The costs of raising children from birth until adulthood are frequently reported by media and vary widely depending on whether you want your children to go to public or private schools and whether they plan to go to university or college. We’ve put together a few ideas on how to save for your kids education.

For example, if you send two children to a private high school which costs an average of $20,000 a year for each child, by the time they both graduate you will have spent $240,000 on school fees. And that’s not counting extras such as school uniforms, trips and sporting clinics.

Public schools are much cheaper but there are still extra tuition fees, textbooks, uniforms and school camps to pay for.

The cost of going to university or college can also vary. If your child is eligible for HECS-HELP (a government loan available to tertiary students) they can choose to defer payment of university fees. Even if they don’t pay fees upfront, your child will have to pay for books and materials, union and sports fees and transport costs.

The earlier you start saving for your children’s education, the better. Education costs are usually a long-term goal that can take more than 5 years to achieve.

There are four key steps to set up a savings plan for a child:

1. Set a savings goal – decide what is being saved for (eg education – type of education and at what level, private schooling and/or tertiary education?)
2. Set a budget – how much needs to be saved to reach the required goal
3. Choose an investment option – decide which product or where the money should be invested
4. Who should own the investment – whose name should it be invested in.

To help you reach your goal, you could put your savings into:

• Direct investments such as shares
• Managed funds or insurance bonds
• Term deposits or savings accounts
• Education funds

Starting your savings plan sooner makes it easier to keep your savings growing, reducing the risk that you may have to fund any shortfall when the school fees are due.

This is due to the benefits of compounding interest.

Compound interest is like a layer cake for your savings. You earn interest on the money you deposit, and on the interest you have already earnt – so you earn interest on interest.

An example of an account which earns compound interest is an online savings account which pays monthly interest.

If you invested $10,000 at 5%, you would earn $2,834 in compound interest after 5 years, giving you a total of $12,834. This is because every month the interest is added to your account and you’ll earn interest on the interest.

Compound interest on a $10,000 investment at 5% per year (compounding monthly)

However, before you decide to put your money into any saving options you should consider your other financial obligations.

For example, you may be better off repaying your non-deductible debt such as the mortgage or car loan first, before you start saving.

Your financial planner can assist you will all of these decisions, ensuring that the future of your child’s education is off to a great start.

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.

Account-based pensions are the most popular type of retirement income stream for retirees. They offer both flexibility and ease of understanding and can be purchased from a professional fund manager or run within a self-managed superannuation fund.

What are account-based pensions?

An account-based pension is basically an income stream that is payable from a superannuation fund.

Anyone with accessible superannuation money – that is, “unrestricted non-preserved” superannuation money – can either rollover to, or directly purchase, an account-based pension. You don’t necessarily need to be retired to start the pension but you do need to have met a condition of release so that your money becomes accessible. In some cases, you can open an account-based pension even before your superannuation money becomes unrestricted non-preserved (under transition to retirement rules) but you should seek help from a financial planner to determine if this is appropriate for you.

You can purchase an “off the shelf” account-based pension from a fund manager, or alternatively you can commence one within your own self-managed superannuation fund.

How do account-based pensions work?

Account-based pensions operate similarly to a regular bank account in that investment earnings top up the account balance, and withdrawals in the form of regular pension payments reduce the balance.

Pension payments within a financial year must be at least equal to the legislated minimum amount (based on age). There is no maximum on a standard account-based pension so you can choose how much you want to receive. You can elect to receive payments at regular intervals, for example, monthly, quarterly, half-yearly or annually.

In addition to regular pension payments, lump sum withdrawals – known as ‘commutations’ – may be made from account-based pensions unless the transition to retirement rules apply.

Account-based pensions can be invested in a broad range of investment options that can be selected to suit your needs. They allow investment in the major assets classes such as cash, bonds, shares and property in addition to alternative assets classes, if desired and depending on the offer by your selected provider.

Why are account-based pensions so popular?

The popularity of account-based pensions is due to tax concessions but also due to their flexibility and versatility. Account-based pensions allow flexibility in relation to income, access to capital, investment options and payment possibilities in the event of your death.

