Do I have enough super?

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Calculate – do I have enough super?

The table below is the ASFA (Association Of Superannuation Funds of Australia) suggestion of what is “enough super”.

ASFA Retirement Standard – June Quarter 2020

	Annual living costs	Weekly living costs
Couple – modest	$40,440	$775
Couple – Comfortable	$62,083	$1,189
Single – Modest	$27,987	$536
Single – Comfortable	$43,901	$841

Enough super?

Assuming an average salary of $74,724 pa, and 30 years to retirement, employer contributions (9.5% of salary) alone would generate $730,393 if growing at a net rate of 7% pa. If inflation averaged 2.5% during this time the real purchasing power of the final amount would be just $341,739. Assuming a net income of 5% in retirement, your super would generate $17,087 pa.
In order to meet the modest goal of $23,662 you would need to make salary sacrifice contributions of $3,000 pa. for the full 30 years. To obtain the “comfortable” goal of $42,861 you would need to salary sacrifice $11,900 pa till retirement.

The crucial factors are;

• Time. The longer you contribute and enjoy growth the better.
• Returns. The higher the returns the better. If returns were a net 9% instead of 7% in the example above you could achieve a “comfortable” retirement by salary sacrificing just $5,400 pa.
• Inflation. Inflation can ravage your savings. If inflation was 6% pa instead of 2.5%, the real purchasing power would be just $114,128 instead of $341,739.
• Contributions. The more you contribute the better and salary sacrifice contributions are a tax-effective way to do this.

Do I have enough life cover?

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Calculate – do I have enough life cover?

Calculate – tax on super death benefits

Life cover provides a lump sum on the death of the insured. The pay-out then goes to the nominated beneficiaries in the policy or, if held in superannuation, to whoever is nominated in a binding nomination.

It is important to note that a life cover payout from your superannuation fund will be distributed by the trustees (as the owner) as they deem fit unless you provide them with a binding nomination dictating who should get the payout.

If the payout goes to your estate then it is distributed as directed by your will.

Life cover is there to provide support for your loved ones after you die and ensure they do not suffer any financial hardship. How much do you need? This will depend on;

• Debts you leave behind you
• Education costs
• Living costs
• How much cover you already have

If it is a private policy held outside your super, it is paid directly to the beneficiaries identified in the policy and tax free. Payment isn’t held up in your estate waiting for the executor to wind it up.

There are a number of comparison sites that will let you compare premiums and benefits. An important factor to keep in mind is that premiums can be stepped or level. Stepped premiums start lower than level premiums and increase with the insured’s age. Over time they will be more expensive than if a level premium had been chosen.
The insurer may ask you to complete a health questionnaire which you must answer honestly so they can properly assess the risk. If you do not answer honestly they can repudiate the claim.

Do I have enough disability cover?

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Calculate – do I have enough disability cover?

Calculate – tax on super disability benefits

Disability cover usually (but not exclusively)provides a lump sum on the total and permanent disability (TPD) of the insured. It is usually purchased as an adjunct to life cover.

The benefit is paid if you are unable to perform;

• Any occupation
• Your usual occupation

The insurer is less likely to pay the benefit if you are able to do “any” occupation and this could become an area of dispute.
Disability cover will provide support for you and your loved ones after your disability and ensure they do not suffer any financial hardship. How much do you need? This will depend on;

• Debts you may want to liquidate
• Education costs
• Medical costs
• Costs of rehabilitation
• Modifications to your home
• Living costs
• How much cover you already have
• How much government assistance you may get

You also need to consider what the insurer considers “Total and Permanent Disability” is. If you don’t meet the definition they won’t pay.

There are a number of comparison sites that will let you compare premiums and benefits. Like life cover, premiums can be stepped or level. Stepped premiums start lower than level premiums and increase with the insured’s age. Over time they will be more expensive than if a level premium had been chosen.

Do I have enough income protection?

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Income protection replaces the income you lose while unable to work due to sickness or injury.
Income protection usually pays out around 75% of your income before you became unable to work and is paid for a fixed period. This can be for (say) 2 years or till (say) age 65. naturally the longer the period of cover the higher the premium. Income is taxed in the same way your salary would have been taxed.
There is also a “waiting period” before the benefit starts and again the shorter the period the higher the premium. The most common waiting period is 90 days.

