20 Expert Tips For Wealth Creation
A new financial year is a great opportunity to reflect and review what action you’re taking to build or enhance your wealth. Personal finance expert Noel Whittaker shares his 20 top tips for wealth creation, specifically for those in retirement.
1. Ignore the prophets of doom — they are always with us and usually wrong.
I have been investing for more than 40 years, and have never known a time when somebody was not predicting that the next depression was just around the corner. In fact, nobody can consistently and accurately forecast what investment markets will do, but many fall into the trap of basing their financial future on predictions. Often this means they sit on their hands waiting until the time is right, and miss out on many opportunities.
2. Make sure your children have adequate insurance. It’s much more affordable than having to rescue them.
Your retirement plans can be going fine until an emergency occurs in the lives of one of your children, and you are called upon to help out. The cost could be many thousands of dollars. It’s much better to plan for this possibility by making sure your children and their partners, if any, have adequate life insurance, TPD and income protection.
3. Understand compounding: appreciate that the rate of return your portfolio achieves is a major factor in how long your money lasts.
You can’t make more time, so the rate of return your investments achieve, after fees and taxes, determines how much you need to save to reach your retirement goals, and how long your portfolio will last after you retire. This is why you should seek the best returns that fit your goals and risk profile, and always be very aware of what fees are being charged.
4. Understand the basics that never change, and take advice on the things that do.
When considering changes to your finances, measure them against the timeless principles, such as always spending less than you earn, greater returns coming hand in hand with greater risks, and the importance of time and rate to your returns. Then get specific advice on how to implement changes using the current rules and products from your financial adviser, accountant, and lawyer, as appropriate.
5. Take advice before the deed is done — not afterwards. It’s hard to rewrite history.
It is common for parents to add their name to the title deed of a home property being purchased by one of the children, because the children do not have the resources to qualify for a loan in their own name. The parents get a dreadful shock at some stage in the future when they wish to transfer the property to the child and discover capital gains tax is payable on the transfer. Taking advice beforehand enables you to explore other options, such as guaranteeing the loan.
6. Always judge an investment on its merits — consider any tax benefits to be the cream on the cake.
Time and time again investments are promoted as being highly tax effective. Often the potential investor gets so focused on the alleged tax benefits that they fail to investigate the disadvantage of the purchase as well as the tax benefits.
7. If a person contacts you to offer a “free” seminar, an investment, or even to help you pay your mortgage back faster, ignore them.
Any person who contacts you with a financial offer will be doing so for their benefit, not yours. Good investments don’t need hard sales tactics like cold-calling, or email campaigns. It is more likely to be a scam to separate you from your hard-earned money.
8. Diversify across the major asset classes and include some international exposure.
It’s a basic investment principle that you don’t put all your eggs in the one basket — that you spread your funds across asset classes to decrease risk. But many people misunderstand diversification: they think having a portfolio of residential properties, or shares in all four Australian banks, is diversification. It’s not.
9. Involve your partner, if you have one, in financial decisions and monitoring. This will make it easier if one of you passes away or becomes incapacitated.
It’s common for one partner to handle most of the financial matters in the household, even if major decisions are discussed and made jointly. This can cause havoc if they become incapacitated or die. This is why, in a relationship, both people should be involved in the financial administration, and know where asset records are kept, and what passwords are required for access.
10. Don’t panic when the share market has a bad day — volatility is the price you pay for the unique benefits of shares.
No other investment offers the flexibility and tax benefits of Australian shares. But every investment has a disadvantage, and the disadvantage of shares is that prices can be highly volatile, even in a single day. There is no need to be spooked by this. In the average decade, there are four negative years and six positive ones. This is why you should think of shares as a seven- to ten-year investment.
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11. Keep your will up to date, including its tax effects and whether a testamentary trust is appropriate.
Many people make a will, then file it away and never think about whether it should be redrawn to take account of changing circumstances. But assets are not all equal, and beneficiaries’ situations change as much as your own: your will should be revised regularly. Take advice on the best treatment of assets from a tax perspective, including whether it’s appropriate to include a testamentary trust. Make sure your executor is aware of their responsibility, and can locate the will when it becomes needed.
