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Be aware:  Australians are being warned that they will need half a million dollars to escape the “retirement trap” of a reduced pension due to assets meeting certain thresholds.

       

 

According to BetaShares, retirees who lift their savings to between $350,000- $600,000 may ironically see their income diminish.

BetaShares senior investment specialist Dr Roger Cohen said, “Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years.” 

“However, our analysis shows that, for certain people, under the current system, accumulating more money can actually produce the reverse.”

The current retirement system in Australia sees retirees drawing income from a combination of superannuation, the Age Pension and external assets. 

The pension is means-tested, with the level of entitlement calculated using an income test and an assets test. These entitlement levels and associated reduction in the pensions are the primary drivers behind the “trap”.

More specifically, for an individual, there is an income range between $174 and $2,026 per fortnight, where for every additional dollar earned, the pension is reduced by 50 cents. This effectively halves the value of additional earnings for retirees in this range.

 

Cameron Micallef
24 January 2020
smsfadviser.com

 

It wasn't long ago that the common view was to save and invest through your working life and then retire to a portfolio that delivered at least a 5 per cent income yield every year.

           

 

For many retirees it worked, at least while interest rates were high. They could live comfortably on income payments and preserve their principal for rainy day events or large ticket items like aged care.

But in an era of all-time low interest rates, that plan no longer works.

Retirees today must work with expected equity returns in Australia of between 4 and 6 per cent over the next decade, alongside fixed income returns between 0.5 and 1.5 per cent (1). Globally, Vanguard data shows the median balanced portfolio is expected to return 4.9 per cent per annum over the next 10 years. That includes both income and capital growth (2).

Given many retirees target an annual spending rate of 4 per cent of their portfolio it leads to what appears to be an insurmountable problem: spending 4 per cent when your portfolio's income component is around half that doesn't add up. Something must give—you either find higher yielding (and riskier) investments or start selling assets and drawing down on your capital to fund your spending.

The underlying question is one of portfolio construction.

How can you design a portfolio that provides income to live off while preserving your capital across your retirement?

The answer lies in recognising that the two types of return in an investment portfolio—income and capital—are interrelated. And that preferencing income over capital growth is not always the right way to go.

All investment portfolios provide two types of return. The income return is made up of the dividends and interest while the capital return comes from the growth of the value of the underlying assets over time.

The problem is many of us are hardwired to prefer an income-biased portfolio – many investors are fine with spending the total amount of income generated by a portfolio but balk at the idea of spending capital. Given a choice between a portfolio that returns 4 per cent income and 2 per cent capital growth over one that returns 2 per cent income and 4 per cent capital growth, many will prefer the one with the higher income despite the fact that both portfolios returned 6 per cent.

This preference can lead to problems when spending is not covered by the natural yield of a portfolio.

In that case, a retiree has three choices—spend less, sell assets, or overweight the portfolio to income producing assets.

That third option can lead to trouble.

Chasing income means seeking out higher yielding companies, buying fixed income investments like high-yield corporate bonds and emerging market debt or diversifying into property investments.

On the surface these provide an attractive yield, but that higher income can come at a cost as risk and return are correlated. Higher yield means higher risk.

The solution is to take a total return approach.

Total return investing involves holding a diversified portfolio that aims to maximise the overall return of the portfolio, rather than preferencing income over growth.

Total return investing has a number of advantages, led by the fact it allows investors to maintain diversification which reduces the risk of capital loss.

The approach also provides better control over the size and timing of withdrawals, allowing a retiree to decide how much and how often to take cash rather than being held to the schedule of dividend payments and distributions. Being able to reduce withdrawals in a down year dramatically increases your chances of not running out of money in retirement.

This means the portfolio's longevity (3) is improved under a total return approach—and that means the portfolio can support your lifestyle for longer.

