Sycon Wealth Newsletter Edition 2 2023

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With Autumn underway, the changing season is a reminder to take stock and prepare for what’s ahead as the financial year heads towards its final quarter and the May Federal Budget. The gloomy prospects for economic growth, both in Australia and overseas, are occupying the minds of investors, businesses and political leaders. The Reserve Bank of Australia believes global growth will remain subdued for the next two years and that Australia‘s economy will slow this year because of rising interest rates, the higher cost of living and declining real wealth. The RBA forecasts the unemployment rate, currently at a low 3.5%, to rise by mid year and inflation, which was 7.8% over 2022, to drop to by around 2-3% over coming years thanks to an easing in global prices that will eventually flow through to Australian prices. Oil prices fell almost 3% in February reversing the increase of the previous month. There have been some economic bright spots recently such as the rebound in retail trade in January of 1.9% after a 4% plummet in sales figures in December. And, Australia‘s current account surplus increased $13.3 billion to $14.1 billion in the December quarter 2022 supported by sustained high commodity prices including $400 billion worth of mining commodity exports during 2022. That positive news was enough to lift the Australian dollar slightly to just over US67c, halting a slow decline during February. Australian shares were down by almost 3% during February, while US stocks were down by just over 2% for the month and more than 7% for the past year.

Using equity to buy an investment property

When it comes to investing in real estate, equity is a key concept to wrap your head around. The Successful Investor’s Michael Sloan explains what equity is, and how you can use it to your advantage.

What is equity?

Equity is the difference between the current value of your home and how much you owe on it. For example, if your home is worth $400,000 and you still owe $220,000, your equity is $180,000. The great thing is, you can use equity as security with the banks. This means you can borrow against your equity to fund life’s big purchases, such as:

  • extending your home
  • starting a business
  • buying a car
  • going on a holiday.

You can use also use equity to buy an investment property and get into the real estate game.

Total equity and useable equity

Banks will typically lend you 80% of the value of your home – less the debt you still owe against it. This is considered your useable equity. Since the bank is lending you money against the value of your home, they won’t lend you the full amount. Put simply, if house prices dip, they don’t want an outstanding loan that’s worth more than your property. Keep in mind that it’s possible to borrow more than 80% if you take out Lenders’ Mortgage Insurance (LMI).

How much could you borrow for an investment property?

Using the example above, let’s say your home is valued at $400,000 and your mortgage is $220,000. Here’s the breakdown of sums:

  • value of your property – $400,000
  • value of your property at 80% – $320,000
  • minus your mortgage – $220,000.

This means your useable equity would be $100,000. Using the ”rule of four” When it comes to actually buying an investment property, it can be hard to know where to start. But a simple rule of thumb is to multiply your useable equity by four to arrive at the answer. For example, four multiplied by $100,000 means your maximum purchase price for an investment property is $400,000.

Why four and not five?

If you’re buying an investment property worth $400,000, the bank will lend against your future property just as they would against your existing home. The banks will lend 80% (or $320,000) in this scenario, but the property costs $400,000. This leaves an $80,000 gap, which is your house deposit. However, you also have to budget for purchase costs such as stamp duty, legal fees and more. This is approximately 5% of the purchase price – around $20,000 on a $400,000 property. Therefore, the total amount of funds needed to purchase a $400,000 investment property is now $100,000 – an $80,000 deposit plus $20,000 costs.

Final tips

Even if you have plenty of equity, it’s not always a given that you can borrow against it. The bank will consider several factors including:

  •  your income
  •  your age
  •  how many kids you have
  •  any additional debts

Remember to play it safe. If you don’t have any funds outside your home equity, then it’s risky to use every cent of your usable equity to invest in property. You always need a buffer – back up funds in case things don’t go to plan. Even if it means you can’t invest for a while, it’s important to keep yourself protected. Ultimately, using equity to buy an investment property can be a smart move. But before you get serious, it’s best to talk to your banker or broker. Before you decide which strategy is best for you, call us today. Source: NAB Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances. © 2022 National Australia Bank Limited (“NAB”). All rights reserved. Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Volatility is here to stay

