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Household Income, Wealth and Debt in Australia: an update

171012.Household wealth

A summary of household wealth and income

Every two years, the Australian Bureau of Statistics (“ABS”) releases its survey of Australian household income and wealth. The latest release[1] relates to the 2015-16 year. It provides the opportunity to update our “Household Income, Wealth and Debt in Australia” article of September 2015, that examined various findings from the 2013-14 survey, and to drill down a little to further into the growing level of debt held by Australian households.

The left hand side of the chart below shows how household wealth or net worth was distributed in 2015-16, while the chart on the right hand side shows how that distribution has changed (in 2015-16 dollars) over the 12 years since 2003-04. Some takeaways from the charts include:

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How “real” are your financial planning projections?

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It’s maintaining real spending power that matters

When clients consider how much they expect or wish to spend in the future, they naturally think about it in terms of today’s dollars. The implicit assumption is they don’t want price inflation to erode the amount of goods and services they are able to purchase.

In our cash flow modelling, we assume an inflation rate of 2.5% p.a., mid-way between the Reserve Bank’s target of 2-3% p.a.. With inflation at 2.5% p.a., the spending power of a $1 would be reduced to about 48 cents over a thirty year period.

So, while a financial projection that shows your investment wealth grows from, say, $1 million now to $2 million in 30 years’ time may appear impressive, after adjustment for inflation of 2.5% p.a. the future $2 million is only worth $953,000 in today’s terms i.e. you’ve actually gone backwards in spending power.

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Pitfalls of retirement planning

170815.Retirement Pitfalls

Retirement expert reconsiders previous thinking

Most planning advice, both regarding saving for, and the enjoyment of, retirement, is given by people who are not retired. So, while the advice may be well meaning, it could inadvertently suffer from a lack of empathy with the realities of retirement.

In addition, the experience and expectations of current and previous retirees may differ significantly from that of the vast numbers of baby boomers that will increasingly dominate the ranks of the retirees over the next decade. As a result, retirement advice based on researching earlier generations may not be as relevant as desired.

A recent article in “The New York Times”, titled “Three Things I Should Have Said About Retirement Planning”, touches on the above issues. It is a confession by Paul B. Brown, who co-authored two books on saving for retirement in his 30s and 40s and is now aged over 60, that his typical advice suffered some inadequacies, now made apparent by his own life experience.

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Does “rentvesting” make financial sense?

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Rentvesting: a cheaper way to own a home?

Before attempting to answer the question posed by the title of the article, it may be necessary to explain what “rentvesting” is. Essentially, it involves purchasing a residential property to rent to a third party while, at the same time, renting another property to live in.

It’s the mechanism that many young (and some not so young) adults are using to get a foothold in increasingly less affordable housing markets, particularly in Melbourne and Sydney. Many property spruikers, who previously would have used the old chestnut that “rent money is dead money” to promote residential property purchase, now promote rentvesting as a smart way to rent and buy property.

But does rentvesting make financial sense? We have identified at least three approaches to rentvesting, making it difficult to generalise. The three approaches are:

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The purpose of personal financial planning

The purpose of personal financial planning


The “big picture”: Matching your lifetime financial assets and liabilities

Most people don’t really grasp what we regard as the primary purpose of personal financial planning. As a result, they often fail to identify some long term issues that should significantly influence their current decision making.

Personal financial planning is often viewed as having three increasing levels of complexity or sophistication. They are:

  • Financial planning as investment advice – those without experience of financial planning usually associate it primarily with providing advice on investments. Some planners, while paying lip service to the more sophisticated levels of financial planning, also see their key role as advising on and managing investments;
  • Financial planning as technical advice – while also providing investment advice, planners provide advice of a more technical nature in areas such as superannuation, taxation, insurance and estate planning; and
  • Financial planning as strategic advice – more generally known as comprehensive or lifestyle planning, detailed long term cash flow analysis examines the consistency of a client’s lifestyle objectives with their current and projected financial resources. Relevant investment and technical advice is also provided to increase the chances that any gap between the client’s current and desired position is closed with no more investment risk than is necessary.