12. Give Enduring Powers of Attorney and an Advance Health Directive to trusted people. And make sure they have copies and can locate the originals when needed.
An enduring power of attorney is essential so family affairs can continue if a person becomes incapacitated. And an Advance Health Directive gives you some control over what medical treatment you may have in your final stages of life. But it is absolutely critical that family members and trusted friends know where these documents are, and can access them at short notice. It’s no good keeping them in a safe deposit box in the bank.
13. Get a credit card in your own name before you retire. For couples, this means your own account, not a supplementary card on your partner’s account.
It can be difficult to obtain a credit card after retirement, as lenders take no account of assets, just taxable income. If you’ve always used a credit card in the name of the higher earner, with a supplementary card in the name of the lower-earning or non-earning partner, and they die, both cards will be automatically cancelled. The survivor could then find it almost impossible to get a credit card in their own name.
14. Be extremely wary of going guarantor for any of your children — especially if they are in business.
It’s natural to want to help your children, but don’t damage yourself in the process. Going guarantor for anybody can be highly risky. If you do decide it’s worth it, make sure your guarantee is limited. For example, if you are helping your child buy their first home, limit the guarantee to the value of the home, and have it removed at the first opportunity as the house increases in value. Stay well away from any guarantees for people who are in business; remember, 80% of businesses fail in the first five years.
15. Don’t spend unnecessarily just to maximise your Centrelink benefits. Further cuts to benefits are likely.
The assets test can be harsh, with every $100,000 of surplus assets currently costing assets-tested pensioners $7,800 a year. Money spent on renovations and trips is not assessed by Centrelink, but do the sums first: if you spend $100,000 to increase the pension, at $7,800 a year extra, it would take 13 years to recover that money. During that time, Centrelink rules may well change.
16. Investigate whether to have a Binding Death Nomination in your super fund.
It is the trustee of your superannuation fund who decides who the proceeds of your superannuation will be paid to. You can bypass the trustee by executing a Binding Death Nomination, but keep in mind that executing one may prevent the executor of your estate in arranging your affairs in the most tax-effective manner, and get specific advice.
17. Each year after retirement, assess whether you benefit by staying in super. You may be better off withdrawing the balance to invest outside superannuation.
Current tax offsets mean many retirees can earn considerable income before paying any tax. As the years pass and your superannuation balance drops, take advice about whether to exit the superannuation system, saving ongoing fees, and negating the possibility of the death tax. If you do, you will need to invest the proceeds in your own name outside super.
18. Keep in mind that well-meaning acquaintances who give you half-correct information can be one of your worst enemies.
One of the biggest problems investors face is the wealth of information — and misinformation — from a wide range of sources. Usually this information does not cover the entire topic, and may be incorrect by omission. You are better off to set yourself a good long-term plan, then stick with it and have regular consultations with your adviser.
19. If you decide to take on a reverse mortgage, involve your family in the process, as it affects their possible inheritance.
Reverse mortgages normally have no repayments of principal or interest. This means the debt grows at a faster and faster rate, which means less money for your estate when you die. If you believe a reverse mortgage is appropriate in your circumstances, involve your family members so they know exactly what is going on. It may even be possible for your children to pay the interest each month, so the debt never grows.
20. Review your affairs so they are always appropriate, despite changing conditions.
Your personal situation may change, markets may fluctuate and new investment products may emerge; furthermore, the situation of family members varies as children are born, grow up and some people pass on. This is why it is essential that you sit down with your advisers at least every 12 months and make sure your current wills, powers of attorney and general portfolio optimise your affairs. It doesn’t take long, and may save serious problems down the track.
Main image source: ccpixx photography/Shutterstock.com
About Noel Whitaker
Noel Whittaker, AM, is an international bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, and one of the world’s foremost authorities on personal finance. For 30 years, Noel was the Director of Whittaker Macnaught, one of Australia’s leading financial advisory companies, with more than two billion dollars under management.
Noel’s latest Book is called Retirement Made Simple (RRP $29.99)
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