Planning future finances

In this episode, you’ll hear from Chris Oates, a senior financial adviser at RSM Financial Services Australia. Chris has extensive experience providing financial advice to individuals and families at all stages of life.

Chris guides us through some of the financial decisions and strategies that can help families plan for the future with greater confidence. His presentation covers assets, superannuation, Wills, beneficiary nominations, investment options, insurance and income-producing strategies.

He also explains how financial planning can help families understand where they are now, where they want to get to, and what strategies may help fill the gap. For families thinking about the future support of children or dependants, Chris offers practical ways to consider how money, assets and planning structures can provide greater security over time.

Chris Oates

Chris Oates is a senior financial advisor at RSM Financial Services Australia. He has extensive experience advising individuals and families at all stages of life.

Transcription

This is an auto-generated transcription that may contain some errors.

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What I’ll be talking today from a financial adviser point of view is basically looking and going, well, how do you plan for the future? So, and so for ourselves, for our families. And it’s about where do you start as well? So, where do you start? Where do you want to get to?

On the agenda, what we want to do is we want to look at two stages of planning. So, the first part of what we’re going to talk about is what we’re doing. So, what we’re doing with our money now, how are we going to provide for our, I guess, our futures, our families while we’re alive and we’re in control?

So, that’s the first part. The second part is what will happen in the future. So, that’s more about okay, well after we pass away, how’s things like assets, our investments, those sorts of things. How can they provide for people and what are the options around that.

So, the first part of the agenda here is what’s the purpose of advice. The next part is then thinking about well what are we trying to achieve, what assets are we trying to build up?

And, so, ultimately what what ends up in our estate, different types of assets and investments that are out there that we can use.

And then we’re going to touch on insurance a bit as well, because that’s one thing that a lot of people don’t think about is things like life insurance and total permanent disability cover. So, how they play a key role in planning.

When we then look at what happens after the fact, it’s then, as I said, how do you give an income to to a child to support? And also how do we make sure there’s access to money?

But where I will come at it from is what’s the what’s actually the underlying. So, let’s say if there was a trust or something in there. How do you actually invest and how do you make sure that serves a purpose for us.

So, the first part that if somebody comes to talk to me sits down, the first step that is ultimately is looking okay… well, what is the financial planning process? And it really is about okay, well you’ve got to take stock of what you’ve got and where you are now. So, that’s looking at well what are your assets? The big things that we think about are okay you might have a home, you might have some superannuation, you might have some bank accounts.

What’s there? So, what do you already have? Because that really is your base point with anything you want to do. Where do you start?

The next thing is it’s actually funny because you start, you’re right at the beginning, but then you need to go right to the end. And this is about setting objectives and goals and going, okay, well where are we going to be?

And, well, where do we want to get to? So, you’ve gone to the start and then you’ve got to jump to the end and gone… What’s next? Well where do we want to be? What’s the purpose of what we’re doing? So, then you come back and really financial planning is filling in that little bit. So, that’s about what do you need to do? Well, how do you put a strategy in place or what are the key things that you need to do? And that’s really where I probably provide the most benefit to, to my clients coming up with those ideas, those strategies in there.

So, with the looking at the first part, this kind of ties in then with a bit of the estate planning and going, well, if we start thinking about what we want to be able to provide for our families in the future? It’s really about, well, what is in your estate and what isn’t? So, what gets served with your will and what doesn’t.

So, things that get served with your will, like your home, your contents, your cars, those sorts of things, bank accounts – if anybody has a few shares out there. So, those – and then if anybody might have an investment property – that sort of stuff that’s all dealt with by your will. If it’s in your name, it’s with your will.

The next part of it is then things that you can actually control where they go.

So, things like superannuation, family trusts, some life insurance proceeds. You actually can set your beneficiaries of where that goes to control who actually gets that money. And that’s actually a key thing to be able to as part of that planning process is to be able to separate and go, okay, well, what are what are our kids going to get? What are our families going to get?

