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Income Protection - A Valuable Asset

In most cases, your home is not your most valuable asset; it's your ability to earn an income

With escalating property prices continuing to make headline news, it's no surprise that many people consider the family home as their most valuable asset. It's certainly one they fully insure. But have you considered that, over your lifetime, your earning capacity could amount to millions of dollars - putting the value of your family home well and truly in the shade.

The math on annual income

For instance, let's imagine you're currently aged 40 and are married with two kids, earning $150,000 a year as a logistics manager. Now, let's say that you plan to work until you're at least 65 years of age, and you can expect annual increases of a modest two per cent each year.

Over the next 25 years, your accumulated earnings will amount to more than $4.8 million to cover you and your family's lifestyle and living expenses – everything from the mortgage, to family holidays, your car, school fees, and more. Yet only one in three Australians has income protection insurance, putting many families at risk.

Peace of mind

While injury or illness may stop your income, it certainly won't stop the bills. Indeed, Australian cities are among the most expensive in the world. This high cost of living, coupled with the fact that Australians have a one in three chance of being disabled for three months or more before the age of 65 provide compelling reasons to insure your income.3

Affordability

These days, you can tailor income protection insurance to suit your circumstances and budget. If cash flow is a struggle and finances are tight, you might prefer to get income protection insurance through your super fund.

These days, you can tailor income protection insurance to suit your circumstances and budget.

Being insured through super is generally an easy and more cost-effective option although the amount of cover available is limited compared to holding income protection separately. So if you're an established professional with a high income, or if you want to maximise your retirement savings rather than dip into them for insurance premiums, holding income protection insurance outside your super will probably be more beneficial.

It's also good to know that, unlike other types of personal insurance, income protection premiums are tax deductible.

Two other factors influence the cost of income protection:

1. Waiting period

Policies typically come with a waiting period – and the shorter this is, the more expensive the premiums will be. So if you have enough savings to manage expenses for three or six months, it's worth extending this waiting period.

2. Length of benefit period

You can cover your lost salary for a specific length. The greater your benefit period the more expensive your premiums will be.

To find the most appropriate way to protect your most valuable asset, it's a good idea to talk with your financial adviser.

 

In 2011, the Reserve Bank of Australia set out to create a policy-induced housing construction boom to fill the hole being left by the collapse of the 2003-2011 mining construction boom. It cut interest rates 12 times between November 2011 and August 2016 to levels never before seen in Australia, to lift house prices and lower borrowing costs to encourage development.

House prices are important for Australian investors for several reasons. The local economy and stock market are heavily reliant on the local banks remaining solvent and lending. Our big banks make up one third of the local stock market value and they pay one half of all dividends.

The vulnerability of banks

The problem with the banks has four main elements:

  1. they are extremely highly leveraged (at around 20:1, for every $1 of debt there is 5 cents of equity capital)
  2. they are highly exposed to the local housing and housing construction industries
  3. they are heavily reliant for funding on fickle foreign markets, as Australia's conduits for foreign debt, and
  4. mortgage interest rates are extraordinarily low and rising rates will put pressure on highly geared borrowers.

The pattern of mining booms switching to housing construction and lending booms that collapse in bank bad debt crashes and economic recessions is not new. The 1870s-80s mining boom (which gave birth to BHP, Rio and many others) turned into the 1880s housing construction and lending boom which collapsed in the bank bad debt crash in the early 1890s, triggering a deep economic depression. The 1960s mining boom turned into the early 1970s housing construction and lending boom which collapsed in the property finance crash in 1973-1974, triggering the deep 1974-1976 recession. The early 1980s 'mini-resources boom' expanded into the mid-1980s 'entrepreneurial boom' which after the 1987 crash turned into the late 1980s construction and lending boom which collapsed in the bank bad debt crisis in the 'recession we had to have' in 1990-1991.