Each year you need to take a minimum pension payment from your pension but you have a great deal of flexibility to increase the pension payment anywhere up to 100% of the account balance. How much you take will impact how long your pension lasts. If you need additional money in a particular year you can take out extra by increasing income or taking a lump sum commutation.

If you are age 60 or over and the pension is paid from a ‘taxed’ source, pension payments and commutations will also be received tax-free. If you are under age 60, tax may apply to pension payments and commutations, although a portion may be tax free and/or entitled to a 15% tax offset.

Investment earnings on the underlying assets of an account-based pension are added to your account entirely tax-free but you are only able to roll over a total of up to $1.6 million of superannuation savings to start retirement income streams. If you have higher savings in superannuation, the balance will need to remain in accumulation phase (with 15% tax) or be taken out of superannuation.

It is also important to note that the tax-free status of earnings will not apply to any pensions paid under the transition to retirement (TTR) rules. The earnings in a TTR pension will be taxed at 15%.

In the event of your death, the account balance may be paid to your beneficiaries or estate as a lump sum. Some beneficiaries may be eligible to select to continue the benefit as a pension. This is a complex area and advice can help determine the best option.

Your situation can be examined to determine the taxation implication of account-based pensions.

What about the disadvantages?

Probably the biggest disadvantage of an account-based pension is the risk that your savings will not last your lifetime and your income will stop. This will largely be determined by your starting balance, the investment performance of the underlying assets and how much you choose to take out each year.

There is also a limit on how much money you can have in account-based income streams.

Illustration of an account-based pension

Consider an account-based pension purchased by a 65-year-old for $300,000. Suppose the assets earn 7% per annum and the annual pension is elected to be $20,000 in the first year, indexed at 3% each year thereafter.

The following graph indicates how much pension would be paid each year as well as how the account balance changes over time.

Is an account-based pension for you?

For most retirees, account-based pensions will play a significant role in generating retirement income.

The attractions are undoubtedly the flexibility and the tax-free environment from age 60. It makes sense to consider investing part of your retirement savings in an account-based pension to provide flexibility to meet your changing needs but with advice to ensure your individual needs are met most effectively.

Get in touch if you want any more information about account-based pensions – we can explain whether an account-based pension is appropriate for you. 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.

Reducing Risk in Your Portfolio

By Kristopher Meuwissen

As the title suggests, this article is all about removing or reducing risk in your portfolio and that means you need to understand what RISK is for YOU.

Allow me to elaborate by using an example.

The average person faces many different types of risk in a day. Some risks we all face such as the weather and general hazards like tripping over that box you have left next you’re your front door for a week (Yes, we all that a box at our front door). But some people take a lot more risk in their daily lives such as electricians with live wires and carpenters using saws and working at heights.

The reason why I am explaining this is because you will have often have different investment risks that are intolerable to you that you in particular need to avoid. For example, a retiree needs to avoid loss of capital as much as possible which makes a large use of cash and bond assets more useful whereas a 25 year old needs to protect themselves from the effects of rising living costs which makes cash investments far less desirable.

So what are the common types of risk that may affect your portfolio?

The table below summarises some of the risks that an investor may incur when investing money in different markets. Please note the list below is not extensive and that your exposure to risk is not limited to the list below.

Parts of the above table are extracts from “Understanding Investment” a joint publication from the FPA & Macquarie Investment Management Limited

Although risk is usually associated with the probability of losing all or part of your capital, in investment terms it is the likelihood of achieving or not achieving your expected returns or goals in a given time period.

So, whenever you make an investment decision it means that you are prepared to take a risk of some sort. This decision will relate to the amount of money you have to invest and your existing circumstances and your needs for the future.

You will never be able to remove all risk from investments but by understanding which risks are intolerable, you can start to pull the right levers to mitigate against catastrophe.

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.

You can also check out our other articles to get you started on your financial journey here.

