For more than 25 years KnowledgebankIQ has been helping everyday Australians achieve the retirement lifestyles of their dreams.
At KnowledgebankIQ, we understand that everyone’s needs and goals are different. Whether you are looking for financial advice to help you achieve your long term goals or facing a life changing event, our advisers are here to help you choose the best path based on your circumstances.
Our goal is to use proven wealth creation strategies and legitimate benefits built into the superannuation and tax systems, our expert advisers can show you how to become financially independent in your retirement.
Understanding – We start with an in-depth conversation about you, your family, your goals and your financial situation. The aim is to understand exactly where you currently are and where you’d like to go in life, so we can help you get there faster.
Planning – We work with you to develop your personal plan for a comfortable retirement, covering everything from growing your investments to saving on tax and protecting your family’s financial security. Your plan is designed to put you in the driver’s seat, with smarter strategies for creating and preserving your wealth.
Implementation – When you’re ready to set your plan into motion, we’re ready to help. Whether you need to invest in shares, buy an investment property, insure yourself and your family, or even start your own self-managed super fund, we’ll support you at every step of your financial journey.
Ongoing Management – Our service doesn’t end when your plan is in place. We help keep your finances on track with regular meetings to monitor performance and your changing needs. We’ll also keep you up to date on market trends, government changes and new opportunities, so you can be confident that you’re in control.
A financial planner is your financial coach who will assist you in deciding what you want to achieve and set strategies to help you reach your goals.
A financial planner can help you with the following:
Insurance – to protect against risk
Grow your assets
Make the most of your superannuation
Plan for retirement
Discuss strategies to reduce tax
Make the most of redundancy payments and early retirement
Maximise potential government benefits
Maximise potential government benefits
The value of financial planning advice can be priceless. Locating a financial planner that you feel comfortable with and trust can seem a daunting task.
Selecting an advisor who understands your needs and what is important to you will lead to a higher level of satisfaction than numbers on a chart. The best way to find an advisor that understands your needs and goals includes doing a little legwork.
The first step to finding a great advisor is to ask friends and family members. Pay particular attention to those in similar life situations. Recommendations from people with similar ages and financial goals will lead you to an advisor that understands your demographics.
Once you have a list of a few potential advisors, look at their web pages. Information found online will give you an idea of what market they are targeting and their investment philosophy. Call the ones you like and schedule a meeting. As you meet with each potential advisor prepare questions that will help you understand what is important to them, and what they will be able to provide for you.
What qualifications do you have?
What experience do you have?
What area of financial planning do you specalise in?
What services and products are you licensed and authorized to provide advice on?
What is your approach to investment?
Are you a member of the financial planning association?
How often do you contact and/or meet with your clients?
What are your fees and how are they charged?
After you meet with the advisor, evaluate the meeting. Did they answer questions in a way that built your confidence? Did they ask questions to better understand your situation? Selecting an advisor is a very personal decision. You will trust this person with your most intimate information.
Taking the time upfront to select an advisor should be the beginning of a long term relationship. They will help you build a retirement plan, pay for your children’s college and most other important aspects of your life. They will be a part of most major decisions. A financial advisor will help you put forth a plan that will enable you to reach your financial goals. This is a very important person in your life.
We seek to build lasting relationships with our clients. We take the time to clarify what’s important to you and to understand your situation and values. We want to work with you over the long-term to create a plan that works for you now and in the future.
Our financial planning process ensures that your financial goals are our highest priority. We have a structured process which ensures that our advice is collaborative, simple and transparent.
Our financial planning process involves the following:
The first appointment is about getting to know each other and is free of charge.
The purpose of the meeting is to allow you and your financial planner to get to know each other, assess your general needs and decide whether you feel comfortable with your adviser to proceed into an advice relationship.
To make the most of the of your discussions, make sure that you bring any relevant documents, such as details of your income, superannuation, debts, assets and insurances so we can work out how we can help you.
If you decide to proceed to the next stage, we will discuss all fees and charges with you at this point.
We will present and explain our recommendations to you in a written document known as a Statement of Advice. This forms the basis of your financial plan.
We take you step by step through the plan, answer any questions you have, and make any modifications you require.
Once you have agreed with the advice and given us the go-ahead, together we will help you implement your chosen strategies.
Your financial plan is not a set and forget solution, it is a living document that can adapt to change. It is therefore important to seek regular check-ups to ensure that the plan continues to meet your needs and identify any changes in your circumstance.
Our initial consultation is both cost and obligation free.
During our initial meeting we will determine whether or not we are able to assist you. If there is a match we will agree on the fee for our Statement of Advice (based on the complexity and strategies explored) with you prior to commencing any work. We will also provide you with a copy of our Financial Services Guide (FSG), this document contains the services that your financial planner is authorised to provide and clearly defines our fees for those services.
The Statement of Advice that we provide to you will detail all fees and charges to the financial planner should you agree to proceed with the advice.
You can pay in the following ways:
as a fee for advice that will be deducted from your investments as a one-off payment or in instalments;
by direct invoice from us for initial and ongoing advice;
via commission we may receive from a financial product provider when you commence an insurance contract, or loan product;
or a combination of the above.
There are restrictions on when you can access your super for a lump sum withdrawal or to start a retirement income stream.
Generally, you can access your superannuation once you have:
Reached your preservation age and retired from the work force.
Reach your preservation age and commence a transition to retirement pension
Termination of employment after turning 60 years of age
Reached 65 years of age.
The superannuation system was established to assist you in building savings to help fund your retirement lifestyle. There are restrictions on when you can access your super for a lump sum withdrawal or to start a retirement income stream.
Your preservation age is the minimum age you can access your super – currently 55 years of age for people born before 1960. The below illustrates your preservation age based on your date of birth.
Before 1 July 1960
55 years old
01 July 1960 – 30 June 1961
56 years old
01 July 1961– 30 June 1962
57 years old
01 July 1962 – 30 June 1963
58 years old
01 July 1963 – 30 June 1964
59 years old
From 1 July 1964
60 years old
There are limited circumstances where you can apply for an early release of your superannuation benefits.
Your superannuation may be accessed early in the following circumstances;
Death (benefits are paid to your dependants or personal legal representative)
Diagnosis of a terminal medical condition*
Termination of employment with an employer-sponsor where your preserved amount is less than $200
Permanent departure from Australia if you are an eligible temporary resident
Satisfying any other condition of release as specified in superannuation law.
*In order to access your super on medical grounds, you must satisfy the definitions of Permanent incapacity or Terminal medical condition as defined by the Federal Government. These definitions may be different to the definitions that apply to insured benefits.
Limited access to your superannuation benefits may be available in the following circumstances:
Severe financial hardship (limited access
Eligibility for approval on compassionate grounds
The federal government has set strict conditions which must be met to access your super under financial hardship and compassionate grounds.
The Australian Government has set limits on the amount that can be contributed into superannuation each year. The Government has imposed limits on both personal contributions (which are made with your after tax income and known as non-concessional contributions) and concessional contributions (such as contributions from your pre-tax salary).
For Super the age definition is as of July 1st of the given year. Super contributions are established for 2014.
• Superannuation Guarantee contributions made by your employer
• salary sacrifice contributions made from your pre-tax salary
• personal contributions for which a tax deduction is claimed
Concessional contributions are taxed at 15% on entering super. From 1 July 2012 an additional tax of 15% (total tax of 30%) has been applied to individuals who earn in excess of $300,000 p.a.
If you exceed the Concessional contributions cap the amount in excess of the cap will be included as your assessable income and taxed at your marginal tax rate. Furthermore, the excess concessional contribution will be counted against your non-concessional contributions cap.
As a result of exceeding the concessional contributions cap, you will be liable for the Excess concessional contributions (ECC) charge on the increase in your tax liability. When determining your tax liability, the tax office will take into account the 15% contributions tax which has already been paid on the concessional contribution.
You may nominate to withdraw up to 85% of your excess concessional contributions from your super fund to pay your increased income tax assessment. In this event any excess concessional contribution withdrawn from your super fund will no longer be counted towards your non-concessional contributions cap.
Non-concessional contributions are made from your after tax income. These are voluntary personal contributions that you make into your super fund. Non-concessional super contributions are not taxed.
The cap for non-concessional (personal contributions) is $180,000 for 2015/16 for those under 75 years of age.
You can make personal after-tax contributions to your super fund or retirement savings account if you’re not working, provided you’re under 65 years of age.
If you’re 65 years of age or over, you can only make personal after-tax super contributions if you:
aren’t yet 75 years of age and
have been gainfully employed for at least 40 hours over 30 consecutive days during the financial year. This is known as the work test.
Legislation allows those under 65 years of age to bring-forward up to two years of non-concessional contribution. The bring-forward rule is automatically triggered in the year that you make a personal contribution in excess of the contribution cap in a year.
Once the bring-forward rule has been activated, the normal contribution cap does not apply, you are instead limited to personal contributions of $450,000 over a continuous three year period ($540,000 from 1 July 2014).
Non-concessional contribution cap examples are included below:
2013/14 - $450,000
2014/15 - Nil
2015/16 - Nil
2016/17 - $180,000
2013/14 - $450,000
2014/15 - Nil
2015/16 - Nil
2016/17 - $540,000
2013/14 - $200,000
2014/15 - $100,000
2015/16 - $150,000
2016/17 - $180,000
2013/14 - $200,000
2014/15 - $200,000
2015/16 - $50,000
2016/17 - $540,000
2013/14 - $300,000
2014/15 - $150,000
2015/16 - $Nil
2016/17 - $180,000
Note if you have activated the bring-forward rule prior to 01 July 2014, you are restricted to total non-concessional contributions of $450,000 over a three year period.
The Aged Pension was put in place to support older Australians who are in need of income support and other concessions during their retirement years. Benefits are offered to Australian residents who are age 65 or over and meet the income and asset test requirements. The aged pension system provides a wide range of support for older residents during retirement.
Your eligibility to the age pension depends on when you were born.
Date of Birth
Qualifying Age (Male)
Qualifying Age (Female)
1/1/1949 to 30/6/1952
1/7/1952 to 31/12/1953
1/1/1954 to 30/6/1955
1/7/1955 to 31/12/1956
Note that women who were born prior to 31 December 1948 have already reached their qualifying age.
The Aged Pension offers several other elements. This can include:
other supplemental payments.
These programs are set into place to assist seniors with the aging process. It provides funds for seniors who are in need of financial assistance as they reach retirement. There are specific rules and qualifications for each program and they may change frequently. It is recommended that you seek professional advice to ensure that you receive the Age pension benefits that you qualify for.
Your age pension entitlement is based on the assets and income tests. The test that results in the lower entitlement determines your pension entitlements. The threshold for each test is adjusted for single and for couples.
Payments are determined by a few factors. This includes whether you are single or a couple. It also accounts for couples that must live separately due to health reasons.
Other payments are also available and will have separate requirements as far as income and asset tests. These include Widow B Pensions, Bereavement allowances, carer payments, and disability support pension payments.
In order to qualify for The Age Pension you must meet income and asset tests.
The asset and income tests apply each year in March and September to determine if there are any changes in the recipient's financial situation. A change in financial situation may result in the pension entitlement being adjusted.
If the pensioner exceeds the assets and/or income limits the pension can be reduced in staggered amounts based on the amount the individual or couple are over the established limits. There are also strict rules about disposing of assets, in order to qualify for the Aged Pension.
Essentially being a long time resident of Australia will qualify you for the aged pension. When you lodge a claim you must be a resident and currently living in Australia.
You also need to have been an Australian resident for a continuous period of at least 10 years, or for a number of periods that total more than 10 years, with one of the periods being at least 5 years. Unless you:
• Are a refugee or former refugee
• Were getting Partner Allowance, Widow Allowance or Widow B Pension immediately before turning Age Pension age, or
• Are a woman whose partner died while you were both Australian residents, and you have been an Australian resident for two years immediately before claiming Age pension.
Life insurance is something most people need, but very few understand. When used correctly it can provide a financial lifeline for your family in the event of the death of a loved one. The thought of leaving your family in dire financial straits from lack of preparedness often motivates individuals to think of life insurance as they complete estate planning goals.
Life insurance can cover a wide range of financial needs. It can cover:
Provide a pool of funds to replace lost income from the deceased,
help pay for children’s education
Having enough insurance to maintain the family’s standard of living is a major goal when it comes to determining if and how much life insurance should be carried.
The other occasion when life insurance is important is when a family has mostly illiquid assets or expects to pay estate taxes. If much of the family’s wealth is in real estate or assets that are not easily sold, a death can create a serious financial crunch. Life insurance can alleviate the need to sell items because they will have access to cash from the insurance policy.
Life insurance should be obtained if others depend on your income to cover basic needs. This would include breadwinners, especially if children are still at home. It is also wise to look at your complete financial picture to determine how things will be paid when and if a spouse or parent dies.
Consider “what if” scenarios that include what it would be like to lose one source of income. If the results would make maintaining your standard of living difficult, then insurance can be purchased to cover those needs. Stay at home parents also provide a valuable service in raising children. Many couples choose to purchase insurance for this spouse because it is expensive to cover the costs of childcare and the additional time off required for the surviving parent.
Evaluating the need for life insurance is an important part of estate planning. This financial benefit can help your family maintain their standard of living, even with the loss.
There is a lot of peace of mind that comes from carrying life insurance and knowing your family will be provided for, no matter what happens.
When purchasing life insurance you have the option of naming beneficiaries. This is a very important aspect of purchasing insurance. The beneficiary named will be the person or persons who will receive the proceeds from the insurance.
It is important to understand that when you name a beneficiary it will bypass the will. This means the will is not considered and a proceeds of the policy is paid to the beneficiary directly. If you are dividing assets or including children this can be significant consideration.
The other option is to have the will or estate named as the beneficiary. This sends the life insurance proceeds to the will and estate. The advantage is that all the proceeds will be divided based on how the will is written. The disadvantage is that the life insurance proceeds will then need to go through the formal estate process, which may delay the payment of much needed funds to your beneficiaries. Where there is no will, intestacy rules will apply which may vary across states.
No one likes to talk about death, particularly not your own. Yet leaving your loved ones with a financial burden is not something responsibly family members want to do, which sometimes requires uncomfortable discussions.
Funerals in Australia range from around $4,000 to $15,000 depending on how elaborate the services you are seeking. Most funeral homes require the costs to be paid upfront which can create a real financial burden on the family. Funeral insurance is one way to address final expenses and relieve the financial burden during this time of sorrow.
Insurance for final expenses is really a small insurance policy. It can range from $3,000 to around $15,000 and will be paid quickly once the claim as been filed, with the intention of covering funeral expenses. Generally policies will pay the designated beneficiary who may use the funds where they are most needed.
When making the decision to purchase funeral coverage it is important to look at what the policy covers and what are the stipulations. For example it is common for policies to include clauses about the cause of death. A typical policy will pay only for an accidental death in the first year, and any cause of death after that. Some policies pay additional amounts if the death is accidental. This is to assist with other expenses like medical bills that might be incurred in the event of a fall or car accident.
Some premiums are stable through the life of the policy and some will increase each year. Since policies will generally pay nothing if the policy is cancelled, looking at future premiums is an important aspect of the evaluation process. Other policies are considered paid up at a specific age. This means that once the policyholder reaches that age no more premiums will be due, but the policy will still be in force. It is common for the age threshold to be at age 90.
There are some important considerations when looking into funeral insurance policies.
The premiums for funeral cover may start out being quite low, however these can jump up as you get older and if you stop paying you lose your cover.
Another thing to consider is that you may actually end up paying considerably more in insurance premiums than the value of the policy. Something which may be likely to happen more as we are living longer.
You can get cover from day one but most policies only cover accidental death in the first year or two
Insurance may seem familiar and affordable when you take it out and may suit you if you aren't sure if you can save for funeral costs
Premiums generally go up over time. This means what started out as a cheap way to pay funeral costs can become very expensive, especially if you are living on a fixed income
If you can't afford to keep up the premiums or want to cancel your policy you are not likely to get back the premiums that you have paid
If you live another 5 to 10 years you may end up paying more in premiums than the cost of the funeral
As most insurers only cover accidental death in the first 2 years, if you die from a terminal illness in this time you may not be covered. Check the policy's terms and conditions
Sometimes it can take a while for your family to receive the insurance payout to cover funeral costs.
There are alternates to assist in funding funeral cost, talk to your financial planner to discuss which option is more suitable for you given your personal circumstances.
Trauma insurance also known as critical illness insurance is something that many families are turning towards in order to cover the high costs associated with a critical illness. These policies can provide peace of mind in the event that a family member receives a trauma diagnosis.
Trauma policies will pay a lump sum in the event that the policyholder is diagnosed with a trauma event that is listed in the policy. Insurers require the policy holder to survive a certain number of days after the diagnosis of the event, generally between 8 and 14 days.
The definition of critical illness and its diagnosis are not standardized in Australia, what is covered will vary from policy to policy. Therefore it is important to understand what illnesses are included in the policy you select. Many policies will cover 40 or more occurrences, such as heart attack, cancer, stroke and coronary artery by-pass surgery.
Other inclusions might be Alzheimer’s disease, kidney failure, blindness or deafness, organ transplants, multiple sclerosis, Parkinson disease, paralysis or other terminal illnesses.
We all know someone, perhaps a family member or a friend who has suffered cancer, heart attack, stroke or who have required heart surgery. At some stage in our lives other critical illness or conditions could occur to us.
With the advances in medicine and technology, more people are surviving trauma events, where in the past they may not have. And with us living longer the chances of suffering a trauma events increases.
The good news is that we can insure ourselves so that in the event that we suffer a trauma event we can have cover in place to provide financial security and support to assist with meeting our bills and expenses.
Trauma cover provides you with a lump sum payment which can be used to:
Pay for specialists, recovery costs and rehabilitation therapy
Pay for lifestyle changes, e.g. home renovations that may assist in recovery
Pay off your mortgage and/or outstanding debts you may have
To enable a partner to reduce working hours to look after you, or hire a personal carer.
To provide insurance cover for people who have not been eligible for income protection cover due to the nature of their occupation, pastimes or pre-existing conditions.
There are no restrictions on how you use the proceeds of a payout from your trauma policy. The payout is tax free.
Your ability to earn an income is your biggest asset so it makes sense to ensure that it is protected. Income protection insurance provides this cover.
The basics of the insurance is to provide replacement income for the policyholder should you be unable to work due to an accident, injury or illness. The cover is available both inside and outside of super.
Income protection policies have the following features;
A benefit up to a maximum of 75% of your salary
A benefit period – this is the period of time that you will receive a benefit payment in the event of a claim, usually 2 years or to age 65;
A waiting period – this is the period of time that you have nominated to wait after an accident, injury or illness before you can receive a benefit payment. Usually from 14 days, 30 days, or 90 days.
Claim benefits can be indexed to increase in line with inflation
Your occupation will affect your premiums, some higher risk occupations are not eligible for income protection cover
Insurance premiums can be stepped or level
Benefit amounts can be either for an agreed value or indemnity value.
Income protection cover is based on the either one of two definitions of occupation when the policy is created. The options are:
Own occupation, where the insured person is unable to work in the occupation they were in immediately prior to the event giving rise to the claim.
Any occupation is where the insured is unable to work in any occupation for which they are reasonably suitable given education, training and experience.
Income protection benefits will only be activated due to accident, illness or injury. Other events that may prevent work such as unemployment are not covered by the policies.
Carrying a policy that covers Income Protection is a very important part of financial planning. These policies are one of the most used policies that are issued by insurance companies. Whether you are missing work due to an injury that makes you unable to work for several months or you become permanently disabled. Anything that results in your inability to work will have a major financial impact on your family’s ability to cover even basic needs. These policies help families provide for their basic necessities, when the unexpected happens.
Yes, we can refer you to an accredited mortgage broker for your specific credit product and credit advice needs. However KnowledgebankIQ is not responsible for the advice and services provided by the Mortgage Brokers to whom we refer you to.
Mortgage Broker services are provided at no cost you. That’s because the lender will pay the Mortgage Broker for their services in the form of a commission.
A 100% offset account can be operated as your normal transaction account, ensuring you retain complete flexibility and access to your funds. When your interest is calculated, the funds held in this account are ’offset’ against your loan, effectively reducing your interest liability. Using an offset account to its optimum involves keeping all your income and any savings in this account for as long as possible. This effectively minimises the daily balance owing used to calculate your loan interest and as a result, can also reduce the term of your loan.
If you have an investment loan, there is an advantage in making additional repayments into an offset account rather than making the repayments directly into the investment loan. While in both cases you will reduce the effective loan balance and save interest, you are able to withdraw funds from the offset account whilst maintaining full tax deductibility of interest on your loan.
Be aware you may have to pay a fee or higher interest rates for this facility.
Understanding debt management, v4.2, MLC, p5
Good debt refers to using borrowed money to purchase assets that generate income. It’s called “good debt” because the asset’s income should improve your total wealth over time and the interest on the loan may be tax deductable.
Bad debt refers to using borrowed money to purchase non-income generating items like clothes and holidays. Whilst they may be enjoyable or even necessary, this sort of debt is unlikely to generate income, be tax deductible, or improve your total wealth.
In some cases, it may be appropriate to consider replacing inefficient debt with more efficient debt that can be used to create wealth tax effectively. This strategy is known as debt recycling but should only be undertaken after a thorough analysis of your financial situation. Debt recycling can be an effective strategy to accumulate wealth over the long-term. It is a process of using surplus capital or cashflow to reduce inefficient debt and then replacing it with efficient debt in the form of an investment loan. The investment loan proceeds are then invested to form part of your investment portfolio. The inefficient debt is eventually extinguished and an investment loan with fully tax deductible interest remains. There is no tax benefit available on debt used for personal purposes, but a tax deduction is available on the interest expense on investment loans where the loan is used to purchase income producing assets. Debt recycling therefore results in a more tax efficient outcome and wealth accumulation benefits through the accumulation of an investment portfolio. Note the investment loan would need to be repaid at some point in time.
Understanding debt management, v4.2,MLC, p7
This is a strategy gaining popularity and is often achieved through a limited recourse loan.
A limited recourse borrowing arrangement (LRBA) is a loan structure which allows your SMSF to purchase a single asset, or a collection of assets which have the same market price.
The structure works by giving the beneficial ownership of the purchased asset to the SMSF Trustees whilst the legal ownership is held on Trust. This means that a holding Trust is established to hold the asset until the loan is repaid and the legal ownership is transferred to the SMSF Trustees.
Limited recourse means that in the event that you default on the repayments, the lender is only able to take the asset which the loan is held against and not any other assets held in your SMSF. This is why the asset is held in Trust and the fund only holds the beneficial ownership until the debt is repaid in full.
A KnowledgebankIQ Financial Planner can assist you in understanding the benefits and risks associated with such a strategy. Your initial, no obligation meeting with a KnowledgebankIQ Financial Planner is complementary and can be booked at a time that suits you.
Book an appointment with a Planner >
In layman’s terms, bonds are loans. Essentially the investor is lending the company, government or organization money. In exchange that entity agrees to pay the investor money back at a specific interest rate, over a certain period of time.
However, not all bonds are the same, ranging from very safe to very risky investments.
Bonds have a face value, this is the amount that you will receive back at maturity and a coupon amount, which is the interest paid each year. The coupon amount can be paid yearly, half yearly or quarterly.
Bonds are simple if you buy them at the start of the term and hold it until maturity. Bonds get a bit more complicated when you start buying and selling them partway through the bonds term.
Listed or Exchange Traded bonds are bonds that are listed on the ASX. These bonds give you the flexibility to sell the investment in the event that your circumstances change.
Bonds can pay interest in one of two ways:
Fixed Rate Bonds – The interest rate on a fixed rate bond is set when the bond is issued and shown as a percentage of the face value of the bond. The interest rate on a fixed rate bond stays the same for the life of the bond.
Floating Rate Bonds - The interest rate on a floating rate bond will vary in line with movements in a benchmark interest rate. As a result the coupon payment will vary each time the rate changes. You may be able to get a higher return on a floating rate bond when the benchmark interest rates goes up, but you can also get a lower return when the benchmark interest rate goes down.
The market value of a bond will go up and down depending on what is happening with the economy and interest rates.
Certain bonds may perform well when other markets are struggling. It is for this reason that bonds are viewed as a defensive investment.
The capital value of a bond will rise and fall depending on the current interest rate and the amount of interest accrued since the last coupon payment.
if a bond has a face value of $100 but you bought it 11 months after the last annual interest payment was made, you would have to pay the seller more than $100 to take into account the interest accrued.
A bond's capital value can increase or decrease before maturity based on current interest rates. This is illustrated in the example below:
A 10-year bond yesterday with an interest rate of 5% per year. If market interest rates halved overnight to 2.5% per year, then the income from your bond would be twice as valuable. This would increase the price of the bond.
If interest rates had doubled to 10%, the income from the bond would be only half as valuable. This would decrease the price of the bond.
Bonds range from very safe such as, Australian Government bonds through to risky bonds. It is therefore very important to understand the type and class of bond that you are investing in.
In general bonds are less volatile than shares, however, losses can still occur in some years. Bond holders also need to be aware of the potential of a default from the issuer of the bond.
Government Bonds -These are the highest rated bonds and come with the lowest interest rate. This is because they are backed by the full faith and credit of whatever government is issuing the bond. Governments have the ability to increase taxes on its citizens, in order to make the bond payments. As a result the risks are very low that a bond will go in default. Government bonds can include city, state or federal governments. They can also include agencies that support the government. Some government bonds will include tax benefits.
Corporate Bonds - These are bonds that are issued by companies or corporations. They will vary in grade and interest rate because different companies have different strengths. In general, corporate bonds will pay higher than government bonds. They will also have a higher default rate, but typically still relatively low numbers.
High Yield Bonds- These bonds are issued by companies as well, but will have a much higher risk of default and as a result will carry a higher rate of interest. Sometimes they are referred to as junk bonds.
Investors put money in bonds because they are seen as a safe way to invest money, while getting returns that are higher than bank deposits, term deposits and other secure investments.
Bonds offer monthly, semi-annual or annual interest to investors, depending on the type of bonds they invest in. For investors looking for retirement income, this is a very attractive feature of bonds. Retirees can have predictable income over the life of the bond. Since bonds are long term investments, this can provide investors with steady income for 10 to 20 years, depending on when the bond matures.
During the life of the bond, only interest is paid. As long as the investor does not need to withdraw the principle amount, bonds can offer a great investment option that will maintain the principal, while providing the investor with regular payments. The full amount (face value or coupon) of the bond is paid at maturity.
While there are many intricacies to the bond markets, investors are attracted to bonds because of their safety and the regular income payments.
As with all investments it is important to diversify your portfolio, in order to limit your risks. This may include adding bonds to your holdings. It also may mean purchasing different grades of bonds at various maturity dates, to reduce risks.
There are no investments that are risk free. Understanding how bonds work, will help you make better decisions, allowing your hard earned money to work for you.
With interest rates at all-time lows, investors are wondering where to put their money. This is a particularly poignant question for retirees or soon to be retirees. As you look at how to have sustainable gains over the long term while reducing your risk to market exposure.
A low interest rate environment will always create a challenge for conservative investors. There is a high level of dependence on steady income from bank instruments and bonds. When these fail there is a great deal of discomfort in moving beyond these tried and true investments.
Doing a little research and making wise choices will allow you to expand your investment horizons, while still maintaining a conservative portfolio. This will allow you to weather the low interest rate storm. Recognise that as the economy improves, inflation will rise, making it more important than ever, to find investments that will have good appreciation or payout for the long term.
Investing in a well balanced portfolio with exposure to Cash, Fixed Interest and Shares, both domestic and international could be an option worth considering. A diversified portfolio will managed the risk and volatility through spreading your investments around the variety of asset classes.
What are your goals?
What is your tolerance to risk?
How much volatility are you prepared to be exposed to through your portfolio?
What is your investment time frame?
Will you require access to your funds during this time?
The allocation of your portfolio should reflect your personal circumstances and your tolerance for risk.
Strong competition amongst the banks for deposits means that there can be some benefit for investors shopping around for the best rate available.
It is important to keep in mind why you are wanting to keep a cash reserve and how much is appropriate for your circumstances.
Those seeking a higher return need to be aware that with the higher return comes risk.
Fixed interest investments provides income through interest payments over a fixed term. The current rate of return for fixed interest assets are low. However these investment are viewed as a more secure investment as the value does not fluctuate as it would with shares and property.
Listed Australian shares can provide a tax effective income from franked dividends. Whilst international shares will provide further diversification and exposure to companies and industries that are not listed on the Australian stock exchange.
Investing in shares however is inherently risky as the level of dividend and share price will fluctuate with the company’s performance and global factors.
It is very important to note that unlike a term deposit the value of your holding in listed shares can and will fluctuate.
The purchase of a home is usually the single largest investment that any family makes. As a result the home loan is the largest debt a family carries. Homes can be purchased for as little as 5% down, but many families are interested in saving money on the interest payments.
This makes sense given the length of the loan and the total amount of interest paid, if no additional payments are made. For example if a home owner finances 100,000 at 5% for 30 years, they are paying 100,000 for the home and will pay $93,255.78 in total interest payments. Interest payments nearly double the cost of the home.
Homeowners choose to make additional payments towards their home loans for a couple reasons. The most common is to reduce monthly expenses before retirement. With the home loan being the largest monthly expense a homeowner has, the payment is a significant factor in the amount of money needed in retirement. By paying off the home loan this can free up $1000 or more each month, reducing the amount of income a couple must have to live comfortably.
Other’s want to pay off their home loans early so they can live debt free. The amount of debt that families carry is growing exponentially. For those wanting to live debt free paying off higher interest debt, like credit cards, should come before paying off the home loan.
When additional payments are made by home owners, the home becomes cheaper. There are a few strategies that can get the home loan paid off faster. The first occurs when the initial loan is taken out, or during the re-finance process. Taking out a loan for a shorter period of time. Selecting a 15 or 20 year loan as opposed to a 30 year loan will save immensely, yet not cost incrementally more.
A 15 year home loan is not double a 30 year loan. Let’s look at the numbers. If a home owner takes out a $100,000 loan at 5% the monthly payment including principle and interest will be $536.82. A 15 year loan for $100,000 at 5% will only be $790.79. This is only an increase of $253.97 or 68% increase in payment rather than the expected 100% increase. The savings are all in the interest payments.
For existing loans making 1 additional payment a year can take off approximately 4 years off the life of the loan, depending on when the payments are made. A lump sum payment at the beginning of the year will result in greater savings that adding a small amount to each payment, because the interest is charged on the outstanding principle.
The other option is to add small amounts to each payment. If you have a $100,000 loan at 4% and add $10 a month to your payment you will save $3,191.81 over the life of the loan. An additional payment of $25 a month will take 32 months off the loan resulting in savings of $7,450. Increasing that to $100 a month will reduce the loan by 8.5 years and save $22,463.79 in interest payments. The higher your home loan interest is, the greater the savings will be.
There are a few important consideration to take into account when looking into whether making additional mortgage repayments is appropriate for you.
Factors to consider, include:
When do you plan on retiring? The time frame for your retirement is important, depending on your circumstances, you may actually be better off financially by directing extra payments into superannuation, the tax benefits on your salary sacrifice contributions could provide you with a larger sum in retirement to either payout your outstanding mortgage then or provide additional funds to finance your retirement lifestyle.
What are the current interest rates: you need to consider what offers you a better return, paying off your mortgage or the returns on your superannuation.
You should seek professional advice from your financial planner, who can help you in assessing whether making additional payments on your mortgage is the best strategy for you to reduce your debt and build your wealth.
Your initial, no-obligation consultation with a Knowledgebank IQ Financial Planner is complimentary. Make an appointment for a time that suits you.