Need to Know | How you can invest for children or retirement (or both!)

Candice: [00:00:03] Hello and welcome to talk money to me, your need to know financial podcasts? Thanks for joining us. I'm Candice Bourke

Felicity: [00:00:09] I'm Felicity Thomas and we're two financial advisers at Sean Partners who have worked together for the last five years. Now we often get told by our clients that we have a knack for making the complex simple when it comes to financial strategies. How do we do that, you ask? Well, we like to educate our clients on all things finance, from the market to actually structuring their investments to explaining why super is so important to talking through a lot of the what if moments that you have in life. For example, what happens if I can no longer work due to an injury or illness? I mean, what kind of cover do you have? What happens if something happened to you? You've got a family, you know, a little bit morbid, but things that we do like to bring up with our clients, as well as something a little bit more exciting. Early retirement options or perhaps setting up investments for the next generation. 

Candice: [00:01:02] So if that last point really pricked your ears, well, this is the episode for you, as we're going to be talking about two day options like, you know, how can I retire early and what does that look like? And is that even possible in today, right? And then a follow up question we always get asked is, well, if that's the case, you want to retire young. How much do you possibly need in retirement? So we're going to address a couple of those aspects and we'll be talking about obviously early retirement and also another investment strategy which people consider for the next generation. So setting out, you know, your grandchildren's or children's financial future. We're going to be talking about a certain strategy, which is an investment bond. Don't worry if you haven't heard about it. And for those that you have heard about it, it's going to be a bit of a refresher. We're going to go through all the ins and outs and integrity. And then because we love talking about stocks in the markets and just generally what's going on in the world. We're going to wrap up with the Australian reporting season, a little bit of a sneak peak preview of what we can expect over the next couple of weeks. 

Felicity: [00:02:04] Plus, you'd be really busy with your questions as well. So we've actually had a lot more questions come through on our Instagram. And we're going to address these in this episode. But before we do all of that, just a quick side note, here comes our very exciting disclaimer Candace. Take it away. 

Candice: [00:02:19] I don't know if it's exciting, but here we go. Our chat today is not personal advice, even though we're registered financial advisors at Shaw and Partners. Please note that this podcast and the content discussed does not constitute, as always, is financial advice. Nor is it a financial product. That's it. 

Felicity: [00:02:35] So jumping straight into it, I'm going to explain what an investment bond is or an insurance bond because a lot of people think bond. I mean, I'm not sure I want to be in a bond, but it's not a bond at all. So an investment bond is a managed investment. It's usually operated by a financial institution, so a different product provider where your money is pulled alongside other investors and it's actually invested inside the investment option of your choice through your own individual investment bond. Now this can be in your own name, in a company name, in your kid's name, in a trust. 

Candice: [00:03:08] So it's kind of similar to investing in an ETF basket alongside other investors or a managed fund in that sense.

Felicity: [00:03:15] Correct, but you get a lot of additional benefits. So like I said previously, they're also known as an insurance bond, but it's not really insurance at all. It actually combines many features of a managed fund and a life insurance policy. So where the investment bond provider actually only pays 30 per cent tax on earnings in the bond for certain period of time? So you can also set a certain wedding date now the minimum that people recommend for investment bonds is 10 years time, because that's when you actually get all of the benefits of investment bond. You can actually break it a little bit earlier, but the tax benefits are if you hold it for more than 10 years. Now we'll explain the tax benefits with real life example in a moment. 

Candice: [00:03:57] And so, as you can tell, we're really passionate about investment bonds and. This is not a blog, by the way. We just want to educate you guys on this particular strategy because we like to talk about with our clients, friends and even personally, as it does provide an alternative set and forget investment option when you have a long time horizon, in our opinion, like that 10 plus years, for example. So that's because investment bonds, they do offer a wide range of different investment needs across all different life stages. So not just talking retirement, but you can use this for wealth accumulation, tax planning, retirement savings and setting up for the next generation like your child, for example. 

Felicity: [00:04:38] Even estate planning. So I think they're especially useful when you are working and a high income earner and you're really looking to save for, like, Candace said, early retirement or savings for children or grandchildren because we all know kids only have a tax free threshold of $416 in Australia as well as. Education costs because we know how expensive schooling is.

