Goals and Objectives in your Forties
Throughout the decades leading to retirement, the number-one emphasis should be on having a written plan, first and foremost, based on agreed objectives and goals. Individual circumstances will differ, but often this will be both your peak earning and expenditure period, if you have children. Financial planning will often be more complex than anticipated and debt levels need to be managed precisely.
You need to very carefully work backwards from the lifestyle you want to enjoy in retirement to understand what assets and income you need to support that lifestyle - bearing in mind that life rarely goes as planned, so build in some flexibility.
Some specific issues to consider in your 40's:
Mortgage First - no home equity loans for non-capital purposes!
The first focus should be on paying off your mortgage – very few investments offer the same guaranteed rate of return. Beware the tendency to use a home equity loan as a (comparatively) cheap way to finance consumer purchases. Try and discriminate between debt which is employed for investment purposes, such as to purchase an investment property or to renovate your existing home, which provides a return, and debt which is used for discretionary consumer purchases. Life balance is important, but very carefully test those purchases which are "lifestyle" purchases - such as holiday homes and boats - to ensure that they make sense in the long run.
Review your superannuation fund – Investment return and costs (including consolidation)
As previously discussed, carefully review your annual statement from your superannuation fund in terms of both investment return and the account costs detailed within the statement, including insurance costs.
We do not advocate or expect you to change the fund on an annual basis, depending upon investment returns. It is however important to understand how the fund compares on a 3 to 5 year and 5 to 10 year basis and be prepared to move your funds if there is continued unde-rperformance.
There are some publicly available tools which can assist you in making this analysis. Remember also that moving to a new fund, "rolling over", is not difficult and in many situations you will receive assistance from the receiving fund. Similarly, if you have a number of superannuation funds, then you should be seeking to aggregate them in order to save on administration costs. Sometimes, it will be worthwhile to maintain additional funds, perhaps for access to insurance, but this is usually used as an excuse for inaction, rather than a reality.
In terms of fees, anything higher than 1% of your superannuation balance, unless a balance is very small or you have chosen some exotic investments, should be looked at very carefully.
Review your Investment Profile - Time to start turning down the dial?
At this point you need to decide whether you wish to continue with growth options, or begin to start taking a more conservative approach and moving some of the funds into balanced options. Obviously, much depends upon the time-frame you have in mind for retirement and your general attitude to risk and asset position.
As we have mentioned previously, there is a cost attached to moving to conservative investment options too early; but if you have a clear intention to retire in your mid or late 50s, or there are health issues to bear in mind, it is appropriate to try and gradually reduce volatility in the lead up to retirement. Conversely, if you are healthy and have no present intention of retiring prior to your mid-60s (or later) it may be entirely appropriate to continue - given the 20 year time span - with significant parts of your portfolio remaining in growth options.
This can be the case even whilst receiving a pension from your super fund, but bear in mind the need to maintain liquidity within the fund - so that you don't necessarily need to sell assets during a market downturn.
Consider using salary sacrifice to boost your concessional contributions up to the available maximum level. This can provide savings, net of tax, which are higher than is otherwise available outside superannuation. Remember that the maximum concessional contribution level includes your employers superannuation guarantee payment, and you need to be careful not to exceed the total amount.
If your partner has either a lower level of income, or lower superannuation balance, this is a good way to increase their superannuation balance - and protect yourselves from later changes to superannuation rules that may affect larger balances. Note that you can only split concessional contributions and limits apply.
A Self Managed Superannuation Fund (SMSF)?
You may want to consider establishing a self managed superannuation fund (SMSF) - in the right circumstances they can provide you with both a reduction in the cost of membership and a substantial increase in investment flexibility. For example, they can allow you to hold direct real estate investments within your superannuation fund.
However, many SMSF's are not always established in the right circumstances, or for the right reasons. You need to ensure that any advisors are providing clear advice regarding the pros and cons in your particular circumstances.
Protection - Life Insurance
We address life insurance in more detail elsewhere in the site and the various types of policy available. But, fundamentally, you need to ensure that you have enough life insurance in place to meet your family's ongoing requirements, having regard for what would happen if you were to die or become disabled.
This is a very individual calculation, dependent upon you and your family's circumstances, and there are number of online calculators that can be used to generate an indication of the cover required. Some of the calculators can suggest very extreme figures, effectively based on lost income over decades. Other, simpler rules of thumb, include a sum which is equal to 10 times your annual salary.
While arranging life insurance through your superannuation fund, with perhaps the exception of income protection, can be the most cost-effective way of arranging cover, if your circumstances are complex we very much encourage you to see a professional advisor. Regardless of how it may be portrayed on TV advertisements, life insurance can be a complex product.
Life insurance costs obviously increase with age, and the amount of cover should be subject to review to ensure that you are also not "over protected" - for example, in the situation where your children have left home and become independent and you have substantial other assets. Just accepting annual insurance premium increases can be a (very) expensive habit.
Review your Will And "Binding Nomination"
There are an astonishing number of people, often professionals with families, who do not have wills in place and would die intestate. This can lead to unnecessary complications at an already difficult time for your family, and potentially cause an inappropriate or disproportionate allocation of assets. See a solicitor to have a will professionally prepared, and do not – unless your circumstances are exceptionally simple or you enjoy risk - utilise a DIY "will kit". Also, be prepared to review your will every 5 to 10 years.
Remember that superannuation is not treated in the same way as the rest of your estate. If you want to ensure that someone in particular receives all or part of your superannuation should you die then you need to make sure you set up a binding nomination. This will need to be updated every three years for it to be valid.
While building wealth within super can generate the biggest tax savings, the amounts subject to preferred tax treatment are becoming more limited and of course the disadvantage is that your wealth is locked away until retirement with some degree of legislative or political risk. Depending upon your circumstances, and particularly where you run your own business, establishing a family trust can be a tax effective way of saving flexibly for the future.
Professional advice is absolutely required, and you should clearly understand the pros and cons attaching to the establishment of a family trust, including the establishment and annual running costs.