How ‘Affluents’ will be challenged

Chief economist and head of investment strategy and economics at AMP Capital, Dr Shane Oliver, explains the challenges that await the ‘Affluent’ tribes in 2019.

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As in 2018, this year is likely to present some challenges for YourLifeChoices’ Affluent Couples and Singles in managing their finances. Putting aside healthcare costs, which will continue to rise at a four to five per cent annual rate, there are five big areas to keep an eye on.

Housing
For those in Melbourne and Sydney, home prices are likely to remain under downwards pressure as tight credit conditions, rising supply, reduced foreign buying and possible tax changes continue to have an impact. Of course, this is a feel-bad factor for owners, but it is not really a problem unless you have to sell.

A consolation is that home prices had reached levels we never imagined in the first place. And outside Sydney and Melbourne, house prices should perform better.

Interest rates
Official interest rates are likely to stay depressingly low. They may even fall a little if the drop in house prices weakens consumer spending and there is an even longer period of low inflation. So, yet again, it will be difficult for retirees to rely on income from bank deposits and it could get even harder.

Exchange rates
With interest rates on hold and maybe even falling at a time when US interest rates are still rising, albeit more slowly than in 2018, the Australian dollar is likely to fall further. This, in turn, is likely to put more upwards pressure on the cost of overseas travel. Perhaps not dramatically (say by five per cent or so) and it will vary by destination – with the biggest risk being for US holidays, as the Australian dollar is unlikely to change much against the Japanese Yen and the Euro.

That, of course, provides an opportunity to target holidays to destinations where the Aussie dollar is holding up better – such as Europe and Japan.

Your shares
The share market should, hopefully, see a slight improvement after the messy ride of 2018 as profits continue to rise and interest rates remain low. The key here is to maintain a well-diversified portfolio of shares offering solid, sustainable dividends.

Taxation
And the final category is tax. A key event in 2019 will be the Federal Election, which may well result in a change of government. Labor’s tax policies – particularly in relation to franking credits, negative gearing and the capital gains tax – could have a significant impact on the finances of self-funded retirees.

These are the likely financial challenges for 2019. The good news, though, is that with inflation likely to remain low, price increases will remain modest for clothes, technology-based goods, household goods and services, motor vehicles and most types of recreation.

The keys to managing the financial challenges of 2019 for Affluent tribes will be to have a well-diversified portfolio of investments providing decent cash flow, to choose holiday destinations where the Australian dollar remains relatively strong, and to seek advice regarding the impact on your finances of any tax adjustments that may occur from a change of government.

Is the housing slump worrying you? Are you likely to tailor holiday plans according to where the dollar will deliver greatest value?

Related articles:
Falling house prices spook retirees
Where we want to go in 2019
Six tips to cut your travel costs

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

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