Compare the Pair

We all know this ad from Industry Super Funds, if at least not this ad, one of the variants?

Well it's been very successful for them and the premise of the ad is that if you pay low fees, you’ll be better off. And I completely agree with this, keeping costs low is critical to achieving success when it comes to investing.

But industry funds aren’t really that cheap, and particularly not at Precision Wealth Management. Our clients pay about the same as industry funds, if not less, depending on the balance. This is because we are part of a large group that manages over $3 billion and have negotiated very low fees for our clients.

But the biggest determining factor of your financial success is actually the structure of your portfolio. How much do you have allocated to each asset class (Australia/International shares, property, cash, short term/long term fixed interest etc)?  On a simple example, this is evidently true if you look at the 5 year returns on QSuper. The higher risk “aggressive” fund has outperformed the lower risk “moderate” fund by about 4% per annum. That’s massive.

You might say, well shouldn’t everyone invest in the highest return? Well, it’s just not that simple. Risk and return are related and to achieve the higher return, you need to take on more investment risk, which might not be suitable for everyone. That is why a tailored portfolio that suits not only your tolerance to risk but also aligned with your objectives is so important.

On top of that, if you compared a third person ("Compare the Trio" doesn't quite roll off the tongue the same way) that had been salary sacrificing $50 a week for the past 10 years, that person would be light years ahead. I have a lot of dealings with people approaching, or in, retirement and I'm yet to meet one that said "I wish I didn't save so much. I wish I spent a bit more each week on discretionary expenditure". I think you can guess what most people regret when it comes to saving.

The other important aspect is the insurance offering within superannuation funds. The industry superannuation funds offer group insurance policies which are teeming with fine print and are not guaranteed renewable.  This means the insurer can change the terms of the insurance, the definitions, and possibly cancel cover all together. A good insurance policy is guaranteed renewable which means that providing you continue to pay the premiums, the insurer must continue to provide cover and is bound by terms and definitions when you originally took out the policy.  Changing the terms and definitions does happen.  Read the article from Shine Lawyers about the changes to the AustralianSuper definition on Total and Permanent Disability. 

Not only that, but the premiums in AustralianSuper have increased considerably over the past 5 or so years and now, a retail policy with the same level of cover can be cheaper as shown in these pictures. This is the same in almost every instance I see when comparing premiums for clients.

Superannuation is serious matter and one of the most important aspects of your financial life. And as a general rule of thumb, don't take advice from a guy with a mustache and a fedora hat. So if you want to "Compare the Pair", give us a call (1300 200 012) or email (admin@precisionwm.com.au) and I can give you a second opinion on your superannuation. 

Glenn Hilber is a Certified Financial Planner with over 9 years experience and the owner of Precision Wealth Management.

This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.

Retirement Property Investment Strategy

I had a friend (older friend nearing retirement) receive a cold call (perhaps wasn't 100% but was pretty cold) a week or so ago and they were talking to him about a government incentive about buying property to build wealth in the lead up to retirement.

The person continually said government incentives and also used the term property support service or something to that effect, giving the very real impression that there was some sort of government grant or similar. The person was very good on the phone and even though my friend had no interest at the start, they were somewhat curious and interested at the end. The person also insisted that you needed to be 5 years away from retirement.

Nevertheless, I'll explain it here.

Firstly, there is no government incentive (other than first home owners grant which is not what these people were targeting). What they are referring to is simply tax deductions on being negatively geared and claiming depreciation. So that is the first thing to remember. In fact, not only is there no government incentive, but the state government loves it because the stamp duty you pay is huge.

But, the strategy goes like this:

• Buy a newly built property. Use your existing home or investment property as collateral for the borrowings.
• Rent the property out over the next 5 years, based on current interest rates, it should be roughly neutrally geared, but then also claim depreciation which can be quite high on a new property to get tax returns each year.
• Sell the property in a financial year after you have retired so any capital gains tax is minimised or eliminated. Because you are claiming depreciation each year, you are building up an unrealised capital gain, even if the property value stays flat. Over 5 years, this can be about $30,000-$50,000 depending on the value of the property.

So, the selling features of the strategy is:

• You're likely to get tax returns each year through depreciation even though month to month cash flow on the property will be close to neutral. So, pretty much free money from the government. Who doesn't want that.
• Even though you may incur a capital gain because of depreciation (even if the property value hasn't grown), if it is incurred after retirement, you should still not have to pay tax as you'll have no other income and the 50% capital gains tax discount.
• You have exposure to property (which everyone seems to love so much) so if you get growth in the property market you will also do well.

It all seems so good. Getting good tax deductions while you are still working to then incur the capital gains tax in retirement when you might pay no tax, plus potential growth.

But, there is some downsides and this is what they gloss over and where the strategy has its pitfalls:

• Property has very high transaction costs. Over $14,000 stamp duty to purchase a $450,000 investment property. Then sales commission of approximately $10,000. A total of $24,000 of transaction costs is a big hurdle to get over.
• The properties that these people are selling are paying high commission. Whilst it isn't a direct cost to you, you are still paying it. If the developer can sell the land and property for $440,000 but then it is on sold at $450,000 (with a $10,000 commission), then the real value of the property is $440,000 and you need growth to recover that. This can impact the real growth you achieve on the property between when you buy it and sell it.

If I do some rough spreadsheeting on fair assumptions, it is very difficult to have turned a profit after you factor in these costs. And you definitely need growth to turn a profit.

But at the core of the strategy is huge leveraging (gearing) for someone nearing retirement and in my experience, not a prudent investment strategy (do we still remember Storm financial?). Investing in any growth asset should be done with a time horizon of at least (and I stress AT LEAST) 10 years, so any short term leveraged investment strategy is not wise. But, there will always be these things out there and based on the amount of people who share obvious fake Facebook competitions and get sucked in on scams in emails, opening attachments from fake email bills etc, I think there will always be a market for these people, in one form or another.