2009 Economic Update 2009 Economic Update SeminarSeminar

Neil Cox, CFP

Director &Director & Head of Investment Head of Investment ResearchResearch

Presented byPresented by

General Advice Warning

Today’s presentation may contain some general advice.This means that individual objectives and needs have NOT been considered in providing this advice. This information is general in nature and does not constitute comprehensive advice.

Before acting on this advice, you should give consideration to the appropriateness of the advice for you. You should seek proper personal financial advice.

While the information given in the presentation is in good faith and is believed to be accurate and reliable, Financial Foundations Australia does not give any warranty as to the reliability for any errors or omissions.

Helping you through the Helping you through the financial crisisfinancial crisis Dealing with Market Volatility –

Dollar Cost Averaging

Have your cake and eat it too with Have your cake and eat it too with more super for your retirement – more super for your retirement – Transition to RetirementTransition to Retirement

Improve, or gain access to a Improve, or gain access to a Social Security entitlementSocial Security entitlement – – CentrelinkCentrelink

Legislative Update -Legislative Update -Income Test Income Test Reforms from 1 July ‘09Reforms from 1 July ‘09

2008 was a ‘1 in 50’ year event 2008 was a ‘1 in 50’ year event for Australian share market for Australian share market returnsreturns

Source: Standard & Poor’s

20072007

20032003

20012001

19991999 20062006

19981998 20052005

20022002 19971997 20042004 19931993

19941994 19961996 19951995 19851985

19921992 20002000 19891989 19781978 19801980

19901990 19871987 19761976 19881988 19771977 19791979

19821982 19841984 19711971 19691969 19721972 19681968

19741974 19811981 19651965 19641964 19661966 19631963 19671967 19831983

20082008 19731973 19701970 19601960 19621962 19611961 19581958 19911991 19591959 19861986 19751975

-40 to -30-40 to -30 -30 to -20-30 to -20 -20 to -10-20 to -10 -10 to 0-10 to 0 0 to 100 to 10 10 to 2010 to 20 20 to 3020 to 30 30 to 4030 to 40 40 to 5040 to 50 50 to 6050 to 60 60 to 7060 to 70

All Ords /ASX 300 Accumulation Index – 50 years to 2008

But every period of negative But every period of negative returns is generally followed by returns is generally followed by increased gainsincreased gains

Source: Standard & Poor’s

20072007

20032003

20012001

19991999 20062006

19981998 20052005

20022002 19971997 20042004 19931993

19941994 19961996 19951995 19851985

19921992 20002000 19891989 19781978 19801980

19901990 19871987 19761976 19881988 19771977 19791979

19821982 19841984 19711971 19691969 19721972 19681968

19741974 19811981 19651965 19641964 19661966 19631963 19671967 19831983

20082008 19731973 19701970 19601960 19621962 19611961 19581958 19911991 19591959 19861986 19751975

-40 to --40 to -3030

-30 to --30 to -2020

-20 to --20 to -1010 -10 to 0-10 to 0 0 to 100 to 10 10 to 2010 to 20 20 to 3020 to 30 30 to 4030 to 40 40 to 5040 to 50 50 to 6050 to 60 60 to 7060 to 70

All Ords /ASX 300 Accumulation Index – 50 years to 2008

Dollar Cost AveragingDollar Cost Averaging

A way of dealing with volatilityA way of dealing with volatility Helps decrease risk of investing at the Helps decrease risk of investing at the

toptop Can help make a profit even in a Can help make a profit even in a

overall flat marketoverall flat market

Dollar cost averagingDollar cost averaging

Down market:lower price,

buy more shares

Up market:higher price,

buy fewer shares

$ $ $ $ $ $ $$ $ $ $$$ $ $

$200 invested every month for 10 years ($24,000)

The Benefits of Dollar Cost Averaging

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

“Steadily rising share price”

Sha

re P

rice

($)

Year

$32,231

$200 invested every month for 10 years ($24,000)

The Benefits of Dollar Cost Averaging

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

Sha

re P

rice

($)

Year

“Rising share price with short term volatility”

$42,434

The Benefits of Dollar Cost Averaging

0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

Share

Pri

ce (

$)

Year

“Share price recovery”

$62,640

$200 invested every month for 10 years ($24,000)

The Benefits of Dollar Cost AveragingThe Benefits of Dollar Cost Averaging$200 invested every month for 10 years ($24,000)

$32,231“Steadily rising

share price”

Share

Pri

ce (

$)

Year0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

$42,434

“Rising share price with short term volatility”

Share

Pri

ce (

$)

Year0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

$62,640“Share price recovery”

Share

Pri

ce (

$)

Year0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10

OpportunitiesOpportunities

Accumulators• Cheap markets represent an excellent long term entry point;• For regular investors, volatility brings increased future profits by using DCA techniques; • Great time to begin/increase a regular investment program• Protect your family and income with appropriate insurances for Life, Disablement and Income Protection• Don’t forget super

Retiree’sRetiree’s

• No quick fix, we need to ride out this volatility;No quick fix, we need to ride out this volatility;

• Ensure using new super rules to maximum effect -Ensure using new super rules to maximum effect -your own private tax haven;your own private tax haven;

• Assets tested Age Pensioners, seek a Centrelink Assets tested Age Pensioners, seek a Centrelink review now to get a pension increase based on review now to get a pension increase based on market value reductions. market value reductions.

