25 – 35 Year Old

A very busy time of life and the thought of retirement is the last thing on your mind. You are trying to establish a career, start a family, get started in your home and have a bit of fun as well.

This stage of life is akin to the first round of a golf tournament, you can’t win the tournament but you can definitely lose it. In much the same way, you can’t set yourself up for retirement at this stage but you can definitely make decisions that can seriously impact upon ever achieving that goal in the future.

Golden Rule – Protect What You Have got

Main asset at this stage of life is your ability to go out and earn an income for the next 30-40 years.

An “average” individual age 25 years earning $51,235 p.a. will earn more than $3,863,184 in his or her working life, assuming 3% inflation. To protect this amount it will cost them as little as $40 per month, which would be tax deductible.

We need to implement strategies to ensure that you and your family are protected should you not be able to work as a result of sickness, injury or death. Such strategies are designed to provide certainty in such circumstances but we can package them up in cost effective matter to ensure that your cash flow is not impacted, such as using your superannuation fund to hold insurance where possible.

ASB statistics show that the current annual death rate of parents with dependant children is around 4,400.

Real Life Case Study

A father of 3 children died in his early 30’s due to a previously undetected medical defect. He had adequate money for us to be able put in the right tax structure to ensure we could pay the family a tax free income from the proceeds. By getting the structure right we were also able to access to government benefits including regular pension payments that would not have been available otherwise.
A father of 1 was diagnosed with depression in his late 20’s and had to start a course of medication and was advised by his doctor to take considerable time off work. By being properly structured he received income from his income protection policy until such a time as he was able to go back to work. He was off work for about 18 months and has fully recovered from his condition. This recovery may not have occurred if financially he could leave his job in the first place.

Buying a House

We are always surprised by the frequency we see people making the same, very expensive mistakes, in regards to buying a home. The transaction costs associated with buying and selling a property are staggering and can add up to more than a year’s salary or more if a sale results in realising capital losses.

The first step, before you start looking for a property or visit the bank to see how much you can borrow, is to formulate what it is you are trying to achieve and devise a plan. We then incorporate the financial considerations into devising a strategy which would also impact upon the type of loan you need and how it is to be structured, all of which we can assist with.

Before you do step 1 you need to think about step 2 and step 3. Because you don’t want to undo step 1 to be able to go to step 2, this can cost you plenty and is common with people in this age bracket. They are trying to have a go but lack the polish which undoes a lot of the good intention.

Superannuation – The Hidden Gem

The first thing you learn in finance is the beauty of compound interest, over long periods of time the earnings you earn on your earnings over a long period grows substantially. The fact that 9% of your income is getting paid into your superannuation would seem to indicate that people would be ensuring this is working hard for them. Unfortunately, the reality is that most people have no idea how this money is invested nor what their options are to ensure they are getting the most out of their superannuation strategy. Considering this will be invested for some 30 years, the difference between getting this right, wrong, or somewhere in between at retirement age can be enormous. Albert Einstein is quoted as saying, "The most powerful force in the universe is compound interest."

An example, Sarah’s employer will pay $4,800 this year (9% compulsory contribution to super) into her nominated super account. Taking into consideration inflation of 3.1%pa, in 30 years Sarah’s superannuation balance would grow to:

Annual Return 7%	$673,381
Annual Return 9%	$954,948
Annual Return 11%	$1,375,388

The difference between the difference rates of return is quite large over long periods of time. By minimising fees and accessing appropriate strategies we can ensure that we are getting the most out of your retirement nest egg.

We could also use superannuation funds to pay for insurance premiums to make sure the family is protected. I am always frustrated when people say I want insurance and it makes sense but I don’t have any insurance due to the cost. We can utilise superannuation to assist in meeting these costs - at the end of the day, if you need it and don't have it, you are stuffed.

Getting Exposure to Investments

“I am busy paying off my mortgage and I just want to pay off my house first before I start thinking of that”

Is this you?

I hope not, as this is the most common mistake I see. I can safely say that the vast majority of retirees (or wannabe retirees) that don’t have enough financial resources to leave work were proponents of this strategy.

To be financially secure you need two objectives to be satisfied;

You need to own your house
You need a passive income stream from your investments

You cannot spend 25 years only addressing one side of this equation and then expect to do the other one in 5 years. You need to spend 25 years working on both objectives.

Furthermore, your biggest expense is tax! The Australian tax system actually encourages investment by providing tax breaks. Why would we wait?

We have a number of strategies to enable younger people to be able to start investing earlier. There has been substantial development of the opportunities available in this space other the last few years. As a general rule as long as you have some savings capacity we can look at a range of strategies that will get the most out of what you are trying to do.

Real Life Case Study

In June we put clients into a structured product that could go for a period of 5 years. The product was capital protected so you only need to fund the interest and there was no recourse if the investment was under water. The interest rate was 9% and there is a 4.5% income paid to the investor at the end of the year. For a person on 30% tax rate the cost to gain exposure to $100,000 would be $3,150 per annum. In 4 years if the market is back up to where it was 2 years ago we could be walking away with capital gain of about $65,000.