Problems looming in apartments but not houses

In each of these cycles, Melbourne saw the worst of the excesses in construction and lending and suffered worst in the crashes, in terms of price falls, vacancies, bad debts, business failures and unemployment. In the current cycle Melbourne is once again leading the charge (along with Brisbane), while the excesses are less severe in Sydney and other cities.

The main problem is not in the broader suburban housing market but in high-rise construction. As in all previous cycles, the current over-construction will result in high vacancy rates, boarded up building sites, properties lying empty for years, falling rents, falling prices, bankrupt developers and bankrupt over-extended buyers. As in past cycles the problem for the banks will mainly be property developers, not just the highly-leveraged buyers.

This has happened several times before and it will happen again. The risk for investors is that the collapse in the high-rise market will probably also infect the broader economy and the broader housing market as well.

Our broad housing market has not suffered big crashes as it has in most other countries. Our high rates of immigration and population growth and extreme concentration of population in a few large diversified ities ensure broad house prices have tended to rise rapidly for a few years every decade or so, and then go sideways in real terms for several years.

 

There are regular price falls of 10% to 15% or so but no major broad-based collapses like in the US and many other countries. We easily forget that as recently as the seven years from 2004 to 2011, there was no real growth in house prices following a surge from 1996 to 2004. We have had five periods since 1900 when real house prices have not risen for a decade or more.

While the Melbourne and Brisbane high-rise markets are probably heading for another sizable collapse similar to past boom-bust cycles, the most likely outlook for the broad housing market is for modest price falls in housing and then many years of no real growth, rather than a sudden major crash.

 Ashley Owen is Chief Investment Officer at independent advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is general information that does not consider the circumstances of any individual.

How doctors and dentists use SMSF's to buy property

 Medical professionals have been using their super to invest in property for years.

Medical professionals have been using their super to invest in property for years

 by Steven Enticott 

When most people think about acquiring property in their super fund, they assume that the only way to do it is via limited recourse borrowing arrangements (LRBAs), a brittle and unyielding arrangement that self-managed super funds have been using to acquire property since 2007.

They are wrong. 

Investors who wish to purchase property actually have other options available to them apart from LRBAs through structures known as geared and ungeared unit trusts, which have been especially popular among medical professionals for many years now.

Like all strategies for SMSFs that have a degree of complexity, there are conditions that must be met but these hurdles can be surmounted with some professional advice.

For a geared unit trust, it involves SMSF parties purchasing units in a unit trust that  has borrowed to purchase a property. The big condition, however, is that the purchasing SMSFs are only permitted to buy and hold those units when one SMSF does not have control over the entire unit trust.

In other words, as long as you or a family member, associate or business partner owns 50 per cent or less of the units then you do not meet the definition of having control – investing in the geared unit trust by your SMSF is permitted.

Cheaper option

The big benefits start with unit trust loans and structures often being much more straightforward than your average LRBA. Simpler means cheaper. These types of loans also save you the hassle (and potential cost) on the transfer of the title back to your super fund when an LRBA is repaid. It is also easier to transfer units in a unit trust than it is to transfer titles if someone wants to buy in or sell out – often with stamp duty savings – especially with minor shifts in the ownership.

Let's look at a basic example of how a geared unit trust might work. 

Peter, Andrew and Judy are all great friends. They are not in business with each other in any way, nor are they related or associated to each other in any way other than their friendship, similar careers and investment horizons.

They all have their own SMSFs and have found an investment property they would like to buy using their separate funds. The value of the property is $500,000, including all buying costs. 

They have set up a unit trust to purchase this property with a loan from a bank to the unit trust of $290,000 and the other $210,000 to fund the purchase is raised from issuing 210,000 $1 units and their SMSFs contribute the $70,000 each to purchase those issued units.

Keeping it even simpler, if gearing is not required then the total capital for the purchase can be raised through the issuance of units to Peter, Andrew and Judy's SMSFs.

However, if some parties require gearing and some don't, those that do can individually use an LRBA arrangement to buy units in the trust while the others can purchase them outright in their SMSF or in any other entity or individual's name outside of an SMSF.

