Should parents assist adult children to buy their first home?

160913-home-purchase-help

Our Prime Minister and RBA Governor suggest parental support is required

In November 2014, we published a Blog article titled “How do you give financial help to your adult children?”. Its focus was to match any assistance provided with the objective of developing children’s financial maturity. The views expressed were not influenced by what was actually happening at the time i.e. they were meant to be as timeless as possible.

However, since then, housing prices have continued to rise, particularly in Sydney. Young adults are finding it increasingly difficult to purchase a first home to meet their current living requirements. For most, housing that is also consistent with raising a future desired family is out of the question.

This has prompted a number of commentators, including both the Prime Minister, Malcolm Turnbull, and the retiring Governor of the Reserve Bank, Glenn Stevens, to suggest that the only way many young adults will be able to purchase their first home is with significant parental support i.e. the “Bank of Mum and Dad”. There is often an inference that “good parents” should provide such support.

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Is superannuation’s wealth accumulation role in jeopardy

160711.Super in jeopardy

The 2016-17 Budget proposed major changes to superannuation

We have previously discussed our “Personal Financial Dashboard” that graphically captures where a client is on the road to their version of financial independence. A key dashboard measure is the so-called Tax Effectiveness Ratio (“TER”), calculated as the ratio of superannuation holdings to total Projected Lifetime Investment Wealth.

Because of the tax effectiveness of the superannuation environment, we encourage clients to target a TER of at least 75% to be achieved by retirement. For some high income/high net worth clients or for clients who have delayed maximising super contributions, increasingly restrictive contribution caps may make this an impossibility.

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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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A self managed super fund comes with responsibilities

A self managed super fund comes with responsibilitiesSelf managed super funds to come under increased scrutiny

Self managed super funds (SMSFs) are being set up at a faster rate than ever before. They’re now the fastest growing sector of the superannuation industry and account for around one third of total superannuation assets in Australia (see chart below).
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The cost of “free” financial advice

The cost of “free” financial adviceFinancial advice is “freely” available

Many people are reluctant to seek out and pay for personal financial advice. Some are just distrustful of financial planners, heavily influenced by the negative publicity that accompanies every financial product disaster. The entire financial planning industry is tarnished by the “bad apples”

But there are many others that can’t see the point in paying for advice because they believe they can get it for free: from family, friends, and the media, including the internet. “Free” is a very strong motivator, particularly if the advice is apparently authoritative and credentialled.

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A high income does not imply high wealth

A high income does not imply high wealth

Statistics shows that a high income does not mean high net worth

In our previous article, “Household income and wealth in Australia”, we examined the progress toward financial independence being made by the wealthiest 20% of Australian households, with wealth measured alternatively by household net worth and household gross income. We found that the net worth measure of wealth was a better indicator of current financial independence than was household gross income.

The official statistics [1] on which our analysis was based clearly reveal that a high income does not imply high net worth. In fact, they indicate that only about 34% of households that rank in the top 10% by gross household income also rank in the top 10% by household net worth.

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You can be better off paying capital gains tax!

You can be better off paying capital gains tax!

Surely, it’s better to defer paying tax

It is not unusual for clients to have sizeable exposures to individual shares that they have held for long periods of time. We generally would encourage them to sell these holdings and invest the proceeds into highly diversified investments to reduce the risk of their portfolios, without a loss of expected return.

However, we often experience considerable resistance to this advice if sale of the shares would result in the crystallisation of significant capital gains and the obligation to pay capital gains tax. Clients reasonably ask “What’s the point of taking an unnecessary action that brings forward the payment of tax?”

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DIY Financial Planning – The real costs may not be evident

DIY Financial Planning – The real costs may not be evidentDIY Financial Planning appears to be a low cost alternative

There are a lot of smart people who make some rather dumb choices with respect to their finances. More often than not this is driven by short term thinking and the desire to save an immediate out of pocket expense. There is often a failure to lift the eyes and see the bigger picture.

An example that highlights this is the use of superannuation. We’ve talked previously about the significant benefits of making pre-tax contributions to super. However, in this article we look at the benefits of making post-tax contributions to super.
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Maximising Super Contributions – Beware

Super contributions

The super contribution rules changed from July 2007

If you’re planning on maximising your super contributions, it pays to be vigilant when managing and implementing your strategy. There can be a nasty sting in the tail if you’re not careful.

Prior to the introduction of “Simple Super” there was a limit on the amount of pre-tax contributions you could make to super. But after-tax contributions were unlimited.

The “Simple Super” changes not only put a limit on after-tax contributions. They also changed the nature of pre-tax contributions.
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How far to financial freedom?

What you live off when you’re not working …Financial freedom

In our introductory meetings with potential new clients, we want to obtain a preliminary view of their “Net Investment Wealth”. It quickly gives us an idea of how far along the road to financial freedom or financial independence they have come and how far they have to go.

Net investment wealth is your net worth less your lifestyle assets. It’s the stuff available to live off when you are no longer earning income from your work.

To make the concept more concrete, consider Steve and Kate Wilson. Their assets and liabilities are shown below:
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