Cont….

$10,000$10,000SALARYSALARY

Taxed at marginal rateTaxed at marginal rate31.5%31.5%

$6,850$6,850

IncomeIncomeat at

31.5%31.5%

Capital GainsCapital Gains15.75%15.75%

24%24%..RETURN......RETURN....

IMMEDIATELYIMMEDIATELY

SUPERSUPER15% Contribution Tax15% Contribution Tax

$8,500$8,500

IncomeIncomeat at

15%15%

Lump Sum TaxLump Sum Tax15% (Worst Case)15% (Worst Case)

Transition to Retirement Transition to Retirement - Overview- Overview

ProblemProblem – – how to boost your super as you how to boost your super as you transition to retirement without lowering your current transition to retirement without lowering your current incomeincome

SolutionSolution – – a strategy based around accessing your super a strategy based around accessing your super through a non-commutable account based pension (NCAP)through a non-commutable account based pension (NCAP)

Action StepsAction Steps Continue to workContinue to work Boost your super with salary sacrifice paymentsBoost your super with salary sacrifice payments Maintain current income with an NCAPMaintain current income with an NCAP

Result Result – – have your cake and eat it too with more have your cake and eat it too with more super for your retirementsuper for your retirement

Your Preservation AgeYour Preservation Age

If your date of birth is:If your date of birth is: Your preservation age is:Your preservation age is:

Before 1 July 1960Before 1 July 1960

Between 1 July 1960 and 30 June Between 1 July 1960 and 30 June 19611961

Between 1 July 1961 and 30 Between 1 July 1961 and 30 June 1962June 1962

Between 1 July 1962 and 30 Between 1 July 1962 and 30 June 1963June 1963

Between 1 July 1963 and 30 Between 1 July 1963 and 30 June 1964June 1964

After 30 June 1964After 30 June 1964

5555

5656

5757

5858

5959

6060

NCAPs in a nutshellNCAPs in a nutshell

NCAPs can only be started once you reach preservation ageNCAPs can only be started once you reach preservation age

Purchased with superannuation moneyPurchased with superannuation money

No work testNo work test

Minimum and maximum payment limitsMinimum and maximum payment limits

Lump sum withdrawals (commutations) generally not Lump sum withdrawals (commutations) generally not allowedallowed

How to have your cake How to have your cake and eat it tooand eat it too Once you’ve reached your preservation age, Once you’ve reached your preservation age,

continue to work at your present levelcontinue to work at your present level

Purchase an NCAP with your superannuation moneyPurchase an NCAP with your superannuation money

Salary sacrifice into your super account (subject to employer’s agreement) Salary sacrifice into your super account (subject to employer’s agreement)

Purchase an NCAP with your superannuation moneyPurchase an NCAP with your superannuation money

Maintain current income by drawing a pension from Maintain current income by drawing a pension from your NCAPyour NCAP

Tax advantages mean your income stays the same but Tax advantages mean your income stays the same but your super may receive a boostyour super may receive a boost

Peter’s storyPeter’s story

Peter, age 55, wants to retire at 65 and work full-time until thenPeter, age 55, wants to retire at 65 and work full-time until then

He earns $60,000 per year - $47,250 after tax and Medicare levyHe earns $60,000 per year - $47,250 after tax and Medicare levy

Peter has $300,000 in superPeter has $300,000 in super

On 1 July 2008, Peter rolls over all his super into an NCAP and chooses the maximum pension payment of $30,000On 1 July 2008, Peter rolls over all his super into an NCAP and chooses the maximum pension payment of $30,000

He salary sacrifices $37,519 (year 1) into super and receives the same net income of $47,250 after tax and Medicare levyHe salary sacrifices $37,519 (year 1) into super and receives the same net income of $47,250 after tax and Medicare levy

Peter’s position without a Peter’s position without a Transition to Retirement Transition to Retirement

strategystrategy

Superannuation$300,000

(Accumulation)15% Tax on entry15% on earnings

Tax-free Withdrawals (after age 60)

Employer Pays Super Guarantee (9%)

Take Home Income$47,250

TAX MAN

Employer

Gross IncomeTaxed at Marginal Income

$60,000

An NCAP gives Peter a An NCAP gives Peter a super boostsuper boost

TTR Strategy

Superannuation$300,000

(Accumulation)15% Tax

TTR Pension

0% Tax

Salary sacrifice

$37,519

55 -59 comes with a 15% rebate

60+ Totally tax free

Saved

Saved

Saved

Saved

Take Home Income

$47,250

TAX MAN

Employer

Gross IncomeTaxed at Marginal Income

$22,481

Employer Pays Super Guarantee

(9%)

Accumulated Super used to purchase NCAP

$30,000$300,000

The projections in this strategy are based on various assumptions, including but not limited to:

• maximum pension payment = $30,000 in year 1; • salary sacrifice = $37,519 in year 1; • no change in take-home pay before/after strategy; • no change in risk profile; • estimated investment return (Prudent portfolio) = 6.1% pa

(super), 7.0% pa (pension); • all investment earnings figures are after tax and after fees; • no change in Super Guarantee contributions, ie 9% of

$60,000.