Candice: [00:05:03] Yep, Uniphase, et cetera, that's helping with the house deposit, whatever, whatever the goal is, you can really tailor them to what you're seeking to achieve. So, you know, just jump on Google. There's a lot of different providers out there that do too investment bonds. But the more predominant ones that we're familiar with is Australian unity generation, life or gen life or short the banks they provide them some ETF providers also such as Vanguard. They have very similar products. And insurance companies like AIG Australia here. So darling, back here, coming back to the question, can I retire at a young age? And how much would I dearly need, right? So let's consider retirement bond. 

Felicity: [00:05:44] I mean, you know, the super legislation currently states that we can't actually access super until we are 60. I mean, by the time we retire, it could be 70 or 80. Who knows? So if you're looking for an alternative to super, an investment bond could be a solution. You kind of need to work backwards to figure out how much you need personally in retirement, but we'll give you a couple of examples. There's actually no age limits when you can access the funds. It's just that 10 year rule. However, there are certain product rules pending on your provider, which we've just kind of mentioned. 

Candice: [00:06:20] Yeah. So say your 40 years of age right now, for example, and in at least 10 years time, you're thinking, OK, at age 50 alone, I want to retire early and leave the workforce. In this example, let's assume the investor has 50k saved in their bank account and wants to invest this amount in their personal name. So why would you consider an investment bond for the goal of accessing it as an income stream in 10 years time versus, say, leaving the cash in the bank or investing it in ETF or a share portfolio, right? 

Felicity: [00:06:50] Correct. Well, firstly, cash as an asset class since the 1970s has returned an average of seven point seven percent. I mean, that sounds pretty good at the moment, but obviously we're not getting that. So even worse, over the last 10 years, given we have experienced really historically low interest rates. Cash is only performed 2.6 per cent per annum.

Candice: [00:07:09] Batmobile. That's not very impressive, but 

Felicity: [00:07:12] good if you're getting a home loan, right? 

Candice: [00:07:14] Yeah. So therefore, if you 50k in 10 years on average, it's likely going to grow, you know, to sixty four thousand and the interest you've earned along the way, you're going to be paying tax on. That's if you were in cash in the bank, right? That example. 

Felicity: [00:07:27] Yeah, exactly. So that's not ideal

Candice: [00:07:29] versus, let's say, you put the 50000 into a growth managed fund or a growth diversified ETF where you've got a combination of international shares and Aussie shares. Well, since the 1970s, the Australian market has produced on average 9.6 per cent per annum, and the international share market has performed a little bit more at 9.8 percent per annum. Again, any capital gains you may have triggered or income collected along the way because in this example, we're investing in your personal name you are paying tax on. It's not a special tax. We always get caught up in that it's actually just rather the profits that you've trimmed or the income you've collected is simply added to your personal taxable income threshold. Each financial year over that 10-year period, and 

Felicity: [00:08:12] the reason you would choose an investment bond rather than investing in your own name as a solution is, say, you're earning 80 grand. Yeah, your marginal tax rate is 34 and a half percent. Within the investment bond, you're only getting taxed 30 percent, which is the company tax rate for the first 10 years after 10 years. It is tax paid, which means there is no capital gains tax. That's why it's a great solution for a longer term investment. We're going to give you another option, right? So let's look at this example. You've got $20000. You're 25 years old. You want to retire in 25 years. So say 50, which is earlier than the standard 60 you invest in our growth portfolio, you're from seven per cent per annum after fees and tax returns. So historically, we're kind of just looking at a cash return here. You don't actually put any additional contributions. It's just set and forget you earn 80000 per annum. So your marginal tax rate is thirty four and a half per cent. The indicative portfolio tax rate is twenty point seven percent because remember, there are franking credits being received along the way within that investment bond and within the first 10 years, tax is paid. You actually could end up with seventy nine thousand five hundred sixty four dollars very specific in 25 years time, which is all going to be tax free and tax paid. Now that's assuming only seven per cent per annum return. Not the combination of what Candace just mentioned 

