Your health and wealth during the COVID-19 pandemic

There isn’t a single person in the world who hasn’t been impacted by COVID-19. As new case numbers start to slow in Australia, so too is our economy. This time presents new challenges as everyone gets used to a “new normal” and figures out the best way to weather the coming months. This article provides an overview of different measures the Federal Government has announced to support individuals and businesses, current market performance and what you should be thinking about when it comes to your finances and continuing to build long-term wealth.

 

Government support for individuals and businesses

The Federal Government has announced two economic stimulus packages and the JobKeeper Payment to support individuals and businesses. An overview of the Federal Government’s measures announced to date is detailed below.

 

Support for individuals

The Federal Government has announced a range of measures to help individuals. Eligibility to access these measures is determined on criteria such as your employment status or loss of income due to COVID-19. Some of the key measures include:

  • two $750 payments to social security, veteran and other income support recipients (first payment from 31 March 2020 and the second payment from 13 July 2020);
  • access to the JobKeeper Payment from your employer (if eligible) equal to $1,500 per fortnight;
  • a time-limited supplementary payment for new and existing concession recipients of the JobSeeker Payment, Youth Allowance, , Parenting Payment, Farm Household Allowance and Special Benefit equal to $550 per fortnight;
  • early release of superannuation funds (see overview below); and
  • a temporarily reducing superannuation minimum drawdown rates (see overview below).

Full details about the Federal Government’s measures to support individuals are available on the Treasury website.

 

Early release of superannuation

Eligible people will be able to access up to $10,000 of their superannuation in the 2019-20 financial year and a further $10,000 in the 2020-21 financial year. To access your super early, you need to meet one of the following five criteria:

  • You are unemployed.
  • You are eligible for the JobSeeker payment, Youth Allowance for jobseekers, Parenting Payment, Special Benefit or the Farm Household Allowance.
  • You were made redundant on or after 1 January 2020.
  • Your working hours reduced by at least 20 per cent after 1 January 2020.
  • You are a sole trader, and your business activity was suspended, or your turnover has reduced by at least 20 per cent after 1 January 2020.

If you are considering early release of your superannuation, you need to consider what the potential long-term impacts may be to the growth of your superannuation fund and retirement income. While $20,000 split across two $10,000 withdrawals may not seem like a lot of money now, it could have significant compounding value if it’s left in your fund. Understandably, people may not have any other choice to support themselves financially. Make sure you speak to a financial professional to understand your risks and if this is a suitable option for you. If you’re eligible, you can apply for early release of your superannuation directly with the ATO through the myGov website.

 

Temporarily reducing superannuation minimum drawdown rates

The temporary reduction in the minimum drawdown requirements for account-based pensions has been designed to reduce the need for retirees who have account-based pensions to sell their assets to fund their minimum drawdown requirements. The new minimum drawdown rates are outlined in the table below.

 

Age Standard minimum drawdown rates (%)

 

Reduced rates by 50 per cent for the 2019-20- and 2020-21-income years (%)
Under 65 4 2
65 – 74 5 2.5
75 – 79 6 3
80 – 84 7 3.5
85 – 89 9 4.5
90 – 94 11 5.5
95 or more 14 7

 

Support for businesses

The Federal Government has announced a range of measures to help businesses facing financial difficulty. Eligibility to access these measures depends on factors such as your turnover and how much your business’s revenue has decreased due to the COVID-19 pandemic. Some of these measures include:

  • increasing the instant asset write-off threshold for depreciating assets from $30,000 to $150,000;
  • allowing businesses with turnover below $500 million to deduct 50 per cent of eligible assets until 30 June 2021;
  • PAYG withholding support, providing up to $100,000 in cash payments which allows businesses to receive payments equal to 100 per cent of salary and wages withheld from 1 January 2020 to 30 June 2020; and
  • temporary measures to reduce the potential actions that could cause business insolvency.

Full details about the Federal Government’s measures to support businesses and eligibility criteria are available on the Treasury website.

 

How the banks are approaching home loans

Banks have announced that homeowners experiencing financial difficulty can pause their mortgage repayments between three and six months. It’s important to remember that, in most cases, interest will still be capitalised and added to your outstanding loan balance. When payments restart, your lender may require increased repayments, or the term of your loan may be increased. These are important factors you need to discuss with your lender. Here’s what the big four banks are offering customers:

  • ANZ: deferral of repayments for up to six months, with a review after three months.
  • CBA: deferral of repayments for up to six months.
  • NAB: deferral of repayments for up to six months, with a review after three months.
  • Westpac: deferral of repayments for three months, with the potential for a further three months after review.

 

What do past market crashes and corrections tell us about the current environment?

While the circumstances of the current crash are unique, it’s normal to have a market crash greater than 20% every decade. Based on the last eight market crashes, the average market decline is 40% from high to low. From the initial decline to recovery, the average crash duration is 41 months, and the market bottom usually occurs around seven months after the initial 20% decline. This means it can take roughly seven months for the market to hit bottom and the following 34 months to recover.

On February 20 this year, the S&P/ASX200 hit an all-time high of 7162 points. By 31 March, the ASX200 was down 36.5%.

 

What should you focus on when it comes to personal finance?

While it can be tempting to sell all your investments now as the market declines, this locks in your losses and puts your wealth in a weak position. If you haven’t already defensively positioned your investments, speak with a financial adviser about how to best adjust your investing over the coming months. You should also consider how to maximise your returns as the market recovers. As the author of the best-selling investment book The Intelligent Investor Ben Graham says, “Be the realist who buys from pessimists and sells to optimists”.

Investing and building wealth is a long-term game. As such, you should be investing with a long-term time horizon in mind.

 

How do you best look after your health during COVID-19?