So, and that then comes down to making sure that we’ve got those well, if it’s a will that’s in place, but then we’ve got the other things like superannuation beneficiary nominations in place to make sure that they go to where we want them. And that’s a big thing that we talk about is – and a lot of people don’t realise these things like superannuation is making sure you’ve got that beneficiary nomination on there. So, you know who’s going to get it.

What from this point, what I actually thought was a good idea is to put some examples together. Now, I used a family with two kids, Jack and Jill. So, I work in finance and numbers. As you can tell, creativity isn’t my key point.

So, with this example, we look at it and we go, okay, what’s in the estate?

Those are state assets. Let’s say there’s a family home worth $1 million. There’s some personal assets might be your contents and a car worth 50,000, and then somebody has got some shares which is 100,000. They might have inherited them a while ago. Then we look at the non estate assets. So, you’ve got superannuation. So, let’s say you might have somebody might have half a million dollars in there.

So, the total estate is worth $1.65 million. It’s amazing how actually when we look at what we’ve got, we’ve actually built up a fair chunk of money without actually realising. And that’s by having that home, the superannuation, if we’re working, having money paid into it.

So, now the other side of it is, okay, what if there’s not enough? What if we need to provide for our families, but there’s not enough money there to do what we need to?

There’s two ways to do it. First one is you come up with a strategy to maybe build up some investments or build up some money, some money in the bank, or we might be able to build up your superannuation a bit more or just do some small regular investments as well. So, I think the one thing that a lot of people think about is to build up an investment portfolio, you need a lot of money to do it.

That’s a myth.

And you can start out, it’s about what you can do and what you can build up for yourself. Doing things over a longer period makes such a difference. So, the idea of compound interest, it just builds on. So, you if you earn $10 of interest, the next time they pay interest, they’re paying interest on that $10. So, just builds up and grows and grows and grows.

So, that’s where planning early is really important, because the longer you can do it and the earlier you start, the more money you can get. A lot of people don’t start thinking about what can we do until they’re a couple of years away from actually an event happening. So, if you get in early, start it, you can do something as small as a $100 a month, $10 a month, whatever it is, just maybe we can start doing something.

And so that’s, as we said, investment portfolios, super contributions. The other thing you might be able to do is put some money into super and claim a tax deduction. I know nobody likes paying tax, so, if we can if we can help to manage that position along the way too.

The other way, if there is a gap and we’re not able to build up enough investments or we’re not able to build up enough money to fill that gap of what you might need to provide for your families is insurance.

So, death and total permanent disability cover. So, what they do is the main reason somebody might have some debt or some life insurance is to pay off the mortgage on your house. The other one might be there to well, if you’ve if you’ve got a partner, if you’ve got family and you passing away means there’ll be income lost from the family, you can replace that lost income for them over a period of time as well.

The other reason can be that you might need to if, well, if your home wasn’t suitable for family to live in, they might need to need some other money to be able to buy something else. So, that gives you that flexibility to do the things without your family actually being rushed into making some key decisions.

Now, the difference between death and total permanent disability cover is total permanent disability is if you can’t work anymore, you’re permanently injured or you’re sick and you just can’t go to work, you can actually get paid out a lump sum. So, you’re still alive… it’s just that you’re permanently disabled so you can’t work.

So, what that means is that in that instance, instead of you continuing to work, you can still get a lump sum of money which will replace: one, what you may not have earned. Two it might actually, if you had a savings plan in place, you can actually fill that gap of where you may have got to. And then the other side of it is you can still pay out debts and all of those sorts of things. So, there’s a couple of different strategies that we can use in there.

And there are different types of insurance, but they’re the two main ones that we do look at with people.

So, looking at the idea of investing. Now, there’s two reasons that we generally will invest. The first one is to build a growth portfolio. The other one is to produce income.

Now, where we look at growth. So, what growth means is that money is going up in value.