Candice: [00:09:50] and also no contributions, right? You just said twenty grand set and forget see you later in 10 years. And I think it's also important to just totally reiterate that. Point about the 30 per cent tax ruling. It's because if you're using Generation Live, for example, you put your funds into the bond. They are an Australian entity. Therefore, they are subject to 30 per cent tax. They pay the tax on your behalf. And then, like Felicity mentioned, any franking credits is flushed down to you as the end shareholder or investor. So it is a really cool option if you haven't heard about it. To jump on Google, read up about it. Check a few of their product services statements to read more about the nitty gritty. And we asked the question You know, how much? What's the magic number in retirement? Well, it really depends on your own lifestyle, on your own personal circumstances. But if you jump onto the ATO or money smart, there's lots of really good tools and tax calculators and retirement budget planning tools out there. But typically, if you're an Australian listener, they say anywhere from a million dollars is really the ideal optimal superannuation or retirement savings funds. You may have more than that. You may have less than that, 

Felicity: [00:10:59] and I think you need to think about what you actually need to live on, right? Because according to the government, they actually say that a couple only needs about 46000 after tax to live on. I mean, income per year. Yeah. And I mean, that's no no doubt, but I think I need a little bit more than that. So you need to figure out going to factor in your holidays. Well, that's it. You need to figure out exactly what you need every year, whether that's 80000 after tax, 100000, 150000 or 50000 in kind of work backwards from there. But I think Candace, you wanted to give us a little bit of an example of why you've recently actually used an investment bond and how it kind of 

Candice: [00:11:40] works for you. Yeah. So I'm not. Obviously, I would love to retire early, but I didn't set it up for that reason. I set it up for my baby girl who we've just welcomed to the world. So one of my little jobs that I had is a to do list. After her birth was let me set up an investment child bond for her, so I'll just quickly explain what that is. And then, you know, reasons why I did it

Felicity: [00:12:01] So because people are always, always asking, How do I invest for my kids? Yeah, I do. I am sure it's safe because important to note it's also safe from creditors as well, especially Candace running your own business. So I just thought I'd add that in.

Candice: [00:12:15] Yeah, and a very good point. And you know, I can I can put more money into my own portfolio, but that's my portfolio. I wanted something for her that she can decide to use when the voting age is up for whatever purpose like, it's pretty open. So a child born similar to an early retirement bond is typically referred to as investment bond and is designed for anyone you know, like parents, grandparents, family members, friends that really want to establish a tax effective investment vehicle for their child's financial future and their possible goals, which they haven't realised. I mean, her goal, the morning is to wake up, drink milk, go back to sleep. She doesn't have financial goals, they say at the moment. So I decided to put my money where my mouth is, and I put $10000 into a diversified vanguard, high growth child bond. 

Felicity: [00:13:04] But you don't actually need to start with ten thousand the minimum. Well, it depends on what product provider, but it's usually around $1000 would be the minimum correct. [00:13:13][8.5]

Candice: [00:13:13] So I was very generous to her because most of my pregnancy was in lockdown, so we were able to save. And so I did my research on it, and I picked that particular investment option because she's got a long time horizon. She's less than one, and I picked the voting age of 25 years, so I thought, Well, let's just achieve for high growth here. And that particular investment vehicle, which is operated by Vanguard, has returned 11 per cent per annum since Inception, and that's really exposed to mainly global shares, 36 per cent Aussie shares and then the rest in fixed interest and cash a super high growth. 

Felicity: [00:13:51] OK, so you decided to set her voting age at 25, but a lot of parents can choose, you know, 18 21. I think 25 quite reasonable because anything early might blow it on issues or a new car or a boyfriend. 

Candice: [00:14:08] We had in mind. Age 25 is a good year for her because maybe she'll be thinking about buying a property that stage, you know, setting up a business, whatever it is, it's available for her. 

Felicity: [00:14:19] And I think you should probably end up if you're not actually going to put anything else in there, you might end up with around $40000. I think from your initial 10, which is not too bad. 

Candice: [00:14:30] Yes, if we did nothing, it'd be. I think it was like 40 to 45. But we have been clever here and we've set up a direct debit of a thousand bucks contribution a year. And then also, which is important to note, you can just do a monthly, quarterly, six, monthly, yearly, whatever works for you, for your budget, you can basically contribute to your child's future or if it's your grand child's future. And I think 

Felicity: [00:14:54] also you don't actually just have to have the full ten in one option. Like the Vanguard growth option, you can actually spread it between a couple of different options. Again, each product provider has their own list of investment managers that they use, but you aren't forced to stay in one. And you can change it as well whenever you do want to. But obviously, just keep in mind the switching costs to do so. 