 

1. https://static.vgcontent.info/crp/intl/auw/australia/documents/research/rs219_vemo_2019_summary.pdf
2. https://pressroom.vanguard.com/nonindexed/Vanguard_Global_Economic_Market_Outlook_2020.pdf
3. https://www.vanguard.co.uk/documents/adv/literature/total-return-investing.pdf

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
03 February 2020
vanguardinvestments.com.au

 

It might be dry old data but it's how you're county's going and it's used to make decisions that affect you every day.  

           

 

Please click on the following link to see all this interesting information. The areas covered are:

  • Overview
  • Markets
  • GDP
  • Labour
  • Prices
  • Money
  • Trade
  • Government
  • Business
  • Consumer
  • Housing
  • Taxes
  • Climate

 

Access all this data here.

 

 

tradingeconomics.com/australia

A fundamental knowledge gap is continuing to trip property investors up, leading to simple mistakes and heaping pressure on tax agents, the ATO has revealed

         

 

Last year, the ATO singled out rental property deductions as a “top priority” for the agency, with Commissioner of Taxation Chris Jordan claiming that errors were found in almost 90 per cent of returns.

For tax time 2019, the ATO doubled its number of in-depth audits for rental deductions to 4,500, with a specific focus on overclaimed interest, capital works claimed as repairs, incorrect apportionment of expenses for holiday homes let out to others, and omitted income from accommodation sharing.

Speaking on sister title Smart Property Investment’s podcast, ATO acting assistant commissioner of individuals and intermediaries, Adam O’Grady said a vast majority of these errors were down to “simple mistakes” from investors and failing to disclose information to their accountants at tax time.

“What we find when we do review returns and audit people is more often than not, it's a simple mistake or it's a lack of understanding of what they're allowed to do, what they're not allowed to do,” said Mr O’Grady.

“The vast majority of people don't deliberately go out to claim things they shouldn't or obtain refunds. Those that do, finish up in front of the courts and prison and those sorts of things.

“It's really that lack of education, that lack of understanding. So, what we hear stories of when we sort of audit, they walked up to their accountant and said, ‘Oh, here's my income from the real estate agent. Here are my line statements; I don't know about the rest of the expenses,” and just sort of scribble it down on a notepad and paper and say, ‘Oh, look, that's about what I think it is.’”

Mr O’Grady acknowledged that accountants are often at the mercy of their investor clients, noting that they are only as good as the information provided to them by their clients.

“Accountants out there are highly skilled, they understand the tax law, they can really help you, make sure you're structured in the right way and help you set up the proper recording requirements and all those sorts of things. But, they can only do that if you're open and honest with them,” said Mr O’Grady.

“You need to talk to your accountant, explain what you've done, why you've done it, how you've set it up, and then they can give you that right advice. But [if] you don't tell the accountant, they're not giving you the advice you need.”

Sharing economy focus

Mr O’Grady said investors receiving income from short-term rentals through sharing economy platforms such as Airbnb should be aware of the ATO’s new data-matching program that will identify taxpayers who have left out rental income and over-claimed deductions.

“Last calendar year for the first time, we actually collected data off a lot of these platforms, so we can see who rented their property out, for how long, what sort of income they earned from it, and we're working through that data and comparing that to tax returns to understand people that haven't reported that income or haven't reported the full amount, all those sort of things,” said Mr O’Grady.

“What we've been doing with the data we've acquired recently, is actually writing to people and giving them really an opportunity to self-correct their own return.

“It's more in that trying to educate people, that we can see you've got this income, you need to go and fix up your own affairs, and from this point forward, make sure you're reporting correctly,” he added.

“On top of that, we will use the data to audit people. So those, we do have some examples where people are on these platforms renting out 10, 20, 30 properties or rooms across various properties and not reporting on their tax obligations. So for those people, again, we'll take a pretty firm stance.”

 

 

Jotham Lian
31 January 2020
smsfadviser.com

 

Since the news of the coronavirus broke, the human impact globally has been significant and continues to rise.