So, if we think of a property or an investment property, we rent that out. So, we’re getting rental income. So, that’s the income side of it. But then the value of the property, that’s where people’s assets go up over time. So, that’s the growth side of the portfolio.

So, the idea is if you invest in you can do it in shares. There’s plenty of different vehicles you can invest through. But the idea is that they’ll go up over time… gives you a bit more money in the future.

And what that also does is if you’re working and you’re earning an income, you’re earning a salary or you’ve got some sort of taxable income, and when you’re retired, what happens is if your investment grows and just the value of it goes up, you don’t have to pay tax on that year on year that. You don’t pay tax on that until you would actually sell that investment. And then you pay what we call capital gains tax.

So, if you bought something worth $100,000 and it went up to $150,000, when you sell it, you have to pay tax on that 50,000. Now you do get some tax tax benefits and some tax relief. But generally that 50,000 is taxable to you.

So, that then means that if you stop work you’re retired, your income is dropped… that might be when you decide that you want to sell something because you’ve got a lower a lower tax rate, and that that means that you’re not giving as much to the tax office down the road, and you’re keeping more in your in your kitty, which will provide for you and your family.

Then we look at the income portfolios.

So, what we will look at is quite often the type of… when people come to see us for the income portfolio is… they might need that to support their living. They’re retired, superannuation is a big one that people will help us use, that we will help people to invest to use as income. And so that’s where you need that to be able to produce things like bank interest or share portfolios. They’ll actually pay you a dividend or a rental property that will pay rent. So, there’s plenty of different options out there. But there is a distinct difference between the types of assets that you buy when you’re trying to build up a nest egg versus when you’re actually trying to use it. And so that’s actually one key thing that we talk to people about.

The other thing we then talk about is it comes down to risk, the risk of investing as well. So, we and everybody has a different appetite to risk. But we people here that are happy to take on lots of risk, they’ll put money into something or they’ll do something in their lives that they go, okay, I’m happy, I don’t mind, I’ll take the risk that my money could go down at some stage.

I was talking to a client the other day and they they said, oh, it’s the same as when I go and play, I don’t know, they used they played backgammon. They said, oh, I’ll do something. I’ll take a risk when I play knowing that I could lose, but I don’t mind. I’m comfortable with that risk. It might mean the end of the game for me, but I’m happy. I’m still enjoying myself. But knowing what that risk is and knowing you can tolerate it.

So, when we then work out how comfortable you are, we then split it into what we call defensive and growth investments. So, a defensive investment is things like cash and term deposits are the obvious ones.

You know what you’re going to get. You’re going to get some interest. It’s not fancy. It’s not interesting, but you know what’s there and what you’re going to get. The other thing is that other people, we hear government talk about government bonds and buying and selling bonds and managing inflation and things like that. But they are what we would consider defensive and low risk, because generally we know what we’re going to get out of them. There’ll be maybe a couple of hiccups along the way, but we know what we’re going to get.

We then look at what we call growth, and this is where the risk comes into the portfolio, because shares and property, they go up in value. We know that. We see, particularly in the last or last four years, share portfolios have gone up and down like crazy.

For a financial adviser that helps with portfolios. They’ve probably given me a few extra grey hairs or maybe start getting some if I didn’t have any already. But they are. They do. It does happen. And we see shares. You see it on the news every night. The share market has gone up or it’s gone down. They do move daily and that’s where we notice it and we feel that a bit more.

Property…. There is quite often a perception that property goes just goes up in value over time. It does go up and down. If we valued it the same as shares, we’d see similar movements. Property does, but we only ever really value it when we’re ready to sell it or we want to do something with that property, and then chances are, if we’ve held it for long enough, it probably has gone up in value. So, that’s where then we work out a balance. And this also comes into that growth versus defensive allocation of what we want to do. Growth versus income purposes. The allocations to these types of assets are really important.

What this shows as well is with the risk… You can see here the two blue lines at the top. That’s Australian shares and overseas shares. Over the last 20 years they’ve definitely earned more than any other asset class. Then you’ve got underneath that of gold alternatives. That seems like gold. And then the Purple line will be property.