Medical example

Let's extend this example to a group of doctors looking to buy their practice premises. They buy a building valued at $2 million, including all costs, using a unit trust. The senior partner has a substantial superannuation balance and uses $1.2 million to take 60 per cent of the units on offer. As this is a non-geared unit trust purchased with cash, having control of the trust is not an issue.

The senior partner was also interested in retaining key staff and offered his colleagues the remaining 40 per cent of the units. They all sought independent advice on the proposal. The junior partner took 20 per cent of the units while two younger medical professionals took 10 per cent each.

The junior partner bought $400,000 worth of units with her SMSF fund balance in the same way the senior partner did, as she had significant savings. However, the two younger members of the practice did not have the $200,000 in their SMSFs. 

One decided to borrow $200,000 to buy their units outside of superannuation in a family trust. While the other wanted to keep 10 per cent in their SMSF and used $100,000 of cash in their SMSF to purchase their units, they took out a third-party LRBA loan (using equity in their home) to fund the other $100,000 worth of units, equating to a 50 per cent loan to value ratio.

The 50 per cent was within the safe-harbour provisions set for LRBA arrangements from third parties in the Tax Office guidelines so they did so safely. 

Of course, it's critical that before any lending arrangement is considered an SMSF must get solid advice from someone who can evaluate the proposal and consider all the options, as there are always other ways.

 

Estate planning - more than just a will

Estate planning: more than just a will

 

 Estate planning is something everyone should consider.

Since no one knows when they will pass away, estate planning should be on everyone's agenda.

If you pass away without a valid will, state laws determine how your estate will be administered. And it may not necessarily be as you would expect.

Blended families

Early estate planning is even more important for people who have a blended family, have been divorced or have children from more than one relationship. In these situations, there are a range of competing interests.  You may want to make different provisions for family members and those family members may have quite different expectations 

Whilst not always easy, it may help to discuss your plans with members of your family. Later disputes may be overcome by setting expectations in advance. 

Not just a will

An effective estate plan includes more than a will. A substantial part of your estate may not be subject to your will. If you do not allow for this then distribution of your estate may be very different from what you expected.

Jointly owned properties go to the last surviving owner, so it's important to understand how such assets are held. Assets held in trusts and superannuation funds are not included in the estate that is covered by a will and need to be dealt with separately.

There are about 600,000 family trusts in Australia. People who have a family trust need to understand who takes control of the structure after their death. Often the key here is who is the appointor of your Trust?

And now with more than 570,000 SMSFs, controlling more than $600 Billion in assets there is a huge build up of wealth in these funds. So a smart estate plan will include your will and a plan to manage and deal with your interests in Family Trusts and superannuation.

Many superannuation funds carry life insurance policies, causing even funds with relatively low member balances to have significant value in the event of death. People need to approach their superannuation fund and complete the right paperwork to identify who should receive the fund's assets when they die. For self-managed superannuation funds, a death benefit nomination form must be completed to direct how assets will be distributed. 

Life cover

Insurance can be used as an estate planning tool. 

People with a policy outside of superannuation should check with their financial adviser to make sure the payout will be directed to the intended beneficiaries. Life insurance payouts from policies held outside of a superannuation fund may go directly to the person named in the policy, bypassing the estate.

An estate plan can also include an enduring power of attorney or living will, which appoints someone to make financial decisions for you if an illness or accident renders you incapable of making those decisions.

Some people might want to consider leaving a charitable legacy in their will, while business owners should address succession planning issues in an estate plan.

Each person's situation is different and estate planning is a complicated area. It pays to seek specialist advice on what will work best in your personal circumstances.

 

Why Choose a Self Managed Super Fund

 

 

Thinking of moving to self-managed Super? Money editor Caitlin Fitzsimmons outlines the things to watch out for.

To read the article please click here

SMSF's - Peace of mind for small business

 SMSF's - one of the main reasons people establish an SMSF is for Peace of Mind.