Candice: [00:15:18] Yeah. And like, if you're really thinking ahead, you could have right. Let's break out that $10000 into multiple different bonds, right? A little bit of money in the house deposit bond. Maybe you want that to be probably a little bit more safer, so you could pick more like a fixed interest or, you know, a diversified balance fund, for example. And then you could have savings for education fees and savings for future holidays. Whatever it is, you don't have to be locked in to the one bonds that I've decided to do for a little while. So it is super flexible and 

Felicity: [00:15:50] so you are really going to put $1000 in every year 

Candice: [00:15:54] for her birthday, 

Felicity: [00:15:55] for her birthday. Right now, obviously, there is another rule that you need to watch out for. It's called the 125 percent rule. What that actually means is you can't put more in the bond than 125 per cent of the year before. So your first year is generally the year where you can really get as much in as possible. And then after that, you've got to be careful. So again, read the PDX or speak to a financial adviser. So Candace, you want to summarise a few key points. 

Candice: [00:16:23] So a few key points is you've obviously got the 30 percent tax rate, which is a bit of an advantage there. You can do regular deposits if you want to. Super important is that it's very attractive. After 10 years, 125 percent contribution rules or watch out for that can start as small as $1000, but just check the actual provider's rules. You know, you can have options of spreading your bonds, spreading your risk, lots of diversification, lots of ranges of different asset classes from cash, all the way to high growth and, you know, shares and stuff like that. And you can choose the vetting age. So really neat way. Check it out, guys. 

Felicity: [00:16:59] That's it. Now, before we get into the Australian season, sneak peak preview and answer your questions. We're going to take a quick break and hear from our sponsors. All right, so as advisors February and March, representing a very busy time in our calendars as Australian listed businesses will report their financial earnings and outlook for the next six months. Now they also come to market with their previous quarterly or six monthly update and how the business fared in recent months. So what are the ASX reporting season? Market expectations currently CB Well, [00:17:35][36.1]

Candice: [00:17:36] there's three key themes I think that have really emerged on the brink of the reporting season. I think the first one is the supply shocks and obviously the Covid back. So company reporting seasons in Australia are usually dominated by discussions around, you know, how much profit are we making in the first half? What's the dividend going to look like, whether there's going to be a buyback forthcoming, you know, in the coming weeks, I think are going to be really different because what we keep hearing through the business reports is that income statements, while important and a really meaningful more than ever, the investors really going to focus on the actual stress that they're experiencing on the supply chain bottlenecks. So what that means is, you know, labour costs and how much is that really disrupting, you know, the normal earnings expectations because obviously, if margins are compressing, that means revenues are going down, profits are going down. Ultimately, will they cut the dividend? That's a big question. So if you look at the ASX listed companies, about 90 per cent of sales is attributed or costs for the labour costs typically, and this percentage is actually pretty close to the offshore normals. You know, looking over in the U.S. and the S&P 500, it's about 17 per cent labour costs across all companies. So one to watch

Felicity: [00:18:57] and then we have earnings have slipped recently, so we actually expect this to broaden out and continue. But please keep in mind, I think this is still a very short term view rather than long term investing view. It's a little bit, I guess, stockbroking, right? Because we did come from the stockbroking world so very much in the last six months, the outlook for profits had been strong, with upward revisions outnumbering downward revisions up until the end of December. Now, since then, momentum has kind of faded. And with this profit season capturing the Omnicom locked down month of December and January, that was very fun. We expect to skew towards downgrades to continue throughout February. Now we also note that a big asset decelerating earnings growth trajectory was a standard experience from prior periods, which are two years on from an earnings recession such as 2003, 2011 and 2018.

