Need for a Strategic Annual Review

12 Apr Need for a Strategic Annual Review

You have worked hard to get to where you are today so you want to make sure you are getting the most from your money. But just as markets move and change so do your circumstances. Life takes twists and turns that we don’t always see coming and that is why it is so important to review your financial situation.  

Why an annual review is so important?

• Your personal situation may have changed

Ask yourself a question, what changes in your personal situation have occurred in the past year?  Changes like a job change, divorce, having a child, buying a home, retiring, getting married, losing a spouse, etc. can alter your spending and savings. 

• Your lifestyle and financial goals may have changed

As changes in your personal situation occur it is understandable that your goals may change. As such, it is important that you review your financial situation and plan to ensure you have the steps in place to achieve your changing goals. Your goals should be Specific, Measurable, Achievable, Realistic and Time-Targeted (S.M.A.R.T) and should be about your dreams and priorities. 

• You could be affected by changes in legislation

Changing governments, the annual Federal Budget and passing of legislation throughout the year can affect your financial situation dramatically. By reviewing your financial situation, we can identify what needs to be done to deal with the changes in legislation. Some of these changes may include superannuation contribution limits, tax rates, Centrelink deeming rules and Centrelink payment changes ie Family Tax Benefit, Aged Pension etc.  

• You could be paying more tax than necessary

Changes in legislation and changes in your income situation could mean that you are paying more tax than necessary. By reviewing your financial situation on an annual basis, we can identify if there are any tax efficient strategies that could help you pay less tax or boost your after-tax returns. Such strategies could include reviewing your superannuation, investments and even insurance solutions to ensure you have the right products to suit your current situation and goals.  

What strategies are you exploring to help defer, reduce, or more efficiently manage taxes on your investments?

The overall impact of taxes on performance can be significant: Morningstar cites that, on average, over the 88-year period ending in 2014, investors gave up from one to two percentage points of their annual returns to taxes. A hypothetical stock return of 10% that fell to 8% after taxes would, in effect, have left the investor with 2% less investment income in his or her pocket, according to Morningstar.

Although you cannot control market returns or tax law, you can control how you use accounts that offer certain tax advantages. Employing this strategy allows you to choose which assets to keep in your tax-advantaged accounts and which to leave in your taxable accounts. In general, the more tax inefficient an investment is, the more tax you pay on it.

• You don’t have an annual budget

Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt. 

Making a budget and having it reviewed annually should help you to track your expenses on items that you may not normally think of when planning a monthly budget. This can include car insurance payments, car registration, taxes on your home, life insurance, and tuition payments. Before the review, write down the amounts of each of these items. Then you will divide the amount by twelve and include this in your monthly budget. You can leave the money in your checking account, or transfer it to a savings account until you need it.

Another great feature of the annual budget systems is that it allows for you to roll your any extra money you have in a category into the next month. This means that if you did not spend as much groceries as you normally do, you can use the money the next month. This also helps if you have varying power or heating bills throughout the year.

• Your estate plan may have fallen out of date

Reviewing your estate plan is generally something we don’t want to think about too often. However, if done properly your estate plan can ensure your money is inherited by the right people at the right time. Have you got a binding death nomination on your superannuation? Is your Will up-to-date? Do you have a Power of Attorney and do you need a Testamentary Trust?  Even if you don’t have many assets the right estate plan can save your friends and family a lot of trouble and heartache.

• Your insurance needs may have changed

Insurance is really an investment in peace of mind.  Yes, it is an expense that can sometimes feel unnecessary. But if the unexpected happens insurance can save a lot of additional heartache that could be caused by the financial stress of dealing with the aftermath. Do you have enough life insurance to cover your debts and current family situation? Is your income protection sufficient to cover your lifestyle expenses if you were unable to work due to sickness or injury? Changes to your personal, family or work situation can all impact your insurances.

You’ve worked hard and want to protect your income. So, it’s wise to evaluate your family’s total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan.

Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones. On the other hand, many people find as their net worth climbs and their children reach adulthood, they need less life insurance.

If you choose to reduce your life insurance, you may want to apply the savings toward your health insurance, which becomes more critical as you age and continues to increase in cost. You might also benefit from looking into long term care insurance, which may offer a variety of features and options.

One more thing: Your annual review should also include a simple check of your insurance beneficiary designations to see whether they are up to date.

• Your debts may be growing

Are you in control of your debts?  Or are you struggling to make a dent in your credit card, personal loans and house mortgage? Sometimes it isn’t even a matter of your debts increasing but more so the frustration that you work so hard and that your debts just don’t seem to get smaller. By reviewing your financial situation, we may be able to identify ways you can pay off more debt and free up cashflow by looking at how your debt is structured. 

• Is your investment strategy on track?

You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your conditions have changed, make adjustments as necessary.

At least once a year, check your target investment asset mix to ensure that it continues to meet your time frame, risk tolerance, needs, and preferences, and to perform any re balancing that might be necessary in light of the past year’s market performance.

On your own or with your adviser, take some time to look at specific investments and evaluate whether they continue to have a role in your portfolio. It’s important to match your investments to certain time frames or specific goals. Some may be long-term such as saving for a child’s education or your retirement. Others may be more short-term such as saving for a new car, a vacation home, or travel.

For example, you may take on more risk saving for a retirement that is decades away, but you may want more conservative investment options to fund 25% of a grandchild’s college education in five years. Or, you may earmark $35,000 from a fund this year to pay for a new car for your spouse.

• Are you preserving your assets?

Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.

If you do have a plan, do the people you care about know about it? Where is it, and what role should your loved ones play if something happens to you? Marriage, divorce, birth, and death are the four big events that affect estate plans, but you may also want to consider other factors, such as longevity and health, that could affect your planning.

Thinking about a will, health care proxy, and power of attorney can be uncomfortable, but consider the alternative. Do you want someone else making these decisions for you? If you don’t have any of these key documents, take the time to set them up. If you have them, review not only your paperwork but any life events that have occurred. Moving, having children or grandchildren, or losing a loved one can have a big impact on your plan overall.

• Retirement Planning Issues

Regardless of your age, there is invariably some sort of retirement planning issue for you to address.

If you are in the accumulation stage: are you on track towards accumulating enough for retirement? While this number might be tough to nail down for those who are 20 or more years away from retirement, what is critical here is to ensure that you are saving as much as possible to ensure a reasonable shot at a solid retirement.

If you are within ten years of retirement, the questions are more critical and concrete. Do you have a clear picture of what his retirement will look like? How long would he ideally like to work? How much will his lifestyle cost?

If you have not had a review in the last 12 months, please call us on 03 8658-8875 to arrange an appointment with one of our experienced Financial Advisers. You can also click the button to set an appointment!

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