Click to read the article here

7 Entrepreneurial Traits to Teach Your Child

 These are the skills kids need most now to succeed when they grow up. -

 

I own an international PR firm and my brother is an artist, writer and naturalist. We both became entrepreneurs in our early 20s. People often ask if our parents did anything special in raising us. When I had my daughter in 2007, the question took on new meaning-I wanted to know if parents could influence their child's entrepreneurial IQ.

To help answer the question, I contacted Richard Rende, Ph.D., who studies child development, and together we identified a number of areas where parents can have a great impact.

Why does it matter? In our fast-changing world, kids need a whole new set of skills to succeed. Helping children gain entrepreneurial traits will give them a solid foundation for defining, pursuing and achieving their own success.

Here are seven entrepreneurial traits well worth cultivating in your child:

1. Openness to Experience

Babies and children are born to explore. They are open and curious about the world around them. Free form "playful learning" is a proven way to advance academic readiness and lifelong curiosity. Let your kids follow their instincts and discover-and reinforce that with enthusiasm and wonder. Adults who are open to experiences have their "radar screens" on all the time. They see opportunities where others don't and welcome challenges, hallmarks of success in the workplace and in life.

2. An Innovator's Perspective

Innovation isn't just for people who will create new technologies or businesses. Kids growing up today will need to be perpetual innovators, devising new solutions and approaches to problems. Permit kids to test out their ideas when playing or doing schoolwork (without critique). Coming up with their own solutions helps develop and reinforce creativity and critical thinking skills. And make sure to cultivate an environment where failure is tolerated. Innovators embrace experimentation and know that you must fail in order to succeed.

3. Optimism

If there's one trait associated with entrepreneurs, it's optimism. Successful entrepreneurs believe they can change things for the better through their own efforts. Being optimistic confers real life, career and health advantages. To encourage optimism, frame the day in a positive way, model optimistic thinking and problem solving and cultivate gratitude. And remember that optimism is contagious. If Mom and Dad's outlook on life is positive, it will rub off on the kids.

Related: What Separates Chronically Positive People from Everyone Else

4. Industriousness

Whether they're children or adults, successful people get their hands dirty, sometimes literally. To help kids develop a strong work ethic, they need to learn the intrinsic rewards of a job well done. Parents should resist the urge to smooth their child's path or do for them what they can do for themselves. One time-tested way to build industriousness is by giving kids chores. Researchers have found that participating in chores early in life was strongly associated with personal and academic success 20 years later.

5. Opportunity Seeking

Children need to feel comfortable seeking out opportunities-academic, social, personal and physical-without fear of negative consequences. When children feel secure and supported, they develop the self-confidence they need to trust their judgment and instincts and are free to embrace opportunity when they see it.

6. Likeability

Likeability in childhood translates to success in adulthood. It's important to note that likeability is not the same as popularity. Likeability is about getting along well with the people around you. Parents play a big role in helping kids develop social proficiency. They can help them negotiate conflicts without becoming disagreeable, model how to collaborate with others and boost their communication skills.

7. Empathy

There is one tendency above all others that entrepreneurs endorse as key to achievement: serving others. In any endeavor, if people don't contribute something that is wanted or needed, they can't succeed. Kids today can have extraordinary "résumés," but having a sense of entitlement and a lack of empathy will ultimately hinder them. Talk about your emotions and help your child understand that the feelings of others matter. Compassion and empathy will change their world and their lives for the better.

Not every child will grow up to be an entrepreneur but every child can benefit from having entrepreneurial skills to help navigate our complex world. As traditional life and career paths disappear, children will have to be able to adapt and learn at every stage of life. Like entrepreneurs, they must make their way in the world with no roadmap to guide them. Parents can help set them on a path to use their talents and abilities to create success for themselves and others.

- See more at: http://www.success.com/article/7-entrepreneurial-traits-to-teach-your-child#sthash.qBFiZbgz.dpuf

 

Ignore the Share Bears and Look Long Term

 A FAMILIAR feeling of fear has been haunting investors, super fund members and self-funded retirees.