Peter’s estimated gainPeter’s estimated gain

It’s estimated that by using this strategy It’s estimated that by using this strategy Peter will have built an extra amount of Peter will have built an extra amount of around around $91,800$91,800 in super by age 65 in super by age 65

The increase is due to tax advantages and The increase is due to tax advantages and will not require a change in investment will not require a change in investment strategystrategy

By making additional salary sacrifice By making additional salary sacrifice contributions Peter could increase his super contributions Peter could increase his super still furtherstill further

Implementing a TTR Implementing a TTR StrategyStrategy

Once you’ve reached preservation Once you’ve reached preservation age, a transition to retirement age, a transition to retirement strategy can potentially boost your strategy can potentially boost your super as you transition to retirement super as you transition to retirement without lowering your current income.without lowering your current income.

To re-cap it involvesTo re-cap it involves continuing to workcontinuing to work rolling existing super into an NCAProlling existing super into an NCAP boosting your super with salary sacrifice paymentsboosting your super with salary sacrifice payments maintaining current income with an NCAP maintaining current income with an NCAP

As a result you can have your cake As a result you can have your cake and eat it too with more super for and eat it too with more super for your retirementyour retirement

Improve, or gain access to a Social Security entitlement With super fund returns continuing in the negative many investment / superannuation account balances are probably lower since your last assessment.

What you can do:

Existing clients should contact Centrelink and request for a re-assessment of the value of these investments to see if they are eligible for an increase in their age pension entitlement.

Clients who were previously not eligible to claim the Age Pension due to the assets test may wish to contact Centrelink to see if they are now eligible.

Legislative Update - Legislative Update - Income Test Reforms from 1 July '09Proposal to assess certain 'salary sacrificed‘

contributions to superannuation as income is to

broaden the definition of income that is assessed in

determining eligibility for government support

Programs

Review of how the proposed changes will impact the

more popular strategies used for Clients:

Personal deductible contributions to super and 10% rule

From 1 July 2009: Any amounts sacrificed into superannuation from

salary or wages will be added back to assessable income to determine

whether the employee meets the 10% rule or not.

Government Co-contributionFrom 1 July 2009: This strategy will no longer be viable to high income

earners as any salary sacrificed amounts will be added back to

assessable income for determining eligibility.

Commonwealth Seniors Health CardFrom 1 July 2009: The income definition to determine eligibility for the CSHC will be expanded to include non-assessable (tax free)

income from superannuation pensions and lump sums, salary sacrificed contributions, personal

deductible super contributions and total net investment losses.

This is a consequence of the expanded "adjusted taxable

income“ definition.

Mature Age Workers Tax Offset, Spouse Super Contributions Tax

Offset

From 1 July 2009: Assessment for the above tax offsets will include any salary sacrificed amounts to

superannuation.

Family Tax Benefits (A&B), Child Care Benefit, Baby Bonus, Senior

Australian Tax Offsets, Child Support, Medicare Levy Surcharge

From 1 July 2009: Assessment for the above benefits will include any

salary sacrificed amounts to superannuation AND/OR any amounts

contributed to superannuation as a personal deductible (concessional)

contribution.

Cont…….

Where to from here?Where to from here?

Remember, no one has a Crystal BallRemember, no one has a Crystal Ball– ‘‘We simply attempt to be fearful when others are We simply attempt to be fearful when others are

greedy and to be greedy only when others are greedy and to be greedy only when others are fearful’.fearful’.

Warren BuffetWarren Buffet Always get quality advice and buy quality investments;Always get quality advice and buy quality investments; Focus on your strategy and long term goals; Focus on your strategy and long term goals; And finally…And finally…

““In each and every market down turn a massive amount of wealth is In each and every market down turn a massive amount of wealth is transferred from the impatient to the patient”transferred from the impatient to the patient”

We want to make sure you are one of the patient ones!We want to make sure you are one of the patient ones!

FeedbackFeedback

Please complete the feedback form in order for us to continually Please complete the feedback form in order for us to continually improve the service to clients;improve the service to clients;

In order for us to communicate in the most timely manner, please In order for us to communicate in the most timely manner, please provide your email address on the form located on your seat. provide your email address on the form located on your seat.

DisclaimerDisclaimer

This information is a summary based on Financial Foundations Australia Pty Ltd’s understanding of the relevant

legislation. It is general in nature and may not be relevant to individual circumstances. The case studies

should not be considered recommendations or personal advice. 

You should not do or refrain from doing anything or rely on this information without obtaining suitable professional advice.

QUESTIONS??QUESTIONS??