Volatility is part and parcel of investing so it’s important to put it into perspective and look at the full picture when thinking about your wealth, rather than focus on day-to-day market swings. If there was to be a single investing lesson that emerged from the events of the last two years, it is that we should learn to expect the unexpected. And with that in mind we should acknowledge that volatility is part and parcel of investing. There are several ways to measure volatility – the VIX index or as it is colloquially known the “index of fear” being perhaps the best empirical measure. But there is a simpler measure of market volatility that is much closer to home and that is when friends and family start calling to ask “what is happening to my super”. That is when market falls have got people’s attention. And for the near term at least, we will probably continue to experience more market bumps and drops for a while. For those approaching or already in retirement, accepting that market volatility is here to stay could possibly induce a few sleepless nights, especially for those who keep an ever-watchful eye on their investment portfolios. But while dramatic market losses can sting, it is important to keep a long-term perspective in order to participate in the recoveries that follow. Research shows that the average length of a bear market is 236 days while bull markets on average have lasted 852 days, leaving investors well compensated for the long-term risk they took on.1 So a long term perspective is extremely important, but so too, is context. Take a moment to pause and look at the big picture. If you only view your shares or superannuation portfolio balance in isolation to everything else, then recent market volatility will have been of concern with widespread impact across most equity and bond investment portfolios in the past few months. At the time of writing, the ASX/S&P300 is down around 6% while in the US the S&P500 index is hovering around the more eye-catching -17%. But if you were to zoom out and include other aspects of your investment portfolio – dividend payments for example, or your property value, then the overall picture is a little rosier. Dividends are particularly noteworthy during this volatile time because unlike back in 2020 when many investors had to tighten their belts or draw down on capital because payouts had been vastly reduced, most companies are still paying out some form of dividend. In this situation, the income element of share portfolios is still delivering steady returns for most investors – a particularly valuable point for investors with self-managed super funds who commonly have a strong yield tilt in their portfolios. Also, while rising interest rates are front and centre of everyone’s minds right now, for those who own a home or have an investment property, now is a good time to remember that the property values have enjoyed strong gains during the worst of the pandemic in the last two years, far outstripping the interest rate increase aspect of the equation. Further, while landlords might be lamenting interest rate rises, according to a recent Domain report, every state in Australia is also experiencing its sharpest rental price growth in 13 years, with most rental increases keeping pace with interest rate rises. So at times like these, remember to look at the full picture when thinking about your wealth. Your portfolio in its entirety includes your superannuation, your portfolio outside of super including shares, property and fixed income and cash. Viewed in widescreen mode, it’s likely that you’re still in positive territory despite the pull back in share market values. These can be challenging times because when volatility is spiking the emotional response is to want do something – anything. Which is when being clear about your long-term investment goals and having an asset allocation in line with your risk tolerance can be the best antidote and help you be disciplined and stay the course. Contact us if you need help with your investments, or would like to find out more about investing. Source: Vanguard 1 Vanguard Reproduced with permission of Vanguard Investments Australia Ltd Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance. © 2022 Vanguard Investments Australia Ltd. All rights reserved. Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business nor our Licensee takes any responsibility for any action or any service provided by the author. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.


8 retirement mistakes and how to avoid them

Retirement is a phase of life most of us look forward to. It’s a chance to pursue other interests, travel and maybe do some part-time work or volunteering. Thanks to more than 30 years of compulsory superannuation, we are retiring with more savings than previous generations but that also brings its challenges. According to the government’s Retirement Income Review, the average age of retirement in Australia is around the ages of 62 to 65.i On average men and women can expect to live to 85 and 88 respectively. To make the most of your retirement your savings need to last. The best way to achieve that is to have a plan that will help you avoid some common and preventable retirement mistakes.

Mistakes people make

While it’s impossible to predict what financial challenges lie ahead, these eight common retirement mistakes remain the same:

1. Not knowing your living costs

When you earn a regular income, you may be less focussed on keeping a track of your living costs. When the regular income stops at retirement, you can be unaware of whether your investment income and/or pension payments will support your lifestyle costs. Know what your living costs are before you retire to help manage expectations.

2. Not looking at your super until just before retiring

Investing too conservatively when you’re working could mean you don’t have enough super to fund your retirement. Review your super account regularly to ensure it is appropriate for each stage of your life.

3. Underestimating the impact of inflation

Australia’s rate of inflation hovered below 3 per cent per year between June 2012 and early 2020. Since the onset of the global pandemic in March 2020, inflation has jumped to more than 7 per cent.ii The cost of living may require you to reassess your retirement planning.

4. Not understanding your government entitlements

If you’re age 66 or older, you may be eligible for a full- or part-Age Pension. However, if you are not eligible for the Age Pension,  you may still be eligible for other entitlements including the Seniors Card, Pensioner Concession Card, income tax offsets or pensioner stamp duty exemption/concession.

5. Letting the noise affect your investment decisions

Negative news headlines can create uncertainty during market volatility. History has shown, over the long run the market trends upwards. All this noise can make it difficult to stick your long-term strategy.