A shocking start to 2016 for the sharemarket has rekindled memories of the Global Financial Crisis, and worries worsened last week when global bank RBS warned of a "cataclysmic year" and urged investors to "sell everything".

A few finance experts have joined in the gloomy chorus, but many have criticised it, and others have forecast good gains for Aussie shares between now and December.

RBS warned that global sharemarkets might fall by 20 per cent in 2016, which is not that nasty compared with the GFC when Aussie shares tumbled 55 per cent from late-2007 to early-2009.

GFC throwback ... how will the stock market measure up in 2016? Picture: iStock

LOSSES HURT

The All Ordinaries index, which tracks the value of 500 listed companies, has slumped 7 per cent in the first two weeks of January.

"People hate losing money more than they like making it - it's the way we are wired," he said.

"The problem with 'sell everything' is when do you buy back in? There will always be volatility and a big variance in opinions - sometimes it's the people at the extreme at either end who get the most airtime."

 

 

 What is so great about the number 72?

Let me explain what makes 72 the answer
Using an example, if you invested $10,000 that earned you 10% per annum, how much would that investment be worth after 7 years ?
You may expect the answer to be $17,000, as 10% return on $10,000 for each of 7 years would be $7,000. However, the answer is actually $19,487.17 to be exact. This is because your investment earns interest on the interest each year, in jargon speak, compound interest.
What this means is, at the end of the first year, you would have $10,000 plus $1,000 of return, and at the end of the second year, you would have 10% on this $11,000 (rather than just on the initial $10,000). Each year this happens, the greater the effect on your long-term returns. Of course, if you spend the 10% return each year, you will still have $10,000 at the end of 7 years.

What about the number 72? How does that fit in?
The number 72 allows you to quickly and easily work out how much investments may be worth over time. It works like this - if you divide 72 by the interest rate, this will estimate how long it takes to double your investment.
Using the example above, 72 divided by 10% equals 7.2. So your initial investment doubles from $10,000 to $20,000 after 7.2 years. This sounds pretty good, but it gets better as this doubling effect continues. After 14.4 years, you would have $40,000, then $80,000 after 21.5 years, $160,000 after 28.8 years, and $320,000 after 36 years. So in this example, your $10,000 investment would increase to $360,000 after 36 years. Pretty cool, isn't it?

Another great way to use this method is to work out the effect of inflation on your investments.
Let's say you have 24 years left before you retire, and you think you will need $1 million in today's money to retire on. If you had one million dollars and put it under your mattress for "safekeeping", that one million dollars would buy more today than it would in 24 years' time because of the impact of inflation.
If we estimate that inflation is 3% per annum, then 72 divided by 3%  gives us an answer of 24 years. This means that having $1 million today is the same as having $2 million in 24 years' time, because of the impact of inflation.
Considering inflation then, the $360,000 after 36 years in the first example is actually closer to $125,000 in today's dollars. This is still pretty good, but does prove that the earlier you start putting savings away, the more time The Answer 72 has to work its' magic! Compounding is a wonderful thing. Give it time to work for you.

John Clarke - Clarke McEwan Accountants and Business Advisors.

 

10 companies your SMSF needs to own in 2016

2016 may well be a year for traders and those SMSF trustees willing to lock in short term profits.  The old adage, "The bull goes up the stairs and the bear goes out the window" probably won't get much of a look in if the last week of December and the first week of 2016 trading is anything to go by.  Markets finally had their Santa Claus rally jumping some 400 points on the ASX within days as the sun set on 2015 and then losing 200 points several days into the new year.

Had you bought the All Ordinaries (say using an ETF or a balanced portfolio of shares) around the 4950 and ridden the market to 5350 you'd be staring down the barrel of an 8 per cent return.  That's probably better than you did all last year and it all happened in two weeks.  The point I'm trying to make is that if you lock in your profits several times a year with a basic understanding of the market, you can improve your chances of investment success.