Candice: [00:19:52] Yeah. And then finally, we kind of alluded to it and margins are they at risk? Will top down analysts say no, but there's always obviously two sides to every story or coin. Overall, I think the market's factoring in that there's a bit of a short term fear that there will be a collapse in corporate profit margins in the short term, right? Because we've just had a shocking sort of six months, eight months really in Australia here and generally globally. And we're seeing that in the US as well. Like, you know, it's not as good as it has been. And at the stock level, however, the risks appear to be quite meaningful. Labour costs, you know, burdening across all the companies. And I think vulnerabilities lie within the financials, gaming, leisure and travel sectors. They're probably the most at risk. So essentially, guys, we're strapped in here into our seats. We're just about to embark on the Australian reporting season, and I think it's going to be an interesting one. Definitely, probably more volatile, no doubt given the inflationary backdrop that we're facing the Covid supply chain issues and the non-stop talk of interest rate increases. Just that's all anyone can talk about.

Felicity: [00:21:01] I honestly think it's probably been the last three years now. We've just had such a volatile, crazy market. But with a crazy market has crazy opportunities as well. So I think it's just about, you know, like Candace said, strap, you mean buying the companies that you do really want to hang on long term and long term is five, seven, 10 years, not one year, but before we sign off. We also had some questions that we actually really wanted to go through. Thank you for asking them. A quick reminder you can always send us questions via email at Tim Team at Equity Mates dot com or through our Instagram. Our handle is at Talk Money to Me podcast. 

Candice: [00:21:39] So first off, you asked, Are we still keen on Nitro and TNT? So Felicity, you pitched these ones in a few Ord pads ago? 

Felicity: [00:21:47] Yeah. And look, thanks for your question. I definitely am still keen on both of these companies. So small cap software is trading on an intimate read multiple of 5.1 times, which compares to an eight point nine times multiple for the US peer group, meaning a 46 per cent discount to our U.S. peers. So yes, recent software performance has been soft, I guess. Use that word soft in dismal, upsetting, but it's worth remembering that small cap software has actually outperformed ASX small boards in 16 of the last 24 quarters. So you need the exposure now to answer your question. Look, let's look at Nitro. You know, it looks to report on 24th of fabs are coming up. The investment thesis is based on a strong second half, and the sales team is actually ramping up. And with we've got we've got a sign up sell as well catalyst to look out for a further FY21 upgrades and FY22 growth acceleration risks that we're kind of looking at a high expectations and the full price. They paid full price on recent acquisitions. So I guess that's a potential risk if it doesn't play out the way they're expecting it to. However, we've still got a price target of $4, so I don't know about you, but I'm doubling down. 

Candice: [00:23:05] Yeah, I think it is. It is a really good opportunity. And what about TNT? What's what's your thoughts on that one? All right. 

Felicity: [00:23:12] So TNT released its second quarter 2022 for, say, trading update. And look, we see this is another broadly positive update with useful management commentary around expected seasonality in FY22 and continued strong organic growth of 30 percent. So annual recurring revenue exceeded $50 for the first half of 2022. Operating cash flow is solid at 4.2 million. Now, Terrance is interesting company, so we're in cybersecurity. It's actually a game of two halves. So the first quarter of 2020 to April came in at 2.6 mil for a 1.5 22 figure, four point six million, which represents only 22 percent of our forecast twenty point seven million. But it's due to meaningful seasonality inherent in this business and customer budgets. So that's something also to keep in mind. They're also about up profitable and have operating cash flow positive, so they're really ready for acquisitions. So again, making no change to our earnings forecast ahead of the release, which should be at the end of February, we don't have the exact date yet and reiterate a buy with a price target of 35 cents. 

Candice: [00:24:20] And I think also for our listeners, it's important to note we designed the order pad to obviously talk about companies and investments that we are really bullish on and like. But if there's any news flow or anything that happens to the financials, the outlook, you know, the C-suite, whatever causes the red flag, we will make it a sell, right? That's when we've lost conviction and it's going to leave the order pad for that reason. 

Felicity: [00:24:44] That's it. I mean, we're not, you know, it'd be nice for things to go up tenfold the day after you buy it. And look, it does happen sometimes, but it's not going to happen all the time.

Candice: [00:24:52] You know, that's just mainly luck, right? 

Felicity: [00:24:54] You know, we're trying to buy businesses that we believe are good long term holds. Someone else also asked how our out what a pad stock's going bit of a bloodbath. 

Candice: [00:25:07] But no portfolio is really quite on. 

Felicity: [00:25:10] Quite safe. We haven't even been a year yet, right? We released in August. That's true. 