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At last, a “good news” financial planning story

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Our clients respond to an online “Client experience” survey

In late February-early March 2017, a representative group of our clients was asked to participate in a confidential on-line “Client Experience” survey. The survey aimed to help us, among other things, better understand:

• what our clients look for in their relationship with us;
• how they measure the value of our service;
• their greatest personal finance fears; and
• how they felt we were doing.

We were pleased with the 70% response rate we received and thank those clients who participated.

The same survey was simultaneously offered to clients of other financial advisers that choose to use the services of global fund manager, Dimensional Funds Advisors, both in Australia and internationally. The results provide us with the opportunity to compare our clients’ feedback with that of almost 19,000 other respondents.

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The trade-offs for financial independence

170321.Financial independence Levers

There are three levers of financial independence

To increase the chances of achieving financial independence (i.e. having sufficient investment wealth to fund your desired lifestyle indefinitely, without the need to work), you have essentially three options or levers available to you. They are listed below in order of capacity to directly control:

  1. Reduce cash outflows, including lifestyle spending, taxes and investment costs;
  2. Increase cash inflows, primarily from increased employment or business income; and/or
  3. Increase net (i.e. after costs) investment returns.

Most families have significant discretion regarding the amount of their cash outflows and, within a fairly broad range, are able to decide (above a base level of living) how much they want to spend.

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How should I rebalance my growth portfolio?

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The key decision is your defensive versus growth allocation

It is a key element of our approach to investment risk management that you should select a target asset allocation that is consistent with your attitude to risk (i.e. a level of investment risk that will enable you to “sleep well”, regardless of what investment markets are doing). The target is to be met at or before your desired retirement date and/or by the time you wish to be financially independent (i.e. have sufficient investment wealth to support your desired lifestyle, without the need to work).

The target asset allocation is primarily focused on your mix of defensive assets (i.e. cash, fixed interest) and growth assets (i.e. primarily, Australian and international shares, and property). If the current defensive/growth allocation varies from target, we work with clients to develop and implement a strategy to transition over time from where they are now to that target.

We also agree with clients how they allocate the growth component of their investment portfolio between the primary growth asset classes i.e. Australian shares, international shares and property. While this allocation decision is both part art and part science, most investors (both in Australia and around the world) tend to have a strong “home company bias” i.e. Australian investors tend to heavily overweight Australian shares and property, despite our markets only being a small percentage of global share and property markets.

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The “retirement spending smile”

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Retirement spending shown to decrease with age

We have written a lot about the pattern of retirement spending, with “Will spending remain constant in retirement?”, from 2013, and “How much do I need to retire, revisited?”, of only three months ago, being particularly relevant. The underlying theme of these articles is that we don’t believe our “Rule of 25”, the suggestion that you need investment wealth of at least 25 times your expected annual retirement spending to be highly confident of financing a 30 year retirement, is conservative or an unrealistic “rule of thumb response” to the “How much do I need to retire” question.

However, a recent article in “Forbes” magazine, titled “What is the ‘Retirement Spending Smile’?”, by Professor Wade Pfau, a prominent US academic specialising in the financial planning field, provides another potential challenge to the robustness of the “Rule of 25”. It examines US research on retirement spending, by David Blanchett [1], that suggests spending tends to decrease both at and during retirement at a real rate of about 1% p.a.

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Will share returns remain low?

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Share and cash investment returns are unexciting

It feels like the Australian share market has been going up and down in about the same spot for the past six or seven years. Many are becoming disillusioned with shares as an investment class and are looking to “juice returns” with the various hybrid structures and private equity “opportunities” on offer to take advantage of the discontent.

Cash, in the form of term deposits, has also lost its lustre, with yields at record lows. It’s not surprising that in this environment the perennial favourite, direct investment into residential property, has become even more popular. The house price rises experienced over the past three or four years, particularly in Sydney and Melbourne, make the share market appear a pretty dull alternative.

This article examines some of the historical facts that underpin current feelings. While we don’t know what will happen in the future, the past suggests that current investment returns are not inconsistent with what investment theory would expect and may not be a good guide to future investment returns.

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