|In this newsletter: |
Financial Risk Management
Expect More Taxes
Risk Management Reflections
The Cash Reserve Fund
The 2020/2021 financial year has come and gone and we still live to tell the tale.
Before we can go forward with confidence and optimism after any crisis, it is important to review history and reflect on what has happened during this latest crisis period.
Covid-19 ranks alongside the top five hardship periods I have experienced over my 50 year working history, alongside Roger Douglas’s economic reforms of the 1980’s, the sharemarket crash of 1987, Y2K and the global meltdown, 9/11, the Canterbury Earthquakes and now the malaise from the Coronavirus.
For many ordinary Kiwis, the effects will be felt for generations.
Many have lost their jobs, careers, businesses, assets, savings, devastated their retirement accounts and destroyed their retirement plans; and for some their greatest asset – their health.
Please take comfort from the fact that no-one could have foreseen this global disaster, or the way in which it has been managed/mismanaged, resulting in the casualties in the name of good intentions for which only history will judge the correct solution from hindsight.
Our role as a financial risk manager is to help guide you through the roadblocks and to smooth the bumps, in the event of a future disaster that could impact you and your family. Our advice and mitigating strategies are designed to protect you from the outcomes of declining assets or underperforming assets, as well as unforeseen events such as death, illness, accident, loss of job or business failure through the implementation of investment or insurance contracts.
The strategies and products we recommend are purchased to varying degrees based on your willingness and or ability to accept risk. In most instances we find that most clients have more risk than they can actually bear.
The decision is not what you are prepared to pay for the protection, but what you are prepared to lose if you don’t.
Throughout the financial year 2020/2021, I spent most of the year assisting clients in managing their financial cash flows, caused by the lockdowns and general business downturn. The major assistance I was able to provide through our product selection of Asteron, for many clients, was to claim on the hardship benefit and apply to put their insurance premiums on hold for up to 6 months and still be continuously covered whilst not having to repay the premiums. No other product provider offers this benefit. This premium suspension benefit has been a godsend for many clients caught in the Covid downturn.
Having signed off the year end accounts, I am now reflecting on last year and forecasting a more stable 2021 and beyond. Barring any government’ knee jerk’ reactions created through the new trans-Tasman bubble.
I am anticipating that sanity will return to economic management around the world with economies reopening cautiously over the next few months. The reality is that governments around the world are now recognizing that they cannot sacrifice their economies for health issues such as has been their actions created during the Coronavirus. The debt they (and the New Zealand government) have created will take many years to repay, if at all, and this will be what our children and grandchildren will inherit. This will inevitably result in higher taxes, reduced Government spending resulting in less safety nets and sustainable long-term programs and commitments, as future governments grapple with debt laden balance sheets.
Expect More Taxes: The first – the Brightline Test (capital gains tax by another name)
In New Zealand we have seen the first of many new taxes in the form of the extension to the bright line test for investment property, which means that if you sell a property within 10 years (not your family home) you will pay tax on any profit at your then marginal rate. An owner of a property (not their family home) will also not be able to claim the interest on the property as a tax deduction.
This will realign the investment strategy and priorities for many people either in, or contemplating investment in residential property. I expect that death duties which is currently zero rated will re-emerge and tax rates will increase. Accordingly, I would not be recommending the early cancellation of life insurance policies over the next three to four years, if you own more than $1 million in net assets.
When death duties applied in New Zealand, life insurance was historically the mechanism to create the money to pay the tax department which then preserved the value of the estate for the ultimate beneficiaries. Otherwise, the asset had to be sold and the tax of 40% minimised the distribution to beneficiaries.
Risk Management Reflections
After any downturn it is important that you stop and review your new personal and financial structure, your goals and objectives and most importantly your risk management umbrella.
Many things could have changed.
Do you still have a job? Is it safe and secure? Should you consider redundancy insurance?
Do you still have debt? Is it protected? Life, Trauma, TPD, Income Protection, Medical and Redundancy Insurance .
Do you still have dependents relying on you personally or financially? Life, Trauma, TPD, Income Protection, Medical and Redundancy Insurance.
Have you still got a business? Is there a Key person contract over key staff who are key to, or generate the business income? Do you have a funded Buy/Sell agreement in the event of death or disablement of company shareholders. What is their financial position? Are your personal assets protected if you become jointly and severally liable?
Have your cash reserves been affected by Covid?
Do you still need to plan for retirement? Are you in the most appropriate asset allocation for your current funds? Are you maximizing dollar cost average?
Are you already in retirement and your retirement savings are not producing the return you need to maintain your lifestyle? Is your investment strategy and asset allocation appropriate?
