Six Simple Strategies

We recommend that six simple strategies are implemented by our clients in order to enhance their future financial security:

  1. Save for a deposit for your first home - we recommend 25% of the house value (including first home buyer’s grant) to allow for stamp duty and avoid mortgage insurance.
  2. Pay off all non-deductible debt, starting with the loan at the highest interest rate.
  3. Build some financial assets outside super to provide for education, home improvements, new cars, holidays and emergencies. An investment portfolio outside superannuation also could be established so funds are accessible to cater for any medium-term goals.
  4. Once you have met the above goals or are within say 10 years of your preservation age, start to maximise contributions to super – preferably via salary sacrifice or deductible contributions.
  5. Retire with the bulk of your investment assets within super (subject to the contribution limits) – so once you turn 60 you will never have to pay tax again (other than GST). This may involve making substantial non-concessional (formerly undeducted) contributions to super (either in cash or kind) just before and/or shortly after you retire.
  6. If we consider it to be necessary to meet your objectives, subject to your risk profile, we may recommend that you borrow to invest in a diversified portfolio of growth assets in a prudent way, particularly with interest rates at historically low levels at present.

Gearing, as it is called, can be done now even within the tax shelter of superannuation. This strategy could accelerate your progress towards achieving your financial goals in each of the steps above. Using other people’s money is the way most wealthy investors have become prosperous.

However, while gearing multiplies your gains when markets are rising, it also multiplies your losses when markets are falling. Therefore, if you are borrowing to invest, it is crucial to do so in such a way that there is very little, if any, chance of you being forced to sell your investments at a low point through what is known as a margin call. This risk can be eliminated through borrowing through a home equity credit line or investing in internally geared share funds, or minimised by limiting borrowings within a margin loan facility to a very conservative loan to value ratio (such as 40% compared to a margin call trigger of 85%).

While you need to be prepared to hold geared investments for the long term, it is especially important to monitor market valuations and trends closely so ideally you can unwind the strategy, take profits and pay off your loan towards the end of the next bull market – rather than have to ride out the next market downturn. It is important to emphasise that, even if a gearing strategy would help you achieve your financial objectives, you should go ahead only if it passes what we call the “sleep test”, i.e. you can sleep at night with your investment strategy.

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General Advice Warning

The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Retirewell Financial Planning nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.