So, you see those types of assets. Yes. They’ve earned more than any other class. But because you’ve taken more risk with those shares, you’d hope they make a bit more money over the longer term.

And this next chart does actually show that volatility in investment. So, just being prepared to be able to wear that level of risk.

And you can see there’s one there – there’s 2008-2009, the global financial crisis. That’s the big drop on those lines. You need to be depending on how much risk you’ve got, you need to be able to wear those risks.

So, a 20% drop in an investment- let’s say it’s 100,000 that’s losing $20,000. So, that’s a lot out of the back pocket.

So, you’ve got to be able to be prepared that if you look at your your investment portfolio and it’s gone down there, you’re okay. You know it’ll recover. But you can actually wear it.

At the same time, that green line at the bottom, for an aggressive portfolio, you see there in 2021 that’s shot right up. It’s actually made more money. So, you probably make more money over the long run. But you’ve got to wear those fluctuations.

So, an example of how we can build up that money. So, using the example of if we had it in our budget where $10,000 a year for ten years, so that’s a bit under $1,000 a month to go into something.

What would that look like?

7% is a bit of an average return. That’s a middle-of-the-road level of risk portfolio. It means over ten years we’ve put $100,000 in. Over that time, we’ll have actually earned 40,000. So, at the end, you’ll have $140,000 left that you can actually do something with, that can provide for the family, can provide for you for your retirement.

It’s just the way that, okay, over time, it just makes such a difference of building those assets up.

So, that’s a key thing of looking at starting something. It might not be 10,000, it might be $1,000 a year. But if you can just put something away, it can be helping to provide for education, for family, can be putting something aside for if they can, if family needs a car or something.

So, it’s about sort of having that plan and thinking when you might need some money and starting to put something in place.

Then this was, as we said, the insurance is what if something happens to me? So, the death cover, what will happen is it’s a lump sum. It’s whatever you can get insurance cover for whatever amounts that you need.

So, it’s then going, okay, well working out and doing a bit of an analysis and going, what do I really need and what does my family need? Because if you pass away, as we said, there’s that lump sum that will come in and it might go into your estate, or you can even nominate who the beneficiary is.

Now, that can be really important because if we don’t know who controls our estate, so if we don’t know who’s going to control our money and look after it and work out where it goes, if you can nominate somebody in particular to receive that amount, that can be a really good way of actually bypassing your will.

So, it can be things like if you don’t want the the public trustee to be looking after the money, then you can actually go, okay, well, I want this to go directly to someone and it gets paid to them rather than going into your estate. And life insurance is a tax free lump sum, so there’s no tax to pay on it as well.

Total and permanent disability cover. Again, it’s a lump sum similar to death cover. Quite often a lot of people have the same amount of cover because it can cover the same things. There are reasons why you might have different amounts, but again that comes down to everybody’s personal situation.

You can own it in your superannuation, and that’s actually probably the most common place that people do have some total permanent disability cover.

You used to actually get default cover when you’re signed up. So, a lot of people didn’t know they had it and they were just paying premiums. But it can be in your super. So, if you’ve got a superannuation account maybe have a look at it and see what’s in there. And then from there you go okay, is that enough or do you need to top it up. And that’s where then you can work that out.

If it’s in super, you may need to pay tax on it. So, that’s sometimes where we’ll look at and go, is it better if you can pay for it and own it outside of the superannuation system? If you’re under age 60 and it gets paid out to you, then there’s 22% tax paid on part of it.

So, again, personal situations for people of whether it’s better to own it in or out of superannuation, this money is then paid to you. So, instead of you’re still alive, so it’s still your money goes to you and serves a purpose for you and what you need it to do.

Again, let’s go back to Jack and Jill.

So, Jack share of the estate. Let’s say Jack got the home. So, Jack gets $1 million.

