30 October 2017
Over the past week Australian shares were down 0.1% while small company shares rose 0.2%. Shares in developed countries were flat with the US market up 0.2%. Shares in emerging markets fell 0.8%. The Australian dollar fell 1.8% to 76.77 US cents. The Australian 10 year bond yield fell slightly to 2.77% while the US 10 year bond rose to 2.41%. The oil price was up 4.7% to 53.90 US dollars per barrel.
The ATM’s 50-year anniversary – spending and saving for retirement
You might have noticed that the ATM is celebrating its 50-year anniversary, although the machine that appeared in the wall of a Barclays branch in London in 1967 bears little resemblance to what we now know as an ATM. The ‘automatic cash system’ was a vending machine that returned cash for tokens, tiny radioactive cheques, so long as the associated four-digit PIN number was correctly entered. There was no reusable plastic card, and the machine was not linked to the bank’s computer systems; these innovations didn’t appear until after 1969.
The ATM brought more convenient access to cash; no need to locate a bank branch, no lengthy queues at the teller and no need to worry about bank-opening times or bank holidays. But this easy access to cash made spending easier. The same can be said about credit cards. Credit cards can cause issues for individuals and their budgets because they separate the purchase decision from payment. However, this form of payment, along with debit cards and EFTPOS, have a key advantage over cash - a transaction record. This allows consumers to monitor spending over time and discover ways to alter it.
There are many methods to monitor and control spending. ASIC, for example, has a TrackMySpend mobile app. ASIC also has a ‘retirement planner’ page on its website which provides an estimate of how much income you’ll get from super at retirement. Each of these tools are useful. However, consumption and investment decisions shouldn’t be treated separately; whatever we don’t spend we can invest.
The question then is how best to invest? The answer to that question depends on the purpose (for example a car, further education, holiday and retirement) and taxation. The super system provides a tax-effective way for individuals to prepare for their financial needs in retirement, and salary sacrificing up to the before tax contributions cap of $25,000 is an extremely tax-effective way to do this.
Tax doesn’t just impact on the attractiveness of salary sacrificing into super; it also impacts on the investment decisions we make for our members. For example, our asset allocations for super and pension options are different because the earnings on pension accounts aren’t taxed. Additionally, we incorporate the benefits of franking credits from Australian shares.
The impact of tax on additional super contributions can seem complex and the benefits, therefore, difficult to get a handle on.
Every individual’s circumstances are different and the rules surrounding super can change. You should seek financial advice, for example from Mine Wealth + Wellbeing Financial Advice, before deciding to salary sacrifice into Super. It’s never too early (or too late!) to get financial advice.
Sean Anthonisz | Senior Quantitative Analyst – Asset Allocation