EMAIL NEWSLETTER
MAY 2013
Welcome
again to the McLean
and Co. Newsletter
in which we discuss current taxation and business matters. We trust
you find it informative.
We
are happy to accept new clients. We would be happy to assist colleagues
and acquaintances as new clients.
INDEX
-
Budget 2013 Announcements
-
How much Income will you need in Retirement and
How much will you have to Invest to achieve this Outcome?
-
Wealth Building Principles- Compound Interest
Benefits
-
7 Steps to Personal Financial Failure
BUDGET
2013 ANNOUNCEMENTS
Government has announced changes as part of Budget 2013. Once they become
law, the changes will be implemented by IRD over the next few years:
TAX
CHANGES
"Black hole" expenditure
Some business costs are currently not able to be offset against income for
tax purposes. The proposal announced as part of Budget 2013 is to change this
for specific forms of business expenditure. Proposals will be included in a bill
later this year.
Cashing out tax losses for R&D intensive
start-up firms
The Government is concerned that small, innovative businesses face a
financial disadvantage when investing in research and development. A
consultation document discussing this issue will be released in the next few
months.
Reviewing the effectiveness of the thin
capitalisation rules
An issues paper was released at the beginning of this year on this topic.
The thin capitalisation rules form part of our international tax rules aimed at
ensuring that everyone pays their fair share of tax. Changes will be included in
a tax bill to be introduced later this year.
Clarifying when land is acquired
As part of Budget 2013 announcements, the Government released an issues
paper which seeks to clarify the date of acquisition of land that is acquired
with the intention or purpose of disposal.
For
more information go to our Policy Advice Division website
STUDENT
LOANS
The student support changes announced in Budget 2013 focus on improving
repayments from overseas-based borrowers and increasing personal responsibility
for debt.
Information matching with Department of Internal
Affairs
This will allow the Department of Internal Affairs to share contact
details from adult passport applications and renewals with IRD. The
details will be matched against IRD's database of overseas-based
borrowers in default, for student loans, and liable parents in default, or whose
contact details are out of date, for child support. This will enable IRD to get in touch with individuals to confirm their correct contact
details and discuss their outstanding arrears. This will be implemented once the
relevant regulations have been approved later in 2013.
Adjusting the overseas-based repayment regime
Adjustments will be made to the overseas-based borrower repayment regime
by introducing a fixed repayment obligation threshold and adding two more steps
to the current overseas-based repayment regime, so borrowers with higher loan
balances have a higher repayment obligation. This will be included in a bill
later this year.
Introducing the ability to arrest non-compliant
borrowers who are about to leave New Zealand
Making it a criminal offence to knowingly default on an overseas-based
repayment obligation will allow IRD to request an arrest warrant to
prevent the most non-compliant borrowers from leaving New Zealand. Similar
provisions already exist under the Child Support Act. This will be included in a
bill later this year.
Changes to the calculation of the cost of lending in
the Student Loan Scheme
The cost of lending in the Student Loan Scheme is now calculated using
annual interest rate data applicable from the year the borrowing occurs. The new
approach came into effect from 1 January 2013. Previously, the cost of lending
was calculated for each borrower, based on the interest rate in the year the
borrower first entered the scheme, even if they draw from the scheme in
subsequent years. The change will increase the accuracy of the scheme and
provide Government with better information on the cost of lending.
For more information about Budget 2013 go to the:
StudyLink
website - for changes to student loans and allowances
Ministry
of Education website - for changes to tertiary education and student support
The
Treasury website - for all Budget 2013 announcements.
HOW
MUCH INCOME WILL YOU NEED IN RETIREMENT AND HOW MUCH WILL YOU HAVE TO INVEST TO
ACHIEVE THIS OUTCOME?
Working out how much income in addition to New Zealand Superannuation
you'll need in retirement depends on what you expect your cost of living to be.
A good guide as to this
calculation is to base your annual retirement income needs on 60 to 70 per cent
of the annual income you are receiving, or expect to receive, just before you
retire.
The total amount of savings
you will need to cover your retirement income gap depends on whether you use
only the income (e.g. interest) from your savings each year to meet your annual
expenses, or whether you use part of the lump sum (your capital) you have built
up as well.
If you want to use only the
interest and leave the lump sum intact, then you'll need a lot more.
For many people, using only the income from interest on their savings to
supplement New Zealand Superannuation will not be a realistic aim- they will
need a lot more than just these income forms.
The following Table helps you
work out the total amount you will need to save, so as to get the annual
investment income you need on top of New Zealand Superannuation.
The amounts are calculated on the basis that you use income and a portion
of your capital each year for 20 years.
After that you would be dependent on New Zealand Superannuation.
(Assumptions-
based on 2.5% compounding rate of return after tax and inflation)
|
Annual
Income ($)
|
Lump
Sum Needed Using Interest and Capital for 20 years ($)
|
|
|
5,000
|
78,000
|
|
|
10,000
|
156,000
|
|
|
15,000
|
234,000
|
|
|
20,000
|
312,000
|
|
|
25,000
|
390,000
|
|
|
30,000
|
468,000
|
|
The next Table shows how much you will need to save each month to give
you the annual income you need.