Maintain good health by eating healthy foods and exercising regularly to make sure your immune system is as strong as possible. You also need to observe the Government’s social distancing rules and only leave home for essential activities such as going to the supermarket, pharmacy, work, or exercising.

 

What should I do next?

During this time, you may face some challenges in your finances. Your ability, however, to understand the options available to you and what the current period means on a long-term basis is key to getting through this challenging time productively. Further, making well thought-out decisions now will give you the strong foundations you need in your health and wealth as the world recovers and embarks on a new period of growth.

 

Before you make any big changes to your financial situation, speak to your Bridges financial adviser to get personalised advice for your unique situation.

Is paying your mortgage off quicker really the best option?

Not so long ago one of the most effective, low risk wealth creation strategies was to use spare savings to pay down a mortgage – either directly or via the use of an offset account. If your mortgage interest rate was 8% per annum (that’s the effective, after tax investment return) the strategy delivered, substantially reducing the term of the loan and delivering big savings on interest.

But what about now? With home loans being offered at interest rates of less than 4% pa, does using surplus savings to pay off the mortgage still make sense? Or is it better to contribute those savings to an investment that may provide higher returns? Let’s see what we can learn from Emma’s situation.

Emma is a 45-year old, single professional with a $200,000 mortgage on her home. The home loan interest rate is 3.4% pa, and Emma’s marginal tax rate is 39%, including the Medicare levy. Following a recent promotion, she has a savings capacity of $2,000 per month, plus annual bonuses. Her only other debt is $10,000 on her credit card with an interest rate of 20%. Emma has a healthy superannuation balance for her age and does not want to contribute more to super.

 

So, where to from here?

Although a relatively small amount in dollar terms, by virtue of its high interest rate the credit card debt should be cleared as soon as possible. The rules of managing high interest debt are simple: pay off the debt with the highest interest rate first and work down to the lowest interest rate debt. If possible, consolidate all debt at the lowest interest rate. In Emma’s case, if she can redraw some funds against her home loan, she should do so to pay off the credit card.

 

Doing better

With the credit card completely paid off, Emma’s attention now turns to how to make the most of her savings ability. After looking around, she’s identified a number of investments that have consistently produced returns of more than 3.4% pa. Wouldn’t they be a better option than paying down the mortgage?

They may well be, but there are two important things that Emma needs to consider: tax and risk.

 

Tax

Extra payments made to the mortgage provide Emma with a net return, after tax, of 3.4%. But if Emma contributes her savings to a purely income paying investment, that income will be taxed at her marginal rate of 39%. To earn 3.4% after tax, Emma’s investments need to earn 5.57% pa before tax.

If Emma opts for investments that provide a mix of income and capital growth, such as shares and property, the tax situation becomes a bit more complicated. Tax on any capital gains isn’t paid until after the investments are sold, and if held for more than 12 months, Emma will benefit from the capital gains tax discount.

Even without these tax perks a targeted return of greater than 5.57% pa is one that Emma can realistically aim for, as long as she is comfortable with the risk.

 

Risk and return

A fundamental ‘law’ that investors can’t avoid is that higher returns come with higher risk which is more common with shares and managed funds. Paying off the mortgage is about as close to a risk-free return that Emma could achieve. However, in the current environment, Emma may well feel that pursuing the higher returns from an investment strategy is worth the greater risk.

What’s right for Emma isn’t necessarily right for everyone else. Age and stage of life, health and overall financial situation all influence the level of risk we may need or want to take on.

Is paying off the mortgage as quickly as possible the best option? It  depends on your situation. And it doesn’t need to be all or nothing. A blend of paying down debt and investing may provide a happy median.

 

Got some spare savings capacity? Your Bridges financial planner can help you work out a wealth creation strategy that’s right for you.

The faster way to a life supported by passive income

Imagine that… without any effort on your part, enough money regularly pours into your bank account to meet (or exceed) all your living expenses. Suddenly, work becomes optional and a world of opportunities opens up. That’s the ultimate in passive income – all your financial needs met without lifting a finger.

The fast way to a life supported by passive income is to win the lottery or receive a large inheritance. Invested wisely, large lump sums can generate rental income, interest, share dividends and capital growth, all of which can replace an earned income but without the hard work.

Other forms of passive income include royalties on book sales, licensing fees on patents and, increasingly, income associated with creation of Internet content, such as YouTube videos. However, while these passive income streams may become geese that lay golden eggs, it takes a lot of effort to write a book, develop an invention, or create popular Internet content.

And the unfortunate reality is that we can’t all be lottery winners or best-selling authors, genius inventors or Internet sensations. We can, however, start to build a nest egg that will grow over time, to replace our active income in the future. In fact, if you’re working and receiving employer superannuation contributions, you’re already on the path to generating a passive income. You may just have to wait awhile until you can enjoy it. With its generous tax breaks, superannuation is likely to play a leading role in most passive income strategies. However, with its restrictions on access, if you are some years away from retirement age you may want to pursue a more flexible approach to developing a passive income stream. How? It all begins with a savings plan.

This simply involves making regular contributions to a suitable investment vehicle. This might be an interest-paying bank account, but as your nest egg grows you can diversify into potentially higher performing investments such as managed funds, direct shares and or even direct property.

Importantly, by reinvesting the income produced by your savings plan you’ll tap into the power of compound interest. Over the long term, compounding is the powerhouse that will contribute the most to your future passive income stream. As the income produced by your portfolio increases, so do your options. For example, you might want to cut back to working part time.

One other form of passive income worth mentioning is the age pension. If you’re over age pension age it may be a good idea to investigate strategies to maximise your pension entitlement. Just make sure the overall result is positive.

Ready to pursue the potential of passive income? Your Bridges financial adviser will be happy to help you take that first step. Book an appointment today!