By Kristopher Meuwissen

The last 10 – 15 years has been a wild ride for investors. Especially for retirees who need income.

Let me explain…

Since the global financial crisis (GFC) there has been a huge monetary response from governments and reserve banks all over the world.

That response is to lower the cash rate and add stimulus into the economy in an “anything goes” effort to kick start growth and keep people in jobs.

This financial monetary easing has done a few things really well.

1. It has seen one of the largest international share market booms in history.
2. It has driven the cost of housing in Australia through the roof as people have had the capacity to borrow more money.
3. It has almost destroyed the ability for Australian retirees to rely solely on more secure investments like term deposits.

Coupling retirees struggle with generating income through traditionally low risk investments with a longer standard of living and an aging population and you begin to have the makings of a disaster waiting to happen.

So what specifically is the problem?

The problem is that someone who is 70 years old and has saved one million dollars over their lifetime is faced with a troubling choice.

They can keep their money in lower risk assets like term deposits and receive maybe $10-15,000 per annum (which is definitely not enough)

Or

They can start getting creative.

There is a case to be made (and in my opinion this is happening all over Australia) that a retiree should just buy a beautiful (and expensive house) with their money and reduce their declarable assets so they can start to receive the aged care pension. The current rate for a full pension for a couple is just over $37,000 per year.

That means that a retiree is going to be better off on the age pension by a factor of two – three times than by investing their money in low risk investments.

It seems like a no brainer, doesn’t it?

Except it causes a lot of problems later on in life and people are unaware of how much risk they are taking by implementing such a strategy.

A couple of the risks involved are:

• Property is a growth asset and having all of your money tied up in one asset means you could lose a lot of money if property prices drop
• Property may be too much for an elderly person to upkeep and thus fall into disrepair
• The retiree may need to be placed into aged care which then may cause issues with the sale of the property or it may have to be sold in an inopportune time.

So what are the other creative ways for retirees to be able to generate income, take less risk and potentially receive the pension?

Annuities:

An annuity is a guaranteed income for your lifetime or a fixed term and can make up the backbone of your retirement plans. Annuities also have the added benefit of a part exemption from Centrelink which means that you will be able o receive the pension sooner and in greater amounts.

Annuities can be great but they have some down falls such as locking your money away which limited or no access.

Fixed Interest (Bonds):

Similar to term deposits, fixed interest can provide income through retirement and should definitely be considered as a part of an investment make-up for a retiree. Whilst it carries a little more risk they definitely offer stability for a retiree and allows for some certainty with long term income.

High Yield Growth Assets:

High yield growth assets can take shape in the form of high income property (directly held or real estate investment trusts) and high income shares (think Coles, BHP and the big banks etc.).

High income growth assets should definitely make up a small part of a retirees income stream because without it, you are completely beholden to interest rates which looks like they are going to stay low for a long time.

The final word:

Your retirement income should be made up of mostly lower risk assets with a small amount of money in some growth style assets. This should allow you the security that you can receive the pension receive long term income which will allow you to have your money outlast you and not have to scrimp and save every last penny.

If you are wondering what mix of investments you should consider, you need to speak with an experienced and licensed financial adviser.

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.

If you’re heading towards retirement and want more resources and information about how to make sure you have enough money to fund the retirement you want, check out our other articles like this one: https://wealtheon.com.au/make-your-retirement-income-last-as-long-as-you-do/

Make Your Money Last A Lifetime

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.

• 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

By Kristopher Meuwissen

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.