The Reverse Mortgage: an underutilised retirement planning tool?

160430.Reverse Mortgage

Australians’ wealth concentrated in the family home …

We have long been of the view that Australians, in general, have too much wealth tied up in the family home. For those at or near retirement, a corollary is that they often have insufficient investment assets to support their desired lifestyle for an extended period without needing to downsize or being prepared to survive beyond some unknown future time on the age pension.

This unsatisfactory situation is revealed by a measure of financial independence that we call the “Investment Wealth Ratio” (“IWR”). As a “rule of thumb”, we suggest that at retirement at least 55% of total wealth should be held in investment assets and, correspondingly, less than 45% in the family home and other lifestyle assets. But most Australian households either approaching or in retirement have an IWR significantly less than 55%.

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Future capital: a key input to personal finance decisions


Your age may be a poor guide to financial decisions
Future capital: a key input to personal finance decisions

When it comes to personal finance, as in most areas of our lives, we often rely on some fairly simple notions to make some very significant decisions e.g.:

  • “As a 40 year old, the bank is willing to lend and I’m comfortable borrowing five times our household income to purchase a family home – all my friends are doing the same thing”;
  • “I’m only 35, with plenty of time to recover if things go wrong. Therefore, I’m investing all my surplus funds in growth assets”;
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Are your investments held tax effectively?

Are your investments held tax effectively?
The Tax Effectiveness Ratio is a guide to investment tax efficiency

Each of the previous articles in our series on the Personal Financial Dashboard – a graphic format that succinctly captures the journey to, arrival at and maintenance of financial independence – referred to net investment wealth. The first examined its change over time, the second its proportion of total wealth (the “Investment Wealth Ratio” (“IWR”) and the third in terms of the number of years of desired lifetime spending it would support (the “Retirement Expenditure Multiple” (“REM”)).

But regardless of the apparent adequacy of the amount of your net investment wealth, to increase the chances of both becoming and remaining financially independent there are some investment related practices and behaviours that are better than others. A critical one, that is the subject of this article, is to invest so that you don’t pay more tax than is necessary.

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What does financial independence look like?

What does financial independence look like?The “Personal Financial Dashboard” provides the answer

Most of us would like to have enough money in the form of investments so we could choose whether and how much we want to work and still afford the lifestyle we want. We call this financial independence.

But while financial independence is a great goal, a big problem is that it’s not simple to work out how you get there or even to know when you’re there.

In August 2011, we introduced an early version of the “Personal Financial Scorecard”, a graphical format that records a client’s progress and current position on some key indicators of personal financial independence. At that time, the “Scorecard” was, admittedly, fairly experimental.

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Financial planning as lifetime wealth management

Financial planning as lifetime wealth management“Living for today” has future consequences

We often hear people say that they don’t plan too much for the future. They’d rather live for today, as they argue you don’t know what’s going to happen tomorrow. And many of these people spend today as if there isn’t going to be a tomorrow.

Also, it’s not unusual for parents of Gen Y children, who are in their late 20’s or even early thirties, still living at home or travelling the world, saving very little, to suggest that times are different now. They are unconcerned that their adult children aren’t settling down and focusing on their desired futures, because that’s the “new normal”.

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Household income and wealth in Australia

Household income and wealth in Australia

Official statistics provide income and wealth insights

In the latter part of 2011, the Australian Bureau of Statistics released three publications [1] that together provide valuable insights regarding household income and wealth in Australia. The surveys supporting the statistical releases were conducted in 2009-10.

The publications provide the most comprehensive and up to date data, on a state and national basis, for a number of key financial planning and wealth management “progress indicators”. In this article, we will focus on how those in the top quintiles (i.e. top 20%) by household net worth and income are performing in terms of benchmarks we monitor for our clients. The aim is to assess the “financial health” of the nation’s wealthiest 20%.

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Financial Independence: a worthwhile financial planning objective?

Financial Independence: a worthwhile financial planning objective?

Clearly, financial independence isn’t important for everyone

“Financial independence” is achieved when you have sufficient net investment wealth to support your desired lifestyle indefinitely, without the need for earned income i.e. work is a choice, rather than a necessity. We have always regarded the achievement of financial independence as a financial planning objective that most would embrace.

However, separate conversations that I had last week with three mid-late fifty year old professionals (who aren’t currently Wealth Foundations’ clients) really made me think that perhaps we, and our clients, were living in an alternative universe. The three admitted that within the past six months they had each borrowed between one and two million dollars either to renovate their existing residence or partly finance the purchase of a new residence.

And, apparently, they felt reasonably comfortable doing so. Either their accountant and/or financial planner had assured them that they could service the debt. Or they took solace from the fact that many colleagues around their age were borrowing similar amounts for similar reasons.
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“For those with taste, not just money”

“For those with taste, not just money”
A tasteless ad that may be loose with the truth

The title of this article is the “headline” for an advertisement for the 2012 Jaguar XJ and XK that recently appeared in “The Sydney Morning Herald”. As though the headline wasn’t tacky enough, the copy goes on:

“While most luxury cars tell the world you have money, only a Jaguar lets it know you also have taste.”

At a driveaway price of “from $195,000”, taste certainly does not come cheap.

It is rare that an advertisement so directly links a luxury good with money and, by implication, wealth. Most only allude to a link between the purchase of luxury cars, clothes, watches, holidays etc and economic success.

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How does your “Personal Financial Scorecard” look?

How does your “Personal Financial Scorecard” look?

A picture paints a thousand words…

Our recent article, “What is “The Value of Financial Planning”?”, introduced a number of key metrics that we monitor to assess clients’ progress toward meeting their financial objectives. Together with some additional important measures, a “Personal Financial Scorecard” can be created for each client.

This Scorecard succinctly captures financial progress and highlights strengths and weaknesses in a client’s current situation. It’s easy to see whether a client is on track to achieve their desired financial future and what steps they need to take to enhance their financial position.

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Is the nation’s financial planning on track?

Is the nation’s financial planning on track?What trends in key financial planning indicators should we expect?

As wealth managers, we spend a lot of time working with our clients to structure their affairs to give them the best chance of achieving their desired financial futures. And we’re not just talking about structuring in terms of setting up self managed super funds, family trusts and the like. We’re talking about the structure and composition of their personal balance sheets. To us, this is the foundation of good financial planning.

We thought it would be interesting to look at the change in the financial position of the average Australian household over the past 20 years. Given the aging of the baby boomers over these two decades and their growing need to prepare for imminent retirement, we were surprised with what we found.
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