benefits of your investment dollar and is among the most attractive investment structures currently available.
Here are some popular strategies to increase your wealth in superannuation:
Why make NCCs?
You may have money on which you've already paid tax. So, why would you put this money into a superannuation environment where it will be taxed again? Because the earnings on your contributions will be taxed at 15% in a superannuation environment as opposed to potentially more if it's invested outside superannuation.
If you are self employed
If you are self-employed or work on a contractual basis, you may not receive employer-sponsored (that is, SG) contributions to superannuation. Therefore, NCCs can be a worthwhile way to increase your superannuation savings.
The bring forward rule
The bring-forward rule The bring-forward rule enables people under age 75 to make up to three years' worth of NCCs to their superannuation in a single income year. Essentially, they are bringing forward their annual caps and can put up to $330,000-three times the current $110,000 annual NCC-into their superannuation in a single financial year and not pay additional tax.
What is the superannuation guarantee?
The superannuation guarantee (SG) requires your employer to contribute a minimum percentage of your earnings to a superannuation fund. Currently, the rate is 11%, and it is set to rise to 12% by July 1, 2022.
This gives low-income earners the opportunity to have their personal superannuation contributions matched by 50 cents for each dollar contributed, by the Australian government up to a maximum of $500.
You are allowed to contribute on behalf of your spouse to their superannuation fund and receive a tax rebate. Eligible spouse contributions are treated as after-tax contributions. This means that because they are made after tax has already been taken out, there is no more tax to pay when the contribution is initially made. The partner making the spouse contribution may be eligible to receive a tax offset of up to $540 in each financial year.
The downsizer contribution provides a possible way to help manage retirement income. From January 1, 2023, individuals aged 55 or older may be able to choose to make a downsizer contribution into their superannuation of up to $300,000 from the proceeds of selling their home. However, there are a number of eligibility requirements which can be found on the ATO's website (ato.gov.au).
Having adequate income throughout your retirement is a fundamental part of enjoying this stage of life. Retirement income streams are a popular way of receiving regular tax-free income payments in retirement.
Here's a list of potential retirement income streams:
Personal insurance, such as life (death) cover, total and permanent disability (TPD), trauma and income protection, is a key part of an overall financial strategy. These types of insurance are designed to protect you or your family's current living standards in the event of death or disablement, trauma, an illness or injury that prevents you from earning an income.
Here's a list of the types of cover a financial adviser may look at recommending:
Life insurance often relates to unplanned events, which can have serious emotional and financial impact on your current lifestyle.
Life insurance "riders"
Some life insurance policies offer riders such as a child trauma or critical illness cover. This provides a payment to you if your child suffers a specific medical condition and you need to take time off work to look after them. It also applies if your child passes away.
A knowledgeable adviser will provide information about these riders to help you make an informed decision.
Purchasing insurance inside or outside superannuation?
The insurances listed above can be purchased either inside or outside of superannuation. However, depending on your choice, there are considerations that a good financial adviser should bring to your attention. For instance, there are potential tax implications regarding TPD claims if you consolidate your superannuation accounts.
An adviser will analyse your financial strategy and decide if it is necessary to take into account any Centrelink benefits that you may be eligible to receive.
Centrelink applies an assets test and an income test to determine the amount of social security benefits you may be eligible for. The lower calculated benefit payable under each of these tests will be the actual benefit received. If the lower calculated benefit is nil, no benefit is payable.
Here's a list of some potential benefits you may be eligible to receive:
Estate planning is the process of making sure your assets are distributed in accordance with your wishes after your death. If you don't have a Will, this process can be complicated, or the distribution of your assets may not reflect your intentions. For instance, your children, dependants or intended charity may receive less than you wanted.
Other estate planning considerations include powers of attorney, trusts and non-estate assets.
The Financial planning and families section of this guide contains a more detailed discussion of these aspects in a family context.
In order for an adviser to provide advice on the tax consequences of their recommendations, they must be registered with the Tax Practitioners Board (tpb.gov.au).
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