kristopher

Make Your Money Last A Lifetime

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Make Your Money Last A Lifetime

Make Your Money Last A Lifetime

For anyone who was ever paid fortnightly or monthly, the need to budget to ensure you had enough money to see you through until the next payday was essential. In many ways, a retirement income can be similar, albeit within a much longer timeframe.

Research shows that the biggest spending years are at the start of retirement.1 This is when the newfound freedom that comes with retirement can translate into more travel, home improvements and more time to do the things we have long anticipated.

That can also lead to anxiety about having enough money for the future and can stop us truly relaxing and enjoying this early stage of retirement.

With the average time spent in retirement now exceeding 20 years, income worries can increase as you age. This is shown in the YourLifeChoices’ 2018 Retirement Income and Financial Literacy Survey, where almost half (48 per cent) of the 5,064 respondents were concerned their savings would not last in retirement.

Lifetime annuities can help to reduce these concerns. They provide a secure, guaranteed income for life and can form the foundation of your retirement plan. They act as a safety net ensuring you will receive income for life, regardless of how long you live or how investment markets perform.

A lifetime annuity should be seen as one of several income streams you can put in place to help make your overall finances go further to support your lifestyle and changing retirement circumstances.

When it comes to weighing up retirement income options, it can seem as if you’re being forced to choose between future income certainty on the one hand, and the potential for better investment returns on the other. By layering an annuity with other retirement income streams, you can achieve the best of both worlds, with enough income certainty to give you peace of mind and a degree of flexibility with your other investments.

The Trade-Off Myth

A comparison of lifetime annuities and account-based pensions is often completed with the aim of choosing one product over the other. As each product has different characteristics, it may be worth considering how these features can help meet your retirement income needs.

With account-based pensions, there’s the opportunity to invest your balance according to your risk return preferences. Based on your risk-return preference, some investment choices may be linked to market performance. These market-linked investments offer the possibility for growth. However, if markets become volatile, your retirement savings and income might not last the distance.

Lifetime annuities are protected from market volatility and offer an income that’s guaranteed, even if you live longer than expected.

Remember that choosing an annuity for increased security of income doesn’t mean throwing out the account-based pension option altogether. A comprehensive retirement portfolio should include a range of strategies to provide a secure income, as well as income invested for growth, in order to take care of the occasional extras and one-off expenses.

Taking Care Of Essentials

Lifetime annuities can play an important role in securing a layer of income to meet your essential needs.

Together with the Age Pension (if you are eligible), guaranteed income payments from a lifetime annuity can help ensure you have the income you need to cover the essentials, such as household bills, groceries and medical expenses.

Income from a lifetime annuity is protected from market volatility and, if you’ve chosen to link your payments to the yearly changes to inflation, it will allow you to continue to afford tomorrow what you can afford today. When you can be certain you have the cash flow to pay for those essential costs indefinitely, you take a lot of the stress out of living – and being retired.

Discretionary Spending

Once you’ve calculated the cost of meeting those essential needs and securing an income to match, you can explore ways to invest any remaining savings. By selecting a combination of growth and defensive assets, you can develop a second income stream for your discretionary extras – things such as holidays overseas, dining out, upgrading your car and household renovations.

While this sort of income stream can add a lot to your quality of life, particularly in the earlier years of retirement when you can expect to be more active, you won’t be relying on these market-linked investments to make ends meet.

With a well-planned retirement income strategy, and the right investment solutions to meet your cash flow needs and lifestyle goals, you can have the peace of mind that you’ll be covered for life.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

 

References

1 Spending patterns in retirement. Challenger Retirement Income Research April 2018.

How to Plan For an Unexpected Partner Leaving From Your Business

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A guide on buy/sell agreements and insurance ownership structures by Kristopher Meuwissen

 

The premature death, disablement or long-term serious illness of a business partner is one of the most overlooked but preventable business risks I see business owners take time and again.

Let’s set the scene: you and your partner/s are running a great business, you’re making money, you get on well enough and you have big plans for the future. You have overheads, stock and loans but overall, you have gone from success to success and you split the workload, decision making and responsibilities with your partner/s equally.

Then, out of nowhere your business partner (let’s call him Fred) has a heart attack driving home from work. Fred is rushed to hospital and despite the best efforts from everyone working at the hospital that evening, Fred tragically passes away, leaving a wife and three kids who are all school aged behind.

You and Fred have been putting everything into the business and whilst you both have some personal assets, there is no doubt that the business is the biggest asset and source of income for you both – so what happens now?

Well, if you haven’t got a buy/sell agreement in place, you will have a limited amount of control over what happens next, but fundamentally, there are only a few options available.

