Insights Spring 2016

With a good financial plan in place , you’re already well positioned for a rewarding financial future. What’s more, it means you’ll be better prepared for major life events when they arise.

As JFK once said, ‘there is nothing more certain and unchanging than uncertainty and change.’ In other words, none of us knows what the future holds. But that doesn’t mean you should leave things to chance, especially when it comes to your finances.

Of course, everyone’s financial journey is different, but here are some major life events that many of us can prepare for in advance. And even if some of these milestones are already behind you, the next generations can benefit from your guidance and experience, and the lessons you’ve learned along the way.

Starting a family

Having a child is one of life’s great gifts. But let’s not forget how expensive kids can be, especially with the rising costs of education.

In fact, putting a child through private education from pre­school to Year 12 could cost as much as $400,000.1 And even with a public school education, you or your children, could still end up paying over $60,000 per child during their school years, when you take into account things like uniforms, tech essentials and extracurricular activities.2

It’s a good idea to get into the habit of regularly putting money aside, to stay on top of school fees and other expenses. The sooner you start, the longer your money will have to grow — and for potentially higher returns, you might even consider investing the money rather than simply putting it in a savings account.

What’s more, with rising rents and costs of living, there’s a good chance your kids will depend on you financially well into their adulthood. In Australia, at least 1 in 4 young people aged between 18 and 34 live with their parents3 — so it’s worth keeping this in mind when you’re planning for your family’s future.

Buying property

Whether you’re hunting for your first home, in the market for an investment unit, or helping your kids out with a place of their own, buying property is always a big financial decision — so plan it carefully before jumping in.

And with real estate prices soaring across Australia and the median house now valued at over $700,000 nationally4, you need to work out exactly how much you can afford to spend, long before you start picking out wallpaper.

The last thing you want is to be faced with mortgage stress for decades to come. That’s why it’s important to think carefully from the outset about how your mortgage repayment plan will fit into your overall financial strategy.

Next, you’ll need to save for a deposit, as most lenders expect you to pay 20% of a property’s value upfront. If you can’t afford that much, you might have to pay for lenders mortgage insurance as well, which can add thousands of dollars to the cost of your loan.

You’ll also want to consider which type of home loan is best for your financial situation —for example, a fixed or variable interest rate loan. Choosing a fixed interest rate can make it easier to budget your repayments, but it also means you won’t reap the benefits if interest rates drop.

Getting a wealth boost

There are going to be times in your life when some unexpected cash comes your way — like a bonus or maybe an inheritance. You may not know when it will happen, but if it does, you’ll want to be prepared so you can make the most of your windfall and avoid frittering it away.

One way to invest the money wisely is to make a personal contribution to your super, taking into consideration any contribution caps (the Government has proposed (not yet legislated) reducing these caps to $25,000 a year from 1 July 2017). Or, if your newfound wealth is in the form of a pay rise, you might consider putting a bit extra into super each paycheque through salary sacrificing. You can contribute up to $30,000 a year (or $35,000 if you’re 50 or older) from your pre-tax earnings (this cap includes compulsory super guarantee paid by your employer) — plus you could even save on tax, as these types of super contributions are usually taxed at the low rate of 15% rather than at your marginal tax rate.

If you come into money, there are other ways to invest as well, such as shares, managed funds, term deposits and bonds. Each of these is likely to give you a better long-term return than a savings account, but the most suitable investment options for you will depend on your financial situation and goals. Your Financial Adviser can steer you in the right direction.

Becoming a grandparent

After you’ve worked hard to give your kids the best start in life, what better reward could there be than seeing them have children of their own? As a proud grandparent, you’ll want to make sure the little ones, as well as your own children, are looked after financially when you’re gone — and that’s why estate planning is so important.

With the right financial strategy, you’ll be able to pass your wealth down to future generations. The first step is to create a will, which specifies how you want your assets to be divided and distributed after you pass away. Having a proper will can also help avoid disputes between your beneficiaries when the time comes.

Remember, your estate includes most things that you own — — so it’s worth taking stock of all your valuable assets, and updating your will regularly to reflect any changes in your financial or family circumstances. You might also choose to give Enduring Power of Attorney to a trusted family member, so they can manage your estate if you become mentally incapacitated.

But there are a few things that aren’t automatically considered part of your estate, such as your super and life insurance. For these, you’ll need to nominate your beneficiary or legal personal representative if you want them to form part of your estate. What’s more, any assets you own jointly with someone else will automatically pass to that person upon your death.

Retiring

Here’s some good news: the average life expectancy for both men and women in Australia is now over 80.5 And while it’s great that many of us can look forward to a long life, it also means we need to plan ahead so our finances will last the distance.

Even if your retirement plan is on track, or you’re already enjoying retirement, it’s worth being prepared in case your circumstances change. For instance, you could be made redundant and have to retire earlier than expected, or you might have to drop down to part-time hours for health reasons. On the flipside, during your retirement years you might take an opportunity to re-enter the workforce for a while.

It’s estimated that a couple needs $640,000 to retire comfortably, while a single person needs around $545,000.6 The smaller your nest egg, the more you’ll need to rely on the Age Pension when you retire, so it’s a good idea to grow your super as much as possible while you’re still working.

Depending on your circumstances, there may be different options for accessing your super in retirement. You could cash it out as a lump sum, set up an account-based pension, or buy an annuity that will give you a regular, stable income for life. Your Financial Adviser can help work out which option is best for you. And if your lifestyle needs change, your Financial Adviser will be able to adjust your strategy so you can get the most of your finances for many years to come.

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This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Should you wish to ‘opt out’ of receiving direct marketing material, please contact us.

1 Australian Scholarships Group, How much can you expect to pay for your child’s schooling? 2016.
2 Australian Scholarships Group, How much can you expect to pay for your child’s schooling? 2016.
3 Australian Bureau of Statistics, Australian Social Trends, 2013.
4 Domain Group, Domain house pricing report, June 2015.
5 Australian Bureau of Statistics, Life expectancy and deaths hit historic highs, 2015.
6 Association of Superannuation Funds of Australia, Retirement standard, February 2016.

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