         

 

The outbreak and the potential threat of a pandemic has understandably generated strong responses in financial markets as new information is priced into risk assessments., as investors continue to evaluate the uncertain outlook and increasing impacts of the virus.

Media headlines – such as last week's “$36 billion wiped off the value of ASX” certainly grab attention and likely raise anxiety levels.

The challenge for investors is to stay the course. This is one of those periods when the discipline of having a written financial plan – or having a financial planner to discuss things with – can help keep things in the right perspective. What are your long-term goals? Does the current situation materially alter them? Are you on track?

To help investors and their advisers Vanguard's investment strategy group has provided an analysis of what they see as the economic impacts to both China and Australia, published below.

A challenge for China and investors

The coronavirus that is making news for its lethality and rapid spread—and for the selling it has triggered in global stock markets—has a lot in common with the SARS virus that jolted China's economy in 2003.

But China's prompt and internationally coordinated response this time may offer some reassurance that the human and economic effects can be limited, according to Qian Wang, Ph.D., Vanguard's Asia-Pacific chief economist.

As is suspected with the new coronavirus, SARS (severe acute respiratory syndrome, also a coronavirus) started in animals and spread to humans, and quickly became capable of human-to-human transmission. Human contagion coincided with the start of the Lunar New Year, when hundreds of millions travel for China's most festive season.

SARS killed almost 10% of the more than 8,000 people it sickened, according to the U.S. Centers for Disease Control and Prevention, and most of the deaths were in China. It knocked 2 percentage points off China's GDP growth in the second quarter of 2003, with transportation, tourism, and hospitality hit especially hard. Those sectors and retail will likely be among the hardest-hit again, Ms. Wang said.

Yet while the situation is likely to get worse before it gets better, Ms. Wang anticipates acute but short-lived harm to China's growth.

What's different this time?

The main effect on China's economic growth will likely be one of sentiment, Ms. Wang said, with the government's response determining the degree to which people are fearful or confident.

“The good news is that the Chinese government has taken serious actions quickly,” Ms. Wang said. Its disclosure of information and policy responses have vastly improved since the SARS outbreak, she said, and the government has instituted “all-out prevention and control efforts.”

Vanguard therefore has maintained its outlook for China's 2020 GDP growth at 5.8%, though the risk is clearly tilting toward the downside, Ms. Wang said. While the coronavirus threatens growth in the near term, Vanguard foresees the potential for a rebound in the second half of the year amid anticipated government stimulus.

The spillover to the rest of the world could be limited given a prompt and better-coordinated international public health response this time, Ms. Wang said—though the degree would vary across countries depending on their economic ties with China.

What it means for investors

Investors who saw stock markets continue their 2019 gains into the new year have now seen some of the recent gains evaporate with the coronavirus fears. The 2020 Vanguard economic and market outlook envisioned such volatility, given heightened policy uncertainties, late-cycle risks, and stretched valuations in some markets.

Just as we guide investors to consider vibrant markets in the context of their goals, we do the same when markets are ailing. Know why you invest, maintain a diversified mix of assets to match those goals, and look beyond a troubled short term.

What it means for Australia

At this stage, we believe that the initial direct impact of the viral outbreak on the broader Australian economy is likely to be limited via lower tourism exports to China as Chinese authorities seek to impose travel bans on outbound tour groups.

Referring back to the SARS epidemic in 2003, tourist arrivals to Australia from China indeed fell quite drastically – by 35% over the year – so we could expect to see somewhat of a similar impact this time round.

However, this alone is unlikely to detract too much from domestic growth, with tourism exports to China only accounting for about 0.2% of Australia's GDP. Instead, it simply adds to the list of downside risks posed to the Australian economy following the bushfires experienced late last year, with indirect effects of heightened uncertainty potentially weighing on business and consumer confidence.

Vanguard maintain our below-consensus call for Australia's GDP to center around 2.1% this year.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard
03 February 2020
vanguardinvestments.com.au

 

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