Option #1 – Work Twice As Hard: You can pick up the slack of Fred’s half of the work, responsibilities and decisions whilst his family continue to be provided with their entitled share of the profits and assets. This may not be an option as Fred’s wife may want to sell her share of the company to access capital, however.

Option #2 – Take On More Debt: Ok, you have decided that the workload is going to be tough but doable. You might not get as much time with your own family but you know that your business is going to be great so you come up with a fair figure to pay to Fred’s family and you go to bank looking for a loan. The bank is happy to provide you with this credit but you are going to have to put your family home up as security and take out an unsecured line of credit for the outstanding amount. The interest bill is high and all of a sudden you are taking a huge amount of risk. Sure, the reward is great, but what happens if things don’t go as well as planned?

Option #3 – Take On A New Partner: You have realised that the risk is huge and you don’t want to put the family home on the line (it has taken you 10 years of hard work to pay it off). You have discussed it with your family and decided that the best thing to do is to bring on a new partner. One problem though, who is going to dive in with you and what if they have no idea what they’re doing? What if you can’t stand working with them after a few months?

Option #4 – Sell everything: As much as you wish it wasn’t so, you can’t stand the idea of option 1, 2 or 3 so you decide that you are going to sell the business and all the stock. You approach a business broker to try and find a new buyer. After 12 months you finally find someone (all this time you have been basically doing option 1 anyway). They purchase your business and you walk away with a bit of money in your pocket as well as an obligation to work in your business for the next 6-12 months during a ‘handover period’.

So, what is the way to avoid all the heartache, stress and financial risk or loss?

The easiest way to prepare for the unplanned exit of a partner from a business is to have a rock solid buy/sell agreement (BSA) with buy/sell cover in place which insures against the event of early death, disablement and serious illness of a business partner. This should be reviewed every two years to make sure that it is still relevant and cost effective.

What are the benefits of having buy/sell cover in place?

  1. Can provide a tax-free lump sum benefit to the business, the outgoing business partner or their family which makes the transition of ownership seamless and without the need for massive business restructuring or debt.
  2. Alleviates potential cash flow issues.
  3. Can be used to repay business or offset loss of goodwill.
  4. Can provide for loss of revenue.
Buy/sell cover can be held in a number of ways, such as:
  • Self-ownership
  • Cross ownership
  • Insurance trust ownership
  • Family trust ownership
  • Company ownership
  • Superannuation fund ownership

Each of these structures have their own benefits and potential disadvantages, so it is really important that you speak with a professional who understands these structures to make sure that your buy/sell cover is cash flow effective, tax efficient and is going to be accessible after claim.

You will need to work out how much cover is appropriate in each situation. An adviser who works in this area should be able to help you work out how much cover you will need based on EBITA and goodwill.

The Final Word

It is crucial that your buy/sell cover is underpinned by a legally enforceable buy/sell agreement. We recommend that you introduce your financial adviser to your lawyer so they can collaborate and agree on a correct structure that works for your business.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

Creating a Financial Safety Net Is 50% Insurance and 50% Asset Creation

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Creating a Financial Safety Net Is 50% Insurance and 50% Asset Creation

By Kristopher Meuwissen

We all know that protecting your income is important. You have been told a thousand times that you need to make sure that you have enough in case you can’t work anymore. So naturally people think that when I talk to them about income protection, I’m talking to them about insurance.

Well, they are only half right. There are two ways that you can protect yourself in the event of unplanned illness, injury or death.

The first is to pass on the risk to an insurance company which is the most common type. This includes personal insurance covers such as Life, Total Disability, Trauma and Income Protection. These covers range in cost, definition and quality. They can be owned individually, by superannuation or by a company (see our article that explains the difference between different covers).

The second way is to ‘self-insure’. Simply put, you have enough income-generating assets that it no longer matters if you work any longer.

So when you speak to a financial adviser about creating a financial safety net and they don’t mention asset creation, you need to get a second opinion.

The ultimate aim in self-insurance is to have an income coming in from one or more assets, which can support you or replace your employment income. Examples of these may be investment properties that yield rent, or owning businesses (shares) that pay you dividends from profits. You may already own this style of assets and not be aware that they could grow into assets large and stable enough to provide you an income.

This is the fundamental basis of superannuation in particular – the government forces you to put aside enough assets to fund you during retirement. But for most people, super alone isn’t going to be enough, and you’re also going to have to wait until your 65+ to get it.

People have said to me in the past, “Kris, if I saved all of the money that I have spent on insurance, I would have thousands by now”, and for the most part they are correct, but part of the problem is that they are too exposed to risk at that point to not have insurance.

 

So why should you have a plan that involves insurance AND asset creation?

 

The reason is simple, you will be in a better financial position if you do so. You will have more assets and you will spend less money on insurance.