It does mean then that Jill’s only getting 650,000. Now we do. If we’ve got kids, we quite often like to provide evenly for our kids. So, that’s where we go okay, well, there’s $350,000 difference here. That’s a lot of money. What do we need to do to even that up?

And so I was actually having a similar conversation with a client this morning who has three kids. They’ve already given their one of their kids or help their kids with other bits and pieces already. So, then they’ve had to work out, well, how do we make sure that it’s even for our other two kids?

So, they’ve gone okay, well, we’ve talked we’ve had a conversation about some life insurance and actually nominating those other two kids as the beneficiaries. We can be giving that money to kids for any reason. If we want to fill that gap of 350,000 death cover, we can just get that paid.

We can get that level of cover, get it paid into your estate, equalises the inheritances. It’s the easiest way. It’s a pretty simple way to look at it. Then the other side of it is you don’t actually save that money. Yes, you’ve got to pay premiums for that cover. But it’s instead it might take you a lot longer to build up $350,000 than it would to actually have that cover. So, hopefully you could maybe do a bit of a savings plan on the side and over time be really nice if we could save 350,000, that would be the dream. But then yeah, it does give fill that gap for us and this money then. Well it’d get paid into your estate for you as well.

The total permanent disability is I guess that’s then where we have to look at it and go, okay, well that gets paid to you. It still filled that gap. You’ve still got the equal amounts there. It might be an early inheritance or you’ve still got it.

So, even if you didn’t need it, the purpose wasn’t to provide for you, you do have that money anyway, which can give you some extra benefits.

The tips and traps for if you do have insurance – review it regularly. The amount of people that put it in place and then come back in ten years and go, oh, I did this in ten years. I don’t actually know what I’ve got. The premiums have gone up, my cover’s gone up… I just see money coming out every month. I don’t actually know, review it every couple of years. We actually encourage every year with our clients to review their situation. And make sure your wills are up to date as well. They should say the same thing.

The amount of people that did their wills 20-30 years ago and don’t actually know what’s in them don’t know where they are. They might be with a lawyer that has merged firms, doesn’t work anymore, and they actually don’t know where it is and they don’t have a copy. It can be hard to actually find out what was there. And then it comes up, comes to the rest of the family to sort that out when they’re already dealing with grief.

And it’s a hard thing to do. So, make sure you’re reviewing those bits and look at what debts you’ve got. If your debts are coming down, hopefully you’re paying your mortgage off over time. So, if that mortgage is coming down, then you might not need as much insurance. It can reduce the costs for you. So, that might give you a little bit in your pocket to do something else with. We know at the moment it’s expensive to live, so, that puts a little bit extra in the kitty and that might, might just help make things a little bit more comfortable or to do something or to go out for dinner or something.

There are other types of insurance. There are things like income protection. You can get sort of 70% of your monthly income covered for if you can’t work for an extended period of time. Not that you’re permanently injured or incapacitated, you can just then you can actually get some income replacement and trauma cover is serious illness or injury. You can get paid out. Most common things for that are cancer, strokes, heart attacks, those sorts of things.

So, that sort of the idea of what you can do to build up money and to build up assets while we’re still, I guess, earning money, we’re still alive. We’re trying to provide and build up a nest egg for our families.

The next side of it is, well, what happens…? Let’s say you want it to go to the kids, and maybe in a testamentary trust that might go to them personally. It might help wherever the money ends up, but we need it to provide for them.

What does that look like and how can that money be used? Now, the key thing is making sure that we know who’s going to control it for our family. We want to go, okay, well, the decision-making, for example, we want to be able to say who helps to make those decisions. That can be our family, that can be our kids, or we can be our kids with support of other people. So, just making sure that we’re clear on who actually controls that.

The idea… so, once they need the money, if we want to give our kids some income. So, that income can be used to support housing; they might need to pay rent. They might need to pay a mortgage. They might need to pay things like, obviously, groceries, phone bills, all of the above.