You superannuation fund usually carries income protection (salary continuance) and this will be taken into account. If you have more than one source of income protection in place, the insurer will reduce the benefit by the amounts received from other sources. Other sources that may be taken into account are;

• Regular payments from another insurance policy
• Regular payments from a superannuation plan
• Regular payments from workers compensation
• Regular payments from a motor accident claim
• Regular payments from claims made under state or federal legislation

There are a number of comparison sites that will let you compare premiums and benefits.

Do I have enough critical Illness cover?

Critical Illness Cover pays a lump sum benefit if you are diagnosed with o a defined critical illness. Critical illnesses usually include cancer, stroke heart attack or coronary artery disease requiring by-pass surgery.

You may need to survive for a specified period (eg 30 days) after being diagnosed.
The pay-out will help with medical and lifestyle expenses while you’re under medical care.
The benefit is paid regardless of your ability to work.

How is my wealth tracking?

Calculate – investment risk profile

Calculate – debt ratio

Your net wealth is your total assets less your total liabilities. Reducing liabilities increases your net wealth and reduces your vulnerability to an increase in interest rates.

Assets

Assets include shares, fixed interest, cash, property and “other” assets like art and coins. All have their advantages and disadvantages which combine to reflect your investment risk portfolio.

• Shares   have provided the best returns over the long term but can be volatile providing low and even negative returns over the shorter term. They are easy to maintain, and fairly liquid – they can be sold easily on the stock exchange.
• Property  has also provided good long term returns with less volatility although the GFC saw prices drop dramatically and some regions have not fully recovered. Property is not liquid and selling takes time and can be costly. They are more costly to maintain.
• Fixed interest usually provides modest to low returns but has no volatility if the holder keeps them to maturity. They are easy to maintain and can be sold before maturity at a profit or discount depending on current interest rates and time to maturity. They can provide stability to a portfolio.
• Cash usually provides very low returns, often below the rate of inflation which means the return is negative in real terms. Cash is very liquid, easy to maintain and has no volatility.
• Other  assets like coins and fine art can provide spectacular returns (or losses). They need special expertise, are generally not very liquid and are costly to maintain (insurance and security).

Liabilities

Liabilities include mortgages and loans for business, investment and personal use. All are dependent in interest rates.

• Mortgages  are used to buy property which is used as collateral for the purchase.  The borrower has to repay the principal and interest which can be a fixed or variable rate. The loan may be “interest only” for a while before reverting to principal and interest. Payments are calculated on a fixed term.
• Loans  are offered by lenders to purchase personal and business assets. Interest rates are usually much higher than a mortgage but less than credit card interest rates.
• Credit cards usually charge the highest rates and paying off only the monthly minimum can keep the user paying off the card for over 30 years. The best strategy with credit cards is to pay off the balance each month.
• Installment loans are an agreement to repay a loan over time with a set number of scheduled payments. This type of loan is increasing in popularity.

My budget

Calculate – income and expenses

Calculate – education costs

A budget is one of the most important aspects of wealth creation. Try and create as much disposable income as possible and then divert it to savings, investments and paying off debt.

Play with the calculator above to see how you can improve your budget.
Expenses are usually input as monthly values as this is normally how they are spent. Education costs can be calculated by using the education cost calculator – education costs.

The main sources of income are;

• Salary
• Investment income
• Trust income
• Pension

The main expenses are;

• Living costs
• Accommodation
• Servicing debt
• Entertainment
• Investment

Financial planning looks at increasing revenue and reducing costs. This should increase disposable income that can be invested.

Education costs

Calculate – education costs

A budget is one of the most important aspects of wealth creation. Try and create as much disposable income as possible and then divert it to savings, investments and paying off debt.

School costs

Pre-school – varies from around $70 to $185 a day
Public schools – from $2,000 a year to $5,000 a year
Catholic schools – from $12,000 to $23,000 a year
Private schools – from $30,000 to $45,000 a year

Costs will vary according to the standing of the school and whether it is based in a Metropolitan area or a regional area. Tertiary costs will depend on the course and whether you are an international student.

My succession plans

Check your estate planning

Estate planning is often avoided or neglected but is essential if you want your assets to go to the right people at the right time with minimum cost or delay.

If you do not have a valid will your estate will be distributed according to the laws of intestate succession. It is essential you;

• Draft a valid will
• Match assets to beneficiaries
• Appoint an executor and administrator (if there is a trust)
• Give the Trustee of your superannuation fund a binding nomination
• Appoint a guardian for minor children

This process is best handled by an experienced professional.