To understand that reason though, you need to be aware of two things.
The first is compound interest and the effect it has on your investments, and the second is how insurance is priced.

When you take compounding interest into effect, you can have a relatively small investment grow incredibly well over time. For example, if you have a $5,000 investment at 30 and you add $10,000 a year to it which grows at 8% per annum, you will have just under $500,000 by the time you are 50 years old (see figure below).

Now, take this information into account alongside the fact that insurance is price by occupation, gender but most importantly, age. What that means is a 50-year-old is almost guaranteed to be paying more for insurance than a 30 year old.

The traditional idea with insurance is that you won’t need as much as you get older because you will have paid off your mortgage and you won’t have as many dependants in the house, but times have changed.

More and more Australians are entering into 30 year loan terms in their 40s (and the cost of housing has ballooned dramatically) and many households are having kids later and later which is meaning that people are holding onto their insurance later due to necessity of liabilities and dependants.

By having a risk strategy that includes wealth creation, you should be able to reduce your insurance costs and generate an income from your investments precisely when insurance costs become extra expensive.
Keep in mind that it is a sliding scale, and the more assets you have, the less cover you will require. But the opposite is also true. The less assets you have, the more insurance cover is required.

 

What is the right asset creation strategy?

There are so many ways that you can build your assets. Beware the ‘get rich quick’ schemes and the “I bought 5 properties in 5 years, let me show you how” spruikers. No matter what your circumstances are, it is important that you consider the following:

  • Have a combination of income and growth assets
  • Reduce risk by having a lot of different types of investments
  • Don’t buy investments that are going to keep you up at night
  • If you don’t understand an investment, research it thoroughly – complexity doesn’t equal quality (you need to understand why it is going to work for you).

 

The Final Word

Protecting yourself and your family financially is a touch more complex than calling an insurer you see on the TV and getting some quick life cover. Your considerations need to expand beyond the traditional methods of risk planning.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

Andrea’s Claim

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Andrea’s Claim – An Insurance Claim Case Study By Kristopher Meuwissen

 

*Names changed for privacy

What I’m about to tell you is the story of the first ever claim on insurance that I helped one of my Melbourne clients through. I was much younger then and predominantly giving insurance advice to clients.

I started working with a mother of two aged in her 40s, let’s call her Andrea. Andrea had a small loan against her home with a young family of two daughters, who were in their mid to late teens. Andrea was recently divorced. This meant that Andrea was the sole breadwinner of her family and household.

Andrea decided to take the step and get a full financial plan done, which we covered things such as her wealth plan, her insurance, as well as a retirement plan. When it came to her insurances we were covering her for income protection, life insurance, total and permanent disablement, and also trauma insurance. This all took place in about 2013.

Everything was going beautifully and smoothly for about two years. In 2015, I called Andrea and asked her how things were going, and to organize a time for us to sit down and review her circumstances, to check in to make sure that she was on the right track with her financial plan. It took me a little while to actually get a hold of Andrea, I’d called her a number of times prior to her answering the phone, and it had always gone to voicemail. Finally Andrea actually answered the phone. Andrea then told me something, and I’ll never forget the way that I felt.

Andrea told me on that phone call that she had bowel cancer, and whilst it wasn’t really extremely serious, that she was currently receiving treatment for it, and it looked like the doctors were going to have to operate. Andrea asked me if it was okay to postpone our review during this period of time as she just didn’t feel well enough to sit down and go through a financial plan. After initially being taken aback and being a little bit lost for words – because I’ve never had a client who had had a serious illness before – I asked if she was okay and what the prognosis was. She told me that whilst it was in its early stages, it was still very serious, and everyone was quite worried, herself included, and she was very distressed and very upset, and was also out of work for quite a bit and was only able to work a little bit at a time. I asked her a few medical questions about her condition, what it was called, and how much it had progressed, what her doctor said the prognosis was, had she seen a specialist, and straightaway after the phone call, I told her I’d call her back in the next hour or so, and have a look and see if there was something that we could do for her.

I called her insurer, who at the time, I believe, was AMP, and asked them if she had a claimable event, as it was a cancer, to which they replied that she had a claimable event under her trauma insurance as well as her income protection. I organized the paperwork to be sent to our office and prefilled in and gave Andrea another call.

I called Andrea and told her that she was going to be able to claim on her insurance, and the claim amount was going to be over $100,000 for the trauma policy, which is going to be tax free, and the income protection was going to pay her from the point that she was unable to start work, after a waiting period. She had a waiting period of one month, and so they were going back pay her two months’ worth of income protection payments, and then continue to pay her until she was back working full time.