Candice: [00:25:14] Yeah, that's true, right? But here's a rundown. All right. So in first place, we have drum roll, please. BHP it's up 21 percent since we pitched it back in October 2021, and it was trading around $38 share price and the recent close sort of around 47, 47, 40 cents, to be exact. I think the reason it's really rallied has been obviously iron ore. Commodities have had a strong short, short term rally recently. Aussie dollar was sold off. Then its have a little bit of a strength, which obviously helps commodities. But more importantly, for this particular company, they have obviously decided to sell out their oil asset to Woodside, and they're going to pay about three point fifty Aussie dollars for that spin off demerger over to Woodside. Then you've got about a buck 50 also coming in the forthcoming BHP dividend update in March above the Dollars. Sorry. 

Felicity: [00:26:10] I'll be okay.

Candice: [00:26:11] It sounds a bit silly, doesn't it?

Felicity: [00:26:13] She's very healthy, isn't she? My apologies. 

Candice: [00:26:16] I'm talking all day, and that's because BHP then thirdly, decided to delist their UK plc holding. And so basically all investors are now just exposed to the Aussie market, which what that means is index funds have to get re weighted. It's going to be natural push and bump to the ASX version of BHP and a lot of institutional investors. Actually, it was one of the most shorted stocks of late and that had to close up their position because obviously it came off the UK market. So it has had this nice little run up and that was a very long winded BHP. He's coming first, but 21 per cent

Felicity: [00:26:58] sorry, and I think she did that because that was happy. But we actually do have we do have more and more in the green. That is Blackstone. My pick up four point one, seven percent since I was pitched in November 20. When he won and more recently on holding, which was our latest order pad is up a little 2.5 two percent. So there we go [00:27:18][20.1]

Candice: [00:27:18] as an example, right? You've been in that. But if you bought a week ago based on Waterbed, you're up two and a half percent in short term. So the market is super volatile. We'll check in with you guys later on, maybe another six months time, but obviously we have to talk about the negative, says lots of Ren in the portfolio. The biggest larga was one of my picks. Australian potash APC, the code on the ASX that's currently down 45 per cent. If you did invest alongside the cap raise, which is about 11 and a half since back then in November 21. And if you touched anything tech related recently, like you jumped in, you know, before Christmas, you're probably going to be down. Nitro is down 37 percent, PayPal down 34 percent, AT&T down about 29 percent, CrowdStrike cyber tech down 21 percent. But this is what we want to end on a positive note from all those red figures. The silver lining is that we have conviction in these businesses, you know, for a long term hold like we mentioned, you know, we we did our research. We want to add these positions to the order pad because they have impressive growth outlook in our opinion. And for some shares like Blackstone and Australian Potash, which is the more ESG lithium, you know, future screenplays. We're happy as investors because you ai to ride out the volatility because we know that we are in these stocks for more like five seven years time.

Felicity: [00:28:39] Yeah, exactly. Even longer, to be honest, I think, by a good company and hold it as long as you can, because a lot of our clients have held their portfolios for over 20 years, they're the ones that are really cheering, you know, now on average, across the several stocks, you know what happened? The aggregate average upside potential is about 55 percent. 

Candice: [00:29:00] Happy days. 

Felicity: [00:29:01] Happy days.

Candice: [00:29:02] Now, before we sign off, please remember, although we are financial advisors at Shaw and partners, please note, as always, our discussion today does not constitute as personal financial advice and always you should reach out to a professional financial advisor such as ourselves before you make any of your investment decisions. So next week, we have our sit down interview episode with a CEO of a financial institution company which do offer investment bonds. So that's why we wanted to give you a one on one. I'm not going to give the guest speakers name away, but this individual is a gold Olympic medallist. The sport of choice is swimming. And I think this particular individual. He is a very well-known household name for a lot of Aussies. And I think you should definitely tune in because we're going to talk not only about investment bonds and, you know, some more benefits about it, but also we're going to ask you, you know, what has he got in his stock portfolio at the moment and also the ins and outs of being an Olympian? So stay tuned, guys

Felicity: [00:30:03] can make sure you follow us on talk money through podcast, the daily market update and sometimes exciting invites to events. We're also now on Reddit and Tik-tok. Please follow our LinkedIn. Until next time, See you