You will also need a basic understanding of value on both individual stocks and the market as a whole.  The market appears expensive at 5,950 and cheap at 4,950 with fair value rated around the 5400 to 5600 region on the All ords.  Remember, as Warren Buffett says Mr Market can be highly emotional and whilst the daily business news can fluctuate from optimism to pessimism on a flash release of a single piece of economic data, the stocks that we are trading are in fact real businesses with real customers, staff, products, services, income, expenses and profits.  Some insights into their operations and thus valuations is essential if you plan on a successful retirement using your SMSF. 

Of course, transaction costs need to be factored in.  You may have brokerage, capital gains tax or advice fees to pay but never be afraid to make a profit and you'll never go bust! If you're lucky enough to be in pension mode, there is no capital gains tax no matter if you're in transition to retirement mode or account based pension mode.  Your ability to trade successfully virtually cost fee is significantly greater.

Ramsay is #1 stock pick.
Ramsay is #1 stock pick. Bloomberg

So lets consider the macro environment. Interest rates are going up in the US and markets are cautious.  Our dollar may be under pressure as a result of rising US rates and unemployment in the US remains low and business conditions strong.  China is still growing but they are not booming and therefore our resources are may remain under pressure, and this too is a contributor to a lower dollar.  Oil prices too remain subdued sitting at multi-year lows so the cost of business for many US companies remains cheap and the consumers will have more money in their pockets unless OPEC gets their act together and curbs supply. 

Whilst global growth rates remain subdued and the outlook for the share market is forecast to run at parallels, the share market will be a stock pickers market in 2016.  Banks still need to raise capital so it may be worth taking up potential further offers as interest rates are low and housing remains strong.  Banks have an uncanny reputation to hang onto their profits despite short term regulatory headwinds. Health care has been a bellweather for growth but an impending government review on bulk billing has rained on the likes of Primary and Sonic but keep an eye on value in this sector.  Ramsay (no. 1) remains a key holding for me and I've been topping up on the dips. 

Consumer goods and services have been strong in our low interest rate environment and I'd urge some caution in the face of the Dick Smith failure but some common sense can be applied here.  Interest rates are low, unemployment is low and house prices have been moving north (in most populous states) so consumers are active.  Just watch for the switch in rates bias that can rain on this parade (possibly end of 2016) but there's little sign of that yet (read the free downloadable Westpac weekly economic report from their website). Every builder, architect and renovation related business I know is absolutely flat out and that should flow through to building and renovation-related businesses such as JB Hi Fi, Breville, Kresta, James Hardie and GWA.  So too AP Eagers may work as a holding as more people upgrade the family sled and motor vehicle sales touch records.  A word of caution though, these stocks can be fickle, must be watched very closely and are not in my top 10 despite strong results.

I'll be watching less of the old stalwarts (although I like the first three) such as CBA (no. 2), NAB (no. 3), Telstra (no. 4), Woolworths and Wesfarmers and more of other large cap stocks in the form of Seek (no. 5), Crown (no. 6) and REA Group (no. 7).  Woolworths is a sell in my books. Never lose sight of dividends and the banks again remain strong contenders for income and CBA is my favourite and Macquarie (no. 8) appears a reasonable prospect to me with the possibility of greater corporate activity and their expansion of recurring revenue streams, as does Challenger (No. 9).  Just be cautious of dividend traps such as BHP (no. 10) although it has looks like good value at the moment and we'll be watching their results very closely this year as it remains in portfolios coupled with Woodside as the only resources contenders for our very conservative clients.

All in all, 2016 may be a subdued year overall but like always opportunity will abound and your results will simply be a function of how you capitalise on the potentially fleeting moment of portfolio profit.  Some logical application of basic economics, consumer behaviour and market and company valuations can have a significant impact on your superannuation balance. Your retirement depends upon it.


Contact Clarke McEwan