While the findings of the Royal Commission have made some question the integrity of some financial planners, there will always be a place for quality financial advice, particularly at five key times in a person’s life, says Jonathan Philpot, Wealth Partner with HLB Mann Judd Sydney.
“There are five life stages when financial advice is a must. These are on the purchase of a property, on significant mortgage reduction, when your income hits $100,000, five years prior to retirement, and when you are planning to pass wealth to the next generation.
“These five life stages are all times where significant sums are involved, and it pays to ensure you are getting the right advice,” he says.
Purchasing a property
“For most Australians, purchasing their home is the largest financial transaction they will do in their lifetime, and careful consideration of how much debt should be taken on is needed.
“A mortgage broker is being remunerated on the size of the loan, and it is in the bank’s best interest to lend as much as you can possibly afford over the next 25 or 30 years of your working life. But what if you don’t want to repay a mortgage for the next 25 years? A financial adviser can help you carefully consider how much debt should be taken on, in light of your other lifestyle and investment expectations.”
Mr Philpot says issues to consider include the best way to save the deposit for a property, and how much risk you should take with your savings considering the expected timeframe to purchase.
“Other issues to consider include whose name should the property be purchased in and whether there are asset protection issues to consider,” he says.
“When the value of the mortgage is reduced to 50 per cent of the home value, this is the point when funds that have previously been directed towards swift repayment of the mortgage, can now be put towards other investment options as well,” Mr Philpot says.
“With the changes to the deductible super contributions, many PAYG earners should now be considering additional super contributions for the tax benefits received. Withdrawing $10,000 from the mortgage offset account will cost 4-5 per cent in interest cost, but could provide a net tax benefit of 32 per cent for those in the top tax bracket.”
Building up investment wealth outside of superannuation is also an important consideration, he says.
“This might involve undertaking a gearing strategy with equity in the home for an additional investment property or share investments, or even simply a saving in a low income earning spouses name.
“While it is important to direct additional income into non-mortgage related investments, reducing the outstanding mortgage should still remain a priority,” he says.
Reach five years to retirement
“To maximise superannuation savings, planning actually needs to start 20 years from retirement, with consideration of how much you think you would like to retire on and how you will get there.
“However, as a minimum, a five year retirement strategy focused on building superannuation will provide a few years to maximise the concessional super contributions.
“If you are in a position to also take advantage of the non-concessional contributions, in particular the three year bring forward rule, careful planning is needed around the age in which the contributions will be made, to maximise the total amount that goes into super.”
Mr Philpot says how your super is invested – not just for the last few years of working life but for the rest of your life – needs to be considered.
“We naturally become more conservative at this point in our lives, but it is important to remember you need a certain rate of return to ensure retirement income that will last a lifetime,” he says.
Once income reaches $100,000 – insure it
“The largest financial risk that we face is the loss of future income. We have no problem with insuring our home, car and assets at whatever cost the annual premiums are, yet we question the value of insuring our future income earning ability.
“Personal insurances have an important role to play at different times in our lives, particularly when debt levels are high and dependent children are young.”
Transferring wealth to the next generation
With longer life expectancy, inheritance for many people is not occurring until well into retirement. While this may still be a very welcome boost to retirement savings, it may also be a point where parents may wish to help their children, perhaps a deposit for a home, or grandchildren’s school fees, Mr Philpot says.
“While receiving inheritance via a testamentary trust can provide significant asset protection and tax advantages, more people are starting to consider some type of assistance to children prior to death.
“If it is a large sum of money, say $50,000 or more, careful consideration should be given as to whether it is simply a gift or whether it should take the form of a loan, with a signed loan document in place, and typically some type of repayment required.
“In the event of any relationship breakdown for the child, this money is then better protected than what it would have been as a gift.
“Ensuring that financial advice is obtained, at least at these five critical stages of a person’s life, will go a long way towards maximising their income accumulation, retirement planning and wealth transfer goals,” Mr Philpot says.