How “real” are your financial planning projections?

170919.Inflation

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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Do current interest rates justify chasing yield?

Do current interest rates justify chasing yield?

Interest rates are historically low …

With bank term deposit and other short term interest rates at historically low levels, many of those who rely on fixed interest to fund their lifestyles (retirees, in particular) feel under increasing pressure to examine higher yield alternatives. These usually come with significant additional, and often underappreciated, risk.

In a previous article, “Are you suffering from money illusion?”, published in October 2013, we warned against making investment decisions based purely on actual or nominal interest rates. We argued that it is critical to also consider both inflation and tax. Despite further falls in nominal interest rates since October 2013, after-inflation short term interest rates remain positive and are not significantly different from average levels experienced over the past 15 years.

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The Reality of Lifetime Annuities in Australia

The Reality of Lifetime Annuities in AustraliaLifetime Annuities: good product, immature market

If you’re looking for a way to outsource your investment, longevity and inflation risks, you’re in luck. There is a financial product (a lifetime (indexed) annuity) that allows you to achieve this aim. However, the market for these products in Australia is quite immature, which is not good news for purchasers.

The lifetime annuity market in Australia has been around for many years, yet its size has never been significant. In 2001, 1,927 lifetime annuities were sold for a total value of $166 million. By 2004, this had increased to 2,801 annuities worth $281 million.

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The Allure of Gold

The Allure of Gold

Gold as a safe haven

The allure of Gold, as a viable long term investment option, has shot to new heights in the past five years. While this is perhaps understandable given its status as a safe haven, should it be a fundamental component of an investment portfolio?

There is a lot of misunderstanding about gold, its role in the financial system and use within an investment portfolio. We aim to address some of these misunderstandings.

A Brief History of Gold

Gold first became a transferable form of money around 560 B.C. when gold coins (stamped with a seal) were used by merchants to simplify trade. The coins were valued according to their inherent gold content. In 1066, Great Britain developed the British pound (symbolising a pound of sterling silver) and other units of currency based on their inherent metal value. During this period, gold (and silver) represented the main means of exchange (i.e. money).

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Wealth Management: a risky business

Share and property investments are risky …Wealth Management: a risky business

Most people understand that the returns of growth investments (i.e. shares and property) fluctuate considerably. If they didn’t prior to the Global Financial Crisis, they most certainly have a better grasp of that now.

But most don’t really have a good understanding of the potential range of variation of returns, without anything particularly unusual happening. And nor do they appreciate how dramatically the pattern of returns can affect long term wealth outcomes.

We use the Australian share market experience of the 25 years to December 2009 to shed some light.
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Ownership of family wealth

Which structure is best?
Family wealthFor our clients, there are predominantly four ways they hold their personal wealth. They are:

  1. Directly, either as an individual or jointly;
  2. In a private investment company;
  3. Through their family trust; and / or
  4. Via a self managed or public superannuation fund.

Which structure is best? It depends. But given our emphasis on focusing on the things you can control, the structure choice is one that needs serious consideration. There are a number of often competing factors to take into account, with taxation, asset protection and succession / estate planning usually most prominent. This article considers some of the issues.
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