6. Trying to time the financial markets

“We haven’t the faintest idea what the stock market is gonna do when it opens on Monday — we never have,” said legendary share investor Warren Buffett. Say you invested $10,000 in the ASX 200 index by trying to time the market and missed the 40 best days between October 2003 to October 2022, your investment would be worth $9,064, whereas if you remained fully invested it would be worth $46,099.iii Trying to time the markets is never a good idea.

7. Being asset rich and cash poor

You may have built up a strong balance sheet of assets, but in retirement you need income. For many Australians, their family home could be their biggest asset. You may have other assets but are they generating enough income? This could include rent from an investment property, share dividends or managed fund distributions. If the income is insufficient, downsizing into a smaller home could free up enough money to live on.

8. Not consulting professionals

Financial advisers, accountants and other financial professionals can help set you on the right path by navigating the complexities of superannuation, investments, constant rule changes and other factors that affect your retirement. A good retirement plan, implemented correctly, can set you up for life.

Start Planning

Whether it’s due to lack of time or awareness, too many people tend to make these same mistakes when entering retirement which can lead to unwanted financial surprises. A phase of life you have looked forward to for so long deserves careful planning. So please get in touch if you would like to review your retirement income needs. i Retirement Income Review Final Report, July 2020 page 63 Retirement Income Review Final Report ( ii iii From 31 Oct 2003 to 04 Oct 2022, Fidelity Australia Timing the market | Fidelity Australia

Protecting your family

The holidays are traditionally a time to relax and reflect on the importance of family. They are also an opportune moment to think about how you can care for and protect your family all year round. When you are enjoying the summer break with your loved ones, it can be hard to imagine anything could ever go wrong. But life is unpredictable, which is why life insurance is so important, particularly when you have people who depend on you. Whether you are a young couple starting out, a growing family with kids at school and a mortgage, or empty nesters with debts to clear before retirement, having the right insurance cover could make a world of difference if the unthinkable happened. Life insurance is not one product but many, to cover a range of needs. If you are unsure which cover is right for your family, begin by asking yourself a series of ‘what ifs’.

What if you get sick or injured and are unable to work?

You probably insure your car and your home, but the impact on your family is potentially much greater if you lose the ability to earn an income. Whether you are out of action for months or years, few families have enough savings to tide them over until you recover and return to work. The solution is Income Protection insurance, also called Income Replacement or Salary Continuance cover. This replaces up to 75 per cent of your current income if you are unable to work due to illness or injury. Depending on the policy, it can cover you for short or long periods, sometimes up to age 65, after various waiting times.

What if you suffer a major illness?

The survival rates for critical illnesses such as heart attack, cancer and stroke are improving, but recovery can take a long time and the financial and emotional toll on your family can be high. The solution is Trauma insurance, also called Critical Illness. This pays a lump sum if you are diagnosed or suffer one of a specific list of illnesses. You could use the money to reduce your working hours, spend time recovering with your family, or to pay for treatment, rehabilitation or a carer.

What if you become permanently disabled and unable to work?

A serious injury or illness can come out of the blue, leaving you unable to provide for your family. A government Disability Pension is unlikely to fully replace your previous salary. And the National Disability Insurance Scheme, while providing care packages, does not pay regular income or a lump sum. The solution is Total and Permanent Disability (TPD) insurance. This pays a lump sum which you can use to pay off debts, cover medical costs or invest to provide regular income to help maintain your family’s lifestyle.

What if you fall critically ill or die?

It’s a sad fact that any of us could be diagnosed with a terminal illness or die prematurely in an accident. If this happened to you, how would your partner and children cope emotionally and financially? The kids still need to be fed, clothed and educated, the mortgage or rent must be paid, and your partner may need time off work for extra caring duties, adding to the financial pressure. If you don’t have kids or they have left home, your partner could be left with a mortgage and other debts. The solution is Life cover, also called Term Life or Death cover. This pays a lump sum on your death or the diagnosis of a terminal illness, allowing your family to focus on supporting each other, secure in the knowledge that the bills will be paid. All these policies can be bought separately or bundled together as often happens with Death and TPD cover. You may already be covered for some level of insurance via your super fund, however it might not be adequate for your needs. It’s important to have insurance that is tailored to your personal circumstances, that will protect your family’s financial and emotional well-being come what may. We are here to help.

Sycon Wealth Level 1, Broncos Leagues Club, 98 Fulcher Road, Red Hill Q 4059 P 07 3858 9090 E W Holmes Financial Pty Ltd, Beauchamp Financial Pty Ltd, NJ Wealth Pty Ltd and NJP Financial Pty Ltd – all t/as Sycon Wealth are Corporate Authorised Representatives of GPS Wealth Ltd | AFSL 254 544 | ABN 17 005 482 726 | This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.