We need to look at those income-reducing strategies that we touched on before. So, the most effective income-producing strategy for people is generally superannuation. So, if you’re over 60 or your kids are over 60 or they meet permanent incapacity guidelines, then they could actually draw a really tax-effective income out of the superannuation. And it’s actually something that people don’t think about as much.

So, even though if you are incapacitated, if you’ve got access to your super, it can actually provide a really good income source. And it’s where we think we haven’t been able to access it long term, we might actually be able to.

So, instead of having to wait once a year or getting ad hoc payments here and there, you actually can get it paid every fortnight, which is a big relief for people that aren’t having to wait a month or six months to get money into the bank account.

The other thing then is a property. So, an investment property where you can get regular income, that’s pretty straightforward. You get rental income, you set your rent… Yes, you’ll have costs, but a property manager can help to regulate all of those.

Then it’s really a set-and-forget strategy. So, it’s pretty simple. We know it’s there. We’re going to get income from it. You don’t really need to do too much about it. The catch with it is I suppose you’ve somebody needs money, they can’t access it.

They can’t take a brick out of the house or they can’t sell off one of the rooms. They do need to sell the whole thing. So, access to some cash, if it was really needed, can be a bit restricted if it’s just a property investment that you’ve got. The other thing then is an investment portfolio. So, that can be things like shares.

You can invest in any sort of structure, whether it’s personally in your own name, through a trust or a company. But really it’s easy to access, easy to buy, takes two days to buy, two days to sell.

You can look and we can really do asset protection. We’re using those different structures in there. So, protecting who actually controls and who can get the money.

And it’s, as I said, it’s highly liquid. So, accessibility is not a problem. If you somebody needed to buy a car or something, you can easily get a lump sum out of it.

The last one is that a lot of people, and they’re not as common nowadays as they were probably 15, 20 years ago, is annuities.

So, this is if you had 100,000, you can actually, I suppose, go with that 100,000 and give up that money and then from there you actually go, well, okay, that money is that just gives you a regular income, you know, it’s there set and forget. You’ve got that comfort. You don’t have to worry. It can be effective for Centrelink benefits as well.

But, as I said, once it’s in there you can’t draw it back out. So, it’s not accessible.

So, again using the example to produce income we’ve got $1 million. We need 50 50,000 a year. We’ve got an investment return of 6%. We’ve got inflation at 3%. I know it’s higher at the moment, but hopefully it does get down a little down to closer to that 3% long term.

The idea here is what I’ve got here is showing how this can provide that 50,000 a year long term. And this is just doing a simple middle of the road risk investment, million dollars the first year you got to take 50,000 out of it. It’s got 6%. It’s earned 60,000. So, it’s actually gone up in value. It’s gone up more than what you’ve had to take out.

Year two… so, you’ve got 1000. You’ve got 1 million, 8,050 because you’ve had to pay a bit of tax on your superannuation is the example in here, the draw down again. So, your income is actually going up over time and it’s earning more over that that period. So, you do get to a point after about that…

Well it’s about what ten years that you’re actually drawing down somewhere between probably about eight years, you’re drawing down more than what it can make. But you can still see after 30 years, you’ve still got $160,000 left there. So, that’s produced an income for somebody over their lifetime. And there’s still money left over over 30 years. So, that’s if you can that’s really where that insurance as well, whether it’s the house insurance, whatever the assets are that can produce those levels of income.

So, in summary, very quickly…. the first thing is plan, plan what you need to provide because that’s the starting point. Think about where you are now where you need to get to. So, that’s then going okay what’s our goal. Then you go what will you and your dependents have? So, that’s really that end step.

And then looking and going how do we feel that middle bit in those different types of assets, different types of investments, investment structures and just having a strategy and a plan in place.

And then what’s the gap? And that’s where then we can look at that insurance side of things in there and again using those assets effectively for an income.

So, whether just getting it right using the different types of assets for you.

So, that’s the presentation. Well, that’s all I had: an idea of what we can do with our money, how we build it up and how we can use it in the future.