Right now, TODAY, is the very time to rethink your long-term investment options.
Through the Maurice Trapp Group acquisition of KSL Insurance we can now assist you.
If you are interested in having an Audit of your Insurance program or a discussion on Kiwisaver or investment options, call me to discuss.
2020 was all about arranging premium relief and restructuring clients’ insurance.
2021 is the reset. If we know nothing else, it is that another disaster will likely occur in our lifetime. It is the wise that learn from the past and plan for the future so the lumps and bumps in the journey of life are smoothed by appropriate risk management strategies.
Last week I took the opportunity of a ‘well-earned’ break by exploring the Catlins, my family history in Lawrence, and E-bike riding in and around Wanaka. While away I took the time to reflect on 2020, the outcomes of what the Coronavirus has done to us as a society and what I can do to help my security conscious clients. After 10 days of relaxing, it reaffirmed that I am not ready to retire.
I am happy to continue working, doing what I love, and educating people about insurance as a risk management tool.
Coronavirus, if nothing else, should have taught us that, unlike normal economic downturns created through inflation, stagflation, falling asset prices for long periods of time, and other man-made financial mismanagements, disasters happen e.g. earthquakes, chemical disasters, floods and fires and now biological viruses.
We must more than ever be prepared for uncertain times. Financial discipline is required to combat and mitigate the effect of these disasters. Highlighted below are some strategies I have promoted over the past 40 years that may assist you and or your family members.
The Cash Reserve Fund
“Everybody should own a ‘Do Not Touch’ three-month cash reserve account.”
If you do not have this cash reserve account, you can fast-track its creation. For instance temporarily stopping socializing, coffees, trips and travel, movies and other forms of entertainment that takes away the discretionary dollar until you have saved a three-month cash reserve account.
Once this account is in place it should not be touched. If a catastrophe occurs again in your lifetime such as a ‘lock down’ you are financially independent for three months. As your salary or income increases the cash reserve needs to be ‘topped up’ to this 3 month level.
Once you have created your ‘Do Not Touch’ cash reserve account, you are then able to live by the 10:20:70 Rule.
10% of what you earn (gross) is applied to your long-term retirement account. From this account you will arrange your life insurance and risk management program. The balance of the 10% will then be applied to your Kiwisaver retirement account. Wherever possible and available, insurance should be arranged on a level premium basis.
20% of your (net) earnings are used for mortgage and debt repayment
70% of your (net) earnings are used for living.
Coronavirus took everybody completely by surprise and destroyed for many their retirement plans, cash reserves, businesses, and in many instances their health, by not being able to obtain appropriate and timely medical treatments caused by the breakdown in the public health system.
It is now time for every insurance conscious person to audit their current program to ensure that they have the most appropriate insurance contracts, can afford to continue to fund these policies, and have contracts with companies that will provide premium relief when and if a further downturn occurs.
Why Undertake an Audit or Advice From Me
You, your family, business colleagues, and loved ones need professional and unbiased advice.
You need, and should, only purchase the best insurance products that will stand the test of time, irrespective of cost, with companies that have the capacity to pay the claims in full, precisely when required, on time ‘hassle free’.
You need to be advised appropriately on who should own the policy, and how to fund your insurance program, so it will be affordable and in place when a claim occurs.
With my extensive experience as a Broker and now a Pre-Claims Auditor, I can provide you with a unique Pre-Claims Audit. The Audit sets out how your policy will respond at claim-time, the limitations and alternative options.
My Pre-Claims Audit is unique and comes from 50 years of commercial, financial, investment and life insurance experience along with all the scars.
You and your family, more than ever, require this Audit to be undertaken to ensure that you can withstand the next disaster.
If you are in your early 50s and 60s planning for a retirement at age 65 you will need to be aware that you will be facing the daunting task of investing your nest egg in an environment offering 1% to 2% interest rates and an uncertain future as Governments grapple with fiscal debt.
Risk management will become part of the new norm, as you plan for your retirement on the basis of higher risk/return investment strategies which will involve higher levels of volatility.
Insurance will become ever more important as the Government benefit programs become asset and/or income tested. Medical services will become restricted through the shrinking of health budgets. This will place greater emphasis on private medical facilities and services and long-term care being required for the surviving elderly.
As you know I do not advertise my services. I work exclusively within my client base and grow my business from referrals from my clients. If you do not require my services personally, but have a son, daughter, family friend or business colleague that may benefit from my advice, please forward on this email and/or text or email their contact details to me at 021 240 4540 or email@example.com
I wish you well in resetting your personal and business plans for whatever 2021 holds in store for you.
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I hope this information and my overview is of value to you.