End of the year myth busting & putting things in perspective...
We are at the finish line of 2011, a year that will be remembered as volatile, emotional and a year of change. So much has happened this year, in Australia and all over the world. So many of those changes happened because someone finally said stop and questioned the ordinary reality they have lived in. Just because things have always been a certain way doesn’t mean it is the right way. It’s good to question or compare things from time to time, it can give you a different perspective on life and it can improve your level of understanding.
Let’s take a closer look at few misconceptions and myths surrounding us every day. They are used in every day conversations so often that they are considered facts. Not many would question them and unconsciously many have their vision clouded by them. The reason why I am writing about them is that if corrected they could possibly change the perception and improve general knowledge of a few financial concepts. Ok, let’s start our myth busting exercise:
Myth no.1 – Superannuation is a risky investment
Superannuation is not an investment; it is a tax structure or a tax environment. It was designed to offer a tax favourable treatment of assets, used to provide you with benefits in retirement. Also it can considerably increase Centrelink eligibility.
The majority of people’s super money is invested in managed funds within their default employer super funds. These are generally exposed to shares and when the share market is volatile (which happened daily in the last few years) their balances would reflect that. But it has nothing to do with superannuation as the tax concept. Most assets widely held outside super such as cash saving accounts, term deposits, investment properties, direct share portfolios, art work, and commercial properties can be structured within the superannuation environment. It comes with certain restrictions, but also considerable tax and Centrelink benefits. So, next time when you hear someone saying: ‘My super lost money’, you can correct them by saying: ‘No, it can’t’. When you think of super, think of tax and Centrelink, instead of performance and investment returns.
Myth no.2 – Shares are risky investments
The only risk that applies here is the emotional risk associated with these assets. Shares generally carry a certain amount of volatility and that is very normal. The share market moves up and down and sideways on daily basis and no one really knows why, nor can they predict what will happen next. But as long as you stick to the fundamentals of buying quality companies, at good value, apply diversification and remove emotions and allow your investment enough time to perform, you are on track to achieve good growth. Unfortunately, average investors fail to stick to these rules and then subsequently blame the investments, of course! Shares generally offer good liquidity, especially if bought via managed funds. This is one of the great advantages compared to other growth asset like direct property. If you are in an emergency and need to cash in a portion of your portfolio, you can, and it is usually done within a matter of days. With property you simply can’t just sell the kitchen should you need cash quickly. Additionally, shares can pay meaningful dividends which are often at rates higher than term deposit rates.
You are better off seeking a financial planning professional to help you make the investment decisions with you.
Myth no.3 – I don’t need insurance, they never pay claims anyway
You don’t need insurance, you want it. Ok, this is a tricky one. Because there are so many different types of insurances out there, it is often confusing to distinguish what type of cover people mean. There is insurance for everything these days. However, generally speaking, it is sadly personal insurance (Trauma safety net, Income Protection, Life and Total and Permanent Disablement cover) people opt to ignore.
It comes down to this; when deciding what type of insurance to choose from, consider two criteria – likelihood of a potential claim and the extent of the impact the claim would have on your life. Ask yourself these questions, and be honest. When are you likely to be more affected emotionally? – A. Someone steals your car or B. You are diagnosed with cancer of the liver. What will make a bigger impact on you emotionally? – A. Your house gets flooded or B. Your spouse dies and leaves you with two young children. Which is it going to be a bigger problem going forward? – A. Someone breaks into your house and steals your jewellery or B. You have a car accident and end up in hospital with a spinal injury and you are not able to go back to work anytime soon, your income has stopped and your bills continue to appear in your mailbox (not mentioning extra medical bills).
Your lifestyle today as well as the majority of your plans for the future relies on your regular income. Do not get fooled that you can start making plans with your income without securing it first.
An enormous amount of $3.5 billion ($3,567,649,826 to be exact) was paid in Trauma, TPD, Life and Income Protection claims* just in 2010. That means an average of $14.3 million was paid to 245 Australians every working day in 2010. Yes, it pays to have an appropriate cover in place.
