Be prepared – things will get worse before they get better

June 2020 was the month when Australia officially entered recession, but given that the numbers were based on data for the quarter ending 31 March, expect the figures from the quarter ending 30 June to be much worse. That’s when we’ll all suffer the brunt of the COVID-19 lockdowns.

We were all shocked by how fast stock markets fell, heartbroken by the queues at Centrelink offices and frustrated at being confined to our homes. Unfortunately, we humans have short memories – we are now enjoying the stock market bounce, loving the fact that many of the restrictions have been lifted and looking forward to life returning to normal.

Well, normal may be a long way away yet. Despite the welcome announcement that homeowners doing renovations and some home builders will get help from the government, the building trade is in serious trouble, with a massive drop in demand predicted as immigrant numbers tumble.

Some of our biggest sources of employment are in sports and the arts, but large events such as football matches won’t work well as long as social distancing is enforced and numbers are restricted. It’s the same with limits on clubs and restaurants. And, of course, the biggest loser is the tourism industry, which absolutely depends on both local and international borders being freed up. At the date of writing, interstate travel was still a controversial topic and international travel is certainly at least a year away. Unemployment will continue to be widespread in these areas.

And it gets worse. In September, JobKeeper is set to finish up, JobSeeker payments return to pre-COVID levels, loan repayment holidays will end and concessions such as the payroll tax holiday for businesses will be no more.

Remember, ‘holidays’ are not gifts. Even though the banks are happy to waive six months’ interest repayments – during which time borrowers will be charged interest on interest – normal repayments will almost certainly be required when the holiday ends.

The COVID-19 crisis, and all its associated damage, is further widening the gap between savvy money managers and those who live for the moment. The opportunity to withdraw up to $10,000 from superannuation in the 2019-20 financial year and again in 2020-21 is a great example.

A friend tells me his 55-year-old house cleaner withdrew $10,000 just to accessorise his motor vehicle, and a car dealer who specialises in cheap used cars tells me the under-$10,000 market has never been busier. Think of the long-term implications of this – taking money that was quietly growing in a low-tax area just to get some cash for consumer spending.

The next issue is government budgets. Both federal and state governments have been throwing money at the crisis. Eventually, the cost of doing so will be immense. To make matters worse, income tax receipts are going to be way down. Most professionals I know have had their income fall by at least 35 per cent, a lot of landlords have been receiving no income at all, and many employees scraped by on JobKeeper.

When you take all the above into account, the inescapable conclusion is that things will get worse before they get better.

Unemployment will continue at record levels, many businesses will close down, never to reopen, and government budgets will be under serious pressure due to a combination of declining tax receipts and the cost of the stimulus packages.

I guess the only good news for borrowers is that interest rates will stay at record low levels, which gives them the perfect opportunity to get way ahead on their loan repayments. This is not a time for rash spending – it’s a time to hunker down and get your finances in order, to build the safety buffer that you may well need.

Earnings from super and shares
A feature of the COVID-19 crisis has been the volatility of stock markets. In the last week of May, we saw bank shares rise more than 8 per cent in a single day and, by the end of the first week in June, the Australian stock market was up 31 per cent from its low point for the year – 23 March.

This proves the folly of trying to time the markets. During the early part of March, I was bombarded with emails either asking whether it’s appropriate to move your superannuation to cash immediately, or else to say they had already done that, and were waiting for a clear signal to move it back when the downturn was ‘over’.

Anybody who invests in shares should understand that timing the market is an impossibility, and it’s made much more difficult by the fact that the biggest upturn usually comes very rapidly after the biggest downturn. Unfortunately, in these present uncertain times, many long-term investors start to behave like traders, and decide to cash in a lot of their investments once they start to fall in value. Their reasoning is that they will come back into the market when the recovery is up and away. There is one major flaw in that thinking – by the time they believe the market has turned, it’s too late.

Warren Buffett put it perfectly: “If you wait for the robins to appear, spring will be over.”

The Age Pension might kick in sooner rather than later
Thanks to the coronavirus crisis, there have been some benefits to pensioners. These include cash payments of $750, and a reduction in the deeming rates that came into effect on 1 May. Although deeming rates affect only income-tested pensioners, it may mean that certain people who are not pensioners are now eligible for the Commonwealth Seniors Health Card (CSHC).

The criteria are simple. You must be of Age Pension age but not eligible to claim an Age Pension, and you must pass an income test. There is no assets test. The amount of income you can have and be eligible for a CSHC is $55,808 per year if you are single, $89,290 per year (combined) for couples and $111,616 per year (combined) for couples separated due to ill health or respite care.

Thanks to the latest changes in the deeming rates, a couple with almost $4 million in financial assets may be eligible for the CSHC and all the benefits that go with it.

The easy way to check if you qualify, is to go to my website and use the deeming calculator. You will discover that assets of $2.5 million for a single person will provide a deemed income of $55,214 a year, which is just under the cut-off point, and for a couple it is just on $4 million.

The obvious question is whether the CSHC is worth having. It varies somewhat from state to state, but one benefit to all holders is that medicines listed on the Pharmaceutical Benefits Scheme (PBS) are supplied at the concessional rate. Once you reach the PBS safety net, you will usually be supplied further PBS prescriptions without charge for the remainder of the calendar year.

It may also be possible to save on your medical consultations if your doctors are happy to bulk bill. And, depending on where you live, there could be a regional travel card and a rebate on your energy costs.

The cream on the cake is that applicants who receive the card before 10 July will receive a one-off $750 stimulus payment. If the economy tanks in October – as many economists are predicting due to the planned cut-off of JobKeeper, the JobSeeker changes and the end of all the repayment holidays – there may well be more stimulus payments.

Pensioners who are assets tested, and who are keen to renovate, could take advantage of the government’s renovation package, HomeBuilder, and spend $150,000 to improve their homes. Because home renovations are not assets, the expenditure of $150,000 could increase their pension by almost $12,000 a year. Just bear in mind it would take 12 years to recover that expense by way of increased pension, so people thinking of using this strategy should ensure that it adds value both to their home and to their lifestyle. And be aware that certain eligibility criteria apply before getting too enthusiastic about it.

One item on the agenda is scary for retirees.There is now a push to replace stamp duty with a universal land tax on the family home. Will this mean that retirees will face an extra outgoing for their property, on top of the normal rates and maintenance? If so, will it be treated like Labor’s plan for franking credits and exempt pensioners? Or will the system once again be skewed so that getting a part Age Pension is more important than being self-sufficient? Watch this space and be on your guard.

Real estate implications for owners and investors
Interest rates are at record lows, but evidence suggests that demand for loans is not strong, and the banks are applying stricter lending criteria in view of the uncertainty of employment. Also, given that many people who may have moved house will now decide to stay and renovate, it’s hard to be optimistic. But, of course, having said that, there is a basic investment principle that it’s never a bad time to grab a bargain.

So, if property is your thing and something great comes your way, it could be well worth investigating. But retirees should be aware of the limitations that go with the lack of liquidity in property. Just this month, I spoke to a couple with $2 million worth of non-residential property. These properties are now vacant, yet they are still liable for ongoings such as land tax and rates, and can get no benefits from government because they are way over the assets test.

Let’s face it, the demand for vacant non-residential properties is very small, and you can’t sell half a shop. In contrast, many shares offer franked dividends, the income usually continues irrespective of the value of the share, and there is never a bill for upkeep.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. For more information, visit his website noelwhittaker.com.au

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Disclaimer: All content in the Retirement Affordability Index™ 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.

Written by Noel Whittaker

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