CCBR Business Review

21 B U S I N E S S T I P S Right place – Wrong Time! IF YOU WERE to ask yourself, “at which point am I at greatest financial risk?” you may be surprised to know it is the moment you retire and cease earning an income. “Sequencing risk” describes the risk of experiencing returns in an unfavour- able order or ‘the worst returns in their worst order’ challenging the conventional wisdom it is the accumulated average of investment returns that matter. It is the belief that wealth is not only affected by the frequency and magni- tude of good and bad returns, but also the sequence in which they occur, with even muted levels of bad volatility, occur- ring at the worst time, having a significant impact on retirement savings. Consider experiencing a GFC event at or around retirement (age 65) Risks large losses occurring at a time when it is difficult to recoup them (ceased working). This tends to be when you have the greatest amount of invested wealth during your life to date and are more vulnerable to large losses. Such losses can force you to return to the workplace and/or may require a more lim- ited retirement than you had planned. If a large loss is incurred, you must achieve a return greater than the percent- age of the loss in order to recoup the loss. For example, if you lose 50% on a $100,000 portfolio, the size of the portfolio shrinks to $50,000. You then must achieve a 100% return on the remaining $50,000 portfolio for it to return to its pre-loss size of $100,000. By Brett Gilday, Director, Moneywise Financial Solutions Strategies to overcome sequencing risk 1. Investment Strategy Your “investment strategy” should be reviewed as you transition to retirement with focus shifting to investments that have less volatility and correlation to traditional asset classes. If a passive investment strat- egy using index or exchanged traded funds has been followed, it will be time to consid- er active management. Liquidity of invest- ments will also become more important, so you have flexibility to sell down a portion of your portfolio as necessary. 2. Transition to retirement If it is possible to reduce time at work down to 4 days then 3 days, you can take advantage of tax rules encouraging you to work longer and provide an additional retirement buffer. 3. Annuities If you are not prepared to take the risk of a share market downturn, it is possible to pro- tect your income/ capital by purchasing an annuity. There is a variety of annuities offering features for differing circumstances. If there is certain level of income that you wish to lock in, a purchase of an annuity for that portion of your income may be suitable for you. 4. Withdrawal Rates Consider combining different withdrawal strategies to target specific needs. For example, you may use an inflation adjusted withdrawal amount to cover essentials and a fixed percentage withdrawal (which will fluctuate with investment earnings) to meet discretionary expenses.  If you feel like your investments are on a return rollercoaster, speak to your adviser regards ways to limit volatility and provide a more consistent outcome as you head into retirement. When is a redundancy payment not required? FOR MANY EMPLOYERS, a changing workforce is a fact of life. Employees may be working seasonally, workload may be subject to the changing market, or depend- ent on securing contracts for work. Add this to the current uncertainties of business and redundancy payments can be a compli- cated aspect of running a business. By Warwick Ryan, Partner, Hicksons Lawyers Redundancy occurs when a perma- nent employee is terminated because the employer no longer requires that job to be performed by anyone due to changes in operational requirements. When this occurs, employees are entitled to redun- dancy pay under the Fair Work Act 2009. When is an employer absolved from paying redundancy? There are some exclusions to the obligation for an employer to pay redundancy where a permanent employee is made redundant: • if the employee is terminated due to the ordinary and customary turnover of labour; • for small business employers with 14 or fewer staff (apart from construction industry employees); • for employees with less than 12 months continuous service’ • where the termination is part of a busi- ness sale and the employee is rehired with their prior service recognised; and • an award that specifies other situations where redundancy will not be paid. What is defined as ordinary and customary turnover of labour? The Federal Court of Australia recently confirmed a redundancy payment is not required where an employee is made redundant due to the ordinary and cus- tomary turnover of labour. This typically arises in industries where it is expected that employee tenure will be relatively short term and uncertain – perhaps because the continuation of a role is dependent upon the employer retaining certain funding or a particular contract, for example welfare or security roles. CONTINUED ON PAGE 22 CENTRAL COAST BUSINESS REVIEW OCTOBER 2020