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Chasing financial independence in a low-growth environment

Posted by Sean O'Kane on 24 May 2016
Chasing financial independence in a low-growth environment

Superannuation is a major focus of this year's budget, with the biggest changes announced to superannuation in a decade.

Changes affecting higher-income individuals, such as medical specialists, include:

  • Lowering of the concessional contributions cap to $25,000
  • Limiting of the non-concessional contributions through a lifetime cap for non-concessional contributions of $500,000
  • A reduction in the threshold from which an extra 15% tax applies on contribution to super, from $300,000 to $250,000.
  • $1.6 million superannuation transfer balance cap, limiting the amount that can be transferred to tax free retirement phase

So what does this mean for medical specialists? And how can effective financial planning help you make the most of your income?

These changes mean medical specialists will need to consider and seek out alternative investment strategies that generate effective returns as part of their financial planning.

What's more, they also need to consider how to do this and start preparing at an earlier point in their career.

There is also a broader issue at play here. All the major economies are struggling with lack of inflation and lower growth rates. And I, for one, don't think this is likely to change in the near future.

Lack of inflation is a real concern in Australia, as elsewhere in the world. Earlier this month the Reserve Bank of Australia dropped interest rates in an effort to stimulate growth.

So if the world economies are struggling with lack of inflation, why does this matter to individuals?

Simply put, in a low-growth environment, people have to invest more to get the same results or invest for a longer time period.

Let's consider three scenarios, where $100,000 is invested and achieves growth rates of 3%, 6% and 9%. If this money was invested for 20 years, the results would be $155,797, $239,656 and $364,248 respectively. I extrapolated the 3% growth figures to see when it would reach $364,248 to be equivalent to the 9% growth rate and it was year 44!

So what should you do?

Firstly, don't rush into any rash decisions. Often people think buying an investment property is the answer, particularly as negative gearing seems to be the sacred cow that won't be touched. However, even if there is meaningful capital growth in residential property, this can only form part of the solution.

The good news is medical specialists should have the incomes to be able to set more aside to invest in order to create financial independence. However, my experience in providing advice to doctors for many years is there's always a lot of competing interests for that income and they're often a lot more attractive than saving!

So it's important to have a plan, and to understand what your financial future looks like if you stick to it. And if you have a plan, now would be a good time to review it to make the necessary changes to ensure you are still on track to reach financial independence at the age that you want.

In our next blog post, we'll look at these competing interests for income and discuss strategies to manage them in order to achieve financial independence.

If you are interested in reading more on this topic, why not download our white paper for medical specialists on helping people to make good decisions in order to build wealth.

Or for specialist financial planning, accounting and tax advice for medical professionals, please get in touch with our team.

Author: Sean O'Kane Connect via: LinkedIn
Tags: News Wealth Creation Financial planning superannuation

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

The financial planning services are provided by Medical Financial Pty Ltd trading as Medical Financial Planning (AFSL 506557)