Andrea, understandably, was beside herself. She was really upset on the phone and crying with tears of happiness that she was now able to take all the time off work and stop worrying about when she was next going to get paid and what was going to happen. It meant that she was able to wipe out the last little bit of her loan with an extra fifty-odd thousand dollars after the fact, that she was able to spend on making sure that she was getting better, and making sure that she was looking after herself.

She was also getting paid the income protection, which meant that her regular expenses were getting paid for, and she was able to keep on top of things during that period of time. Andrea in the end was very fortunate, and her bowel cancer claim didn’t go on for too long. She stopped claiming after 6 months when she was able to get back to work, and her cancer was in remission after her treatments.

The insurance payment allowed her to take the time and not worry about money. She was able to get better, help herself, and springboard into the next chapter of her life. Afterwards, Andrea had paid off her mortgage, had recovered from her cancer scare, she was able to reinstate her trauma insurance, and she still had upwards of $40k left over which she was able to put towards an investment account that she could start contributing to.

Insurance is not there to put you in a much better position than what you were in prior to claiming on it, and it is never a preferable option to have to claim. We always want our clients to be fit and healthy, but it is a bittersweet feeling to see a client get through a terrible event in their life without having huge financial burdens.

It really makes the process of the insurance worthwhile.

Have some questions? Want to know how it applies to you? Want a review of your personal situation? Click here to book a Free 15 Minute Discovery Session, give us a call on 1800 577 336, or email us at hello@wealtheon.com.au.

Wealtheon Winter Wrap Up 2020

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Hey guys,

As we move into the much warmer weather of spring, we thought we’d look back on Winter 2020 and share our thoughts on this season.

This year has been a rollercoaster of financial, emotional, personal, and political events. Whilst sometimes it feels as though the last three months have been nothing but difficult and bad news, there’s also loads of positives and strengths coming out of it and launching us into spring.

Check out our market update, including what’s going on domestically and globally, as well as a bit of what to look forward to moving into the new season.

As always if you have any questions or want a chat just let us know.

 

Wealtheon Winter Wrap Up 2020

 

Market Update:

Great investment growth with most of the larger global markets growing between 5 and 8% in the last 3 months alone, with Australia included. Most of the world has brushed off a lot of the bad news about COVID-19 which I think is premature. Whilst I think that markets are reasonably valued, they are valued as such based on the hope that Australians can get back to work relatively quickly, and the COVID threat can be knocked on it’s head in a reasonably short amount of time.

I see some risks in the market, with continued high unemployment rates, and a current over-reliance on JobKeeper and JobSeeker from the current unemployed or stood down workforce. If we don’t see people getting back to work after Christmas and getting close to previous output, we might see some domestic market shocks, with the international listed markets providing a greater outlook for growth, provided that current global stimulus continues across a lot of the overseas markets.

Property market has remained relatively stable in most major cities. Whilst that is a strength, there are couple of weaknesses in that there has been a decline in demand and in foreign real estate investment and residential development meaning that there is a housing shortage looming, which sounds good in the short term for housing prices, but isn’t good for the broader economy.

Personal Update:

Personally Lauren and I have changed our headquarters from the Whitsundays to Victoria. We are still going to have a very strong presence in the Whitsundays, so nothing changes from the way that we work together as we can do everything online, and so long as numbers continue to fall, we hope to be back up in the Whitsundays by January or February next year. Looking at new business opportunities and maybe taking over a new practice in the new year, so watch this space as it may mean some extra services and we’ll keep you informed of anything along the way.

Interesting tit-bits we’re seeing:

Politics both at the state, federal and international level. There’s so much happening right now that I don’t envy any government leader, especially Daniel Andrews in Victoria because there doesn’t seem to be a right answer and governments at the moment are caught between trying to provide good health outcomes and protect people against COVID, but also ensuring that business and trade keeps moving and allowing the economy to springboard with relative ease.

Internationally we’re keeping our eyes on disputes with China, as they have been throwing their weight around on a few trade issues such as barley, beef and now they’re talking about putting sanctions and tariffs on Australian wine. This is concerning as it seems China is systematically targeting some of our most reliant export goods at a time where we’re not equipped to really retaliate. Former Australian prime minister Tony Abbott has just been placed in a key position in the UK’s department of trade and foreign affairs which is really good news and is fuelling rumours of greater UK and Commonwealth trade collaboration.

One of the biggest causes of opportunities and threats in global politics is obviously the November USA election. I still haven’t made up my mind as to what I think would be the preferable option, and this isn’t because there is a multitude of good options out there, I think that both potential outcomes of either a democrat or republican win is going to have severely polarising repercussions, and we have no idea what the fallout of these events will be. Watch this space.

If you’re feeling any concerns or hesitations about current domestic or international market conditions, please give me a call and we can discuss your investments and how you’re current positioned in the market, and we can make any changes if we need to.

Sources: