An astute way to begin a new year is to take a close look at your personal finances – including your super and non-super investment portfolios and your retirement-saving strategies – and to think about what improvements should be made.
Even if your personal finances are in reasonably good shape, there’s inevitably room for improvement.
Vanguard’s recently-published 2017 medium-to-long term economic and market outlook points to a more challenging investment environment and underlines the importance of beginning 2017 with an appropriately-diversified, low-cost portfolio.
Critically, Vanguard’s “guarded but not bearish” outlook for portfolio returns underscores why investors should take a disciplined approach and ensure that their expectations for returns are reasonable in this low-interest, more subdued-return environment. (Investors who are overly optimistic may be tempted to take excessive risks in pursuit of returns.)
No doubt, numerous super fund members will begin 2017 thinking about how the changes to superannuation laws taking effect from next July may affect them. Depending upon their circumstances, fund members will be considering whether to make adjustments to their super strategies for the rest of 2016-17 and from the beginning of 2017-18.
Here are a few starters to think about including in your 2017 personal finance resolutions.
Consider professional advice
Early in the new year, it’s worth considering how professional advice may help improve your personal finances including your investment portfolio. Much, of course, will depend on your circumstances.
A good adviser may assist, for instance, in creating a diversified portfolio for the long-term, boosting your retirement savings, preparing to move from work into retirement and making adjustments to your superannuation arrangements to reflect any change in family circumstances. The list goes on.
An extra incentive to seek advice early in 2017 is the tranche of imminent super changes – the biggest in a decade. (See next point.)
Understand impact of super changes
The approaching super changes will affect a broad range of super fund members in different stages of their lives. These may include members who want to maximise their contributions (whether years from retirement or near retirement, those who are easing into retirement with transition-to-retirement pensions and retirees, particularly if their balances are substantial).
Key changes from next July include the lowering of the concessional (before-tax) and non-concessional (after-tax) contribution caps and the placing of an indexed $1.6 million cap on the amount that can be transferred into a tax-exempt super pension account.
Further, members with more than $1.6 million in the pension phase at July 1 will have to withdraw the excess from super or roll it back to a superannuation accumulation account (with earnings subject to standard superannuation taxes). Other changes include the removal of the tax exemption on earnings of assets backing transition-to-retirement pensions.
Certain issues can arise for SMSF members including possible CGT considerations with the introduction of the $1.6 million pension cap; once again highlighting the desirability of quality specialist advice. And the super changes can have implications for estate planning – particularly for big balance members – whether in an SMSF or APRA-regulated super fund.
Get your fundamentals right
Early in 2017, it would be worth checking whether you have the fundamentals of sound financial planning/investing practices covered. These fundamentals, often discussed by Smart Investing, include: Set clear and achievable goals, create an appropriately-diversified portfolio and minimise investment costs.
Concentrate on what you can control
A smart New Year’s resolution is to concentrate on investment matters over which you have control or a large degree of control. Investors are vulnerable to fretting over matters beyond their control.
Of course, much is beyond an investor’s control including the emotions of other investors and how world stock markets impact on Australian share prices. Fortunately, investors who follow the principles of sound investment practice have more control over their financial futures than they may think.
Investors have the power to choose their long-term goals; to set strategic asset allocations for their portfolios, to minimise investment costs and to efficiently manage taxes. And disciplined investors can aim to keep their emotions under control by concentrating on their long-term objectives.
Consider beginning 2017 by resolving to tackle the common and potentially highly-damaging investor traits of inertia and procrastination.
For instance, investors are likely to pay dearly for never quite getting around to saving seriously for retirement until their final years in the workforce.
One of the most straightforward ways to begin shaking off investment inertia is to immediately step-up your salary-sacrificed contributions to a suitable level given your personal circumstances. In turn, this may motivate you to have a wider look at the adequacy of your savings.
Control your credit card
One of the smartest ways to begin a new year from a personal financial perspective is to become determined to keep your credit card spending and debt under tight control. In short, the less you pay in credit card interest, the more you will potentially have to finance your lifestyle and to build-up an investment portfolio.
Highly-disciplined credit cardholders pay off their entire credit card bill each month to avoid any interest and minimise the credit limit on their cards to reduce the temptation to overspend.
A New Year resolution to review your savings and investing strategies may be one of your most-rewarding moves of 2017.
Head of Market Strategy and Communications at Vanguard.
17 January 2017