Understanding the Costs of Starting A Family

Understanding the Costs of Starting A Family is an article written by Kristopher Meuwissen, Principal Adviser, Founder and Director at Wealtheon Financial Services.

The financial challenges of parenthood

Right now it is estimated that the cost for raising a child to age 18 is widely varied from $300,000 even up to $1 million. Whatever the true figure may be, any parent knows that it is a significant amount of money, especially if you are not prepared for it.

Short term financial issues

Regardless of whether the new addition to the family is carefully planned or a joyful surprise, often one of the first issues to discuss is the real impact of one partner stopping work or reducing their work hours.

Luckily, options exist to help parents, such as government support in the form of paid parental leave and the baby bonus, as well as employer sponsored parental leave. It is not always a matter of moving from two incomes to one, but eligibility for paid leave and its financial benefits does vary widely, making it important to assess the impact on the family’s regular income in each case.

Anticipating the drop in weekly household income is one thing; estimating how long it will be reduced is also important. A mother may be planning to return to work quite soon, perhaps for financial or career reasons. While that may restore the family income to its previous level, you might also need to calculate additional costs of that such as childcare.

Different questions are raised altogether when there are no immediate plans for a return to the workforce. In addition to claiming all your Centrelink parenting benefits and tax concessions, you may want to consolidate your debts and borrowings to match the tighter budgeting.

Adjusting your family and financial priorities to deal with your new challenges is a natural progression when your daily life starts to revolve around your new baby. It is good to know that by sitting down with an adviser it is possible to get a head start, before your time and energy are taken up with the physical demands of parenthood.

Here at Wealtheon our advisers have the experience to help you plan for these changes, work out how and when to make adjustments, and to assess and manage their financial impact. If there are tax benefits you can claim, your adviser can work with your tax professional to make sure you are getting the most out of your new situation.

Protecting your future

Taking the time to review your insurance needs with an adviser is a must. Making sure your future income stream is well protected through income protection, life and disability insurance is so important, especially if you plan to have one wage earner rather than two, or to take on new costs like childcare.

By taking this approach and getting advice, you will have recommendations on the most appropriate insurance policies for your situation, policies which match your needs and budget and which can be held through your superannuation fund to reduce the impact of premiums on your cash flow.

You can take advantage of our adviser’s knowledge to work out the best way to start saving and preparing for the cost of your child’s education, and we can help you calculate what you need to invest each year to reach your specific savings target.

You get a head start on the many options available to you by getting in touch sooner rather than later. Taking this important step provides you with an opportunity to go over your questions, aims and objectives with an experienced professional so that you can look forward with confidence to the pleasure and challenges of parenthood.

If you’re in this phase of your life you might also want to check out our case study of some of our amazing clients, Tim & Sally, who were just starting out their lives together when they got some financial advice to help them make sure they were on the right track. Read it here.

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.

Check your industry fund insurance definitions.

The world of insurance can be confusing and full of jargon which can make it hard to really know what you are and aren’t covered for.

If you have an industry super fund that was opened for you by your employer, you may not be aware of exactly what cover you have, and as such you need to be careful with the insurance that was offered ‘standard’ inside that fund.  Standard or default cover can often be obscure or have many ‘grey areas’ or ‘obscure exclusions’ that you may not be aware of.

The Australian Securities & Investment Commission (ASIC) have just completed some extensive research into this type of insurance offered by these funds and found that 3 out of every 5 claims (yes, 60%) were declined because they did not meet the funds definitions.

Poor claims handling processes also contributed to some consumers withdrawing their claims: one in eight, or 12% of claims lodged with insurers did not proceed to a decision.

It’s critical that the cover you have in place is up to standard and that you (and your family) have 100% certainty that money will be there when you need to claim.

Requesting a copy of your funds’ Product Disclosure Statement and checking the definitions of disablement is a great place to start.

If you feel as though you need more help to check your industry fund insurance definitions, get in touch with your super fund or a financial adviser who can conduct research into your fund and insurance to give you peace of mind that you will not be caught up in these unfair claim decisions.

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.