· Statistics are the aggregate from the following companies – AIA, AMP, Asteron/Suncorp, AXA, BT, CommInsure, OnePath, Macquarie, MLC, Tower and Zurich.
Myth no.4 – Industry funds - all benefits to members
This will come as a surprise to a lot of you. But here’s the real deal.
Industry super funds (ISFs) fall under different legislation than retail super funds and master trusts due to their not for profit status. They don’t have to publish gross/net investment returns, but instead they use what is called a ‘crediting rate’. This provides them with an advantage to utilise it in their huge advertising campaign.
Tax is the biggest cost in super. When an insurance premium or a management fee is paid from your super balance, these are tax deductible expenses to the fund with tax credits normally applied back to your account. But not with the industry funds, you don’t see a tax credit going back to your account. They pool these credits and include them in the crediting rate and therefore overinflate the fund’s total return. It gets better. These funds are then used for what I think is far from benefits to the members. For example, Australian Super has 1.5 million members and an estimated deductible premium of $200,000,000. At 15%, this would mean a rebate of as much as $30,000,000 that the trustee is using for what? Advertising to non-members (possible breach of the sole purpose test?), subsidizing admin fees so that they look cheaper (transparency issues?) are not my idea of benefiting to members. As far as the facts go, they only benefit to themselves.
There is a long list of issues that an average ISF TV commercial viewer doesn’t realise, and is instead misled by the marketing skills of their sales department.
Oh, and by the way, ISFs refuse to be formally rated by the research houses. Probably due to concerns this would uncover cracks in their deceptive conduct by running their campaign of ‘Industry funds are run only to benefit members’.
Compare the pair? No, thank you.
Myth no. 5 - I don’t need financial advice
Financial advice is available for everyone but not taken by everyone. There are two types of people. The first type always complains about the present and only talks about the future and then there is the other type that does something about their life and plans and controls their destiny.
If you got this far through this blog you are probably in the second group. This is a great start. An ongoing relationship with a financial planning professional will enhance the outcomes you are after. A good planner will stop the information noise around you and keep you focused on your goals. They will simplify the legislative and financial complexities and help you to understand the rules. This considerably eliminates a lot of stress and allows you to get a sense of control, helping you stay confident that you are on track to achieve what is important to you.
Financial advice can end up making a dramatic difference to people’s lives. And it often does. So remember, you always have a choice.
After these holidays, upon returning to work and receiving financial advice, would you rather:
A – Ignore the advice, have no budget, make no extra contributions to your super, pay an extra $175,000 in your mortgage interest, try to time the markets, chase investment returns, and simply miss the best days in the markets and consequently have your super last you only few years into your retirement, pay unnecessary tax after you turn 60 and be at the mercy of government support instead of enjoying your retirement?
Or
B – Implement investment recommendations from your financial planner, get on top of your expenses, pay off your mortgage 12 years earlier allowing you to buy an investment property and increase your overall super benefits in retirement, pay no tax and spend the rest of your life taking trips and enjoying the grandkids?
Would you rather:
B – Ignore the advice, watch your life partner die after not having enough liquid funds to treat his/hers stomach cancer condition, miss the precious last months of their life after having to go back to work to pay the ongoing bills and put food on the table for your children, at the same time have no other option but sell the house you lived in with your family for years and where you were looking forward to raising your grandkids, and abandon the plans to fund your kids’ university studies?
Or
A – Implement lifestyle protection strategies with your financial planner, receive a lump sum when your partner is diagnosed with the disease, allowing you to contact the experts and treat the condition immediately, replace his/her income, take your time off work and spend it by their side and speed up their recovery, maintain all your future plans and together attend your kids’ doctorate graduation?
Merry Christmas and Happy New Year 2012, may it be filled only with the good decisions.
Michal Bodi, Financial Coach