Depending on how many years
away from retirement you are now, the amount will change.
Years
|
Annual
Income
|
5
|
10
|
15
|
20
|
25
|
30
|
35
|
40
|
|
|
5,000
|
1,219
|
572
|
357
|
251
|
188
|
146
|
117
|
95
|
|
|
10,000
|
2,439
|
1,144
|
715
|
502
|
375
|
292
|
233
|
191
|
|
|
15,000
|
3.658
|
1,716
|
1,072
|
753
|
563
|
438
|
350
|
286
|
|
|
20,000
|
4,877
|
2,288
|
1,430
|
1,004
|
751
|
584
|
467
|
381
|
|
|
25,000
|
6,096
|
2,860
|
1,787
|
1.254
|
938
|
730
|
583
|
476
|
|
|
30,000
|
7,316
|
3,432
|
2,144
|
1,505
|
1,126
|
876
|
700
|
572
|
|
WEALTH
BUILDING PRINCIPLES- COMPOUND INTEREST BENEFITS- THE EARLIER YOU START THE
BETTER YOU ARE OFF
The principle of compound interest is that you do not withdraw earnings
or growth from an investment, but
leave them intact to be added to the principal.
Thus you earn interest on the sum of the principle plus interest you have
already earned.
THE
RULE OF 72
The Rule of 72 lets us
calculate how long it will take for an initial investment to double in value if
you divide 72 by the expected rate of growth.
It
works like this:
|
Investment
Return (%)
|
Calculation
|
Time
it takes to Double Your Money (Years)
|
|
|
4
|
72/4
|
18
|
|
|
6
|
72/6
|
12
|
|
|
8
|
72/8
|
9
|
|
|
10
|
72/10
|
7.2
|
|
|
12
|
72/12
|
6
|
|
AN
EXAMPLE OF THE EFFECTS OF COMPOUND INTEREST
An initial investment will increase in value faster and faster as time
passes. For
example, the following table shows
what a single deposit of $10,000 will grow to by age 65 at varying rates of
interest (excluding the effects of taxation).
Age
of Person When $10,000 Invested
|
Compound
Rate (%)
|
20 Yrs ($)
|
30
Yrs ($)
|
40
Yrs ($)
|
50
Yrs ($)
|
|
|
5
|
89,850
|
55,160
|
33,863
|
20,789
|
|
|
10
|
728,904
|
281,024
|
108,347
|
41,772
|
|
|
15
|
5,387,692
|
1,331,755
|
329,189
|
81,370
|
|
7
STEPS TO PERSONAL FINANCIAL FAILURE
Want to face endless financial
difficulties during your lifetime? There are a few simple things you can
do.
1. Pay no
attention whatsoever to where your money goes
Keeping a budget, tracking spending and knowing how much is in your bank account
could all potentially make you realise that you are frittering away your hard
earned money on unnecessary expenses. This might lead you to feel that you need
to cut down on these areas, so try to avoid any knowledge of your financial
affairs.
2. Use credit
cards for anything and everything
Of course, you want to be sure
that you never pay the card off in full, and of course rather than shop around
for a card that suits your spending, make sure that you choose one with high
interest and fees and no rewards. This way you can be sure to pay interest close
to 20% on everything that you buy, while getting nothing in return.
3. Don’t save
anything
If you can possibly spend
everything you earn, then do. The last thing you want is to have money lying
around tempting you to invest it – that would only achieve financial security.
4. Invest
in last year’s winner
If, despite all your efforts
above, you do wind up with leftover money then try to invest in whatever
performed best last year. Since financial and investment markets move in cycles,
the odds are against you doing well with this strategy.
5. Ignore asset
allocation
Pay no attention whatsoever to asset allocation principles, or the level of risk
you can tolerate. Five years to retirement? High volatility is the name of the
game if you want to lose the lot. If you are still young, go ultra-conservative
to make sure your investments don’t keep up with inflation and lose spending
power over time. Ideally, keep it all in a bank account that pays 0% interest.
6. Put all your
eggs in one basket
Diversification would only reduce the risk of you making a poor decision on one
investment, or increase the chance you’ll pick something of high quality.
7. Never seek
professional advice
A professional should make sure you avoid steps 1-6, and they’ll probably find
other ways for you to save more, invest wisely and be financially secure both
now and in the future. They may even have access to independent research ,
so they’ll have recommendations on funds to invest in that expert analysts
have confidence in, and are good investments for the future.
Of course, if the idea of sleepless nights, paying endless amounts of interest,
and living out your retirement solely on superannuation doesn’t appeal, then
maybe financial failure is not for you – in which case you would want to
ensure that you avoid the suggestions in steps 1-7 above.
The information provided in this email newsletter is for
informational purposes only. McLean and Co. accept no
responsibility for the opinions and information expressed in the
information provided and it is provided "as is" without
warranty of any kind. The user assumes the entire risk
as to the accuracy and use of this document. Readers are
asked to seek professional advice pertaining to their own
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