Tag Archives: Retirement Planning

Make Your Super Last

By Robert Wright /August 17,2020/

Australians enjoy one of the highest life expectancies in the world, which means you can look forward to a long and comfortable retirement.

While that’s fantastic news, it also makes saving for retirement more important than ever. Indeed, the majority of Australians over age 40 who are yet to retire are concerned about not having enough money to live on, with many recognising they need professional assistance to reach their retirement goals.

But by getting good advice and planning ahead now, you can take control and enjoy the peace of mind that comes from knowing your future may be secure.

The first step is to figure out how much income you want to receive each year in retirement, and how much you may need to save in order to get there. It’s also important to think about how your spending patterns may change during your retirement, and to plan ahead accordingly.

For example, in the early stages when you’re at your most active, you’re likely to need more funds for travel, sports and recreation. Then, as you enter a more relaxed phase of retirement, you’re likely to need to be ready for possible health issues, so you can afford the care you need as medical treatments are becoming more sophisticated and more expensive every year.

You may also want to keep your options open for the later years when you may need more intensive health support, including specialised accommodation.

Also don’t forget to factor in lump sum spending on big ticket items, such as home renovations or a new car. Because, as retirements grow longer, our cars and appliances are increasingly likely to fade away before we do.

Boost your super

When you crunch the numbers, you may find you’re facing a super gap. An effective way to boost your super savings while potentially paying less tax may be via salary sacrifice.

Even a small contribution can make a big difference over time, as you earn concessionally taxed returns on your contributions. When you invest pre-tax income through salary sacrifice, you may also benefit from the 15 per cent concessional tax rate on super contributions (rather than your marginal income tax rate), putting you even further ahead.

As of 1 July 2017, you can contribute up to $25,000 in concessional super contributions before additional tax applies. Concessional contributions include compulsory super guarantee from your employer, other employer contributions such as salary sacrifice, and personal tax-deductible contributions.

Finally, if there is a large sum you would like to contribute to super, for example, if you plan to sell a non-super asset, such as an investment property, you can do this by making a non-concessional personal contributions of up to $100,000 a year from your after-tax income.

You may also utilise the bring-forward rule which allows for members aged 64 or less to bring forward three years’ worth of non-concessional contributions and contribute up to $300,000 at any time over a three year period.

As of 1 July 2017, your total super balance (across all funds) may further limit your non-concessional cap – your cap is Nil if your total super balance is $1.6 million or more, while the amount of bring forward cap you can use is reduced once your total super balance is $1.4 million or more.

Review your investment options

Our super is one of our most valuable assets, so it’s not surprising many of us seek to protect it by investing in a low risk option.

But it’s also important to remember that trying too hard to avoid risk today could expose you to a greater risk — running out of money tomorrow, when your savings don’t produce the returns you need for a comfortable retirement.

So it’s important to choose the right investment option for your goals and investment time-frame. That’s where personalised advice from a professional financial adviser can make a difference.  Source: Colonial First State

Why it’s important to think about insurance ahead of retirement

By Robert Wright /June 01,2020/

Finding the right level of insurance cover is important when you’re thinking about retirement.

If retirement’s coming up on your horizon, the impact of COVID-19 (Coronavirus) may have thrown a warehouse-sized rack of spanners in your planning.

It makes sense to concentrate on things you can control, such as insurance. Too-high premiums can chew away at the foundations of your savings, at a time when they’re more important than ever. Under-insure and one day your floor may collapse, undone by events you can’t foresee.

Cover for a changing life

A good way to get started is to think about what you really need, and what you don’t. As you get close to retirement, you may want to make sure you’re holding the right insurance for the lifestyle you want.

Here’s a simple checklist that may help:

1. Ask yourself how much money your family would have if you were to pass away or become disabled.
2. Compare that with how much money your family might need in the same situation, including how they’d manage paying for day-to-day costs like child-care and mortgages.
3. The difference between the two can help you work out how much insurance you may need.

Many of us take out insurance and are done with it – it’s enough to know we have the proverbial rainy day covered off. However, with economic clouds gathering, now’s a good time to review what you’ve already got and assess if it’s still right for you and your needs.

So, dig out your existing insurance agreements, taking special note of when they’re due to expire and your continued eligibility for the policies they hold.

An important area for many Australians is insurance held inside superannuation.

Insurance inside super

Insurance inside super can help us out when we really need it. Like any type of insurance, it works best when you’ve got the right level of protection for your situation. As you head towards retirement and your life changes, so might your priorities.

As well as life insurance, you might have total and permanent disablement (TPD) inside super. TPD cover may provide you with a lump-sum payment if you suffer a disability that prevents you from ever working again.

TPD could help you pay for ongoing medical expenses, alterations to your home to make day-to-day life easier and help provide future financial stability.

Total salary continuance, also known as income protection, is designed to pay a monthly benefit of up to 75% of your pre-disability regular income if you’re unable to work due to injury or illness.

Typically, within super, income protection provides you with cover either for a two-year or five-year period or until you turn 65, depending on the terms in your employer plan.

What to look out for

There are pros and cons of insurance within super. Things to think about if you’re approaching retirement include:

• Cover through super may end when you reach a certain age (usually 65 or 70). That’s generally different to cover that’s outside a super account.
• Taxes may be applied to TPD benefits depending on your age.
• Claim payments may take longer, as the money is normally paid by the insurer to the trustee of the super fund before it’s paid to you or your dependants.

Don’t double up and stay flexible

As part of your review, it’s also a good idea to check insurance you hold inside super against other policies you might have outside super.

Then compare your cover, check whether you have any insurance double ups – if you have more than one super account with the same type of insurance, you may be paying for more insurance than you need.

As well as comparing the level of cover you get, consider any exclusions, such as the treatment of any pre-existing medical conditions, and waiting periods. Remember that if you do cancel your insurance, you might lose access to features and benefits and may not be able to sign back up at the same rate.

It’s also important to disclose your situation to your insurer honestly. Otherwise, the insurer may be entitled to refuse your claim.

Tricky times call for flexible thinking. Volatility can be daunting, whatever age you are. Fortunately, you’ve got the life experience to look beyond the headlines and adapt to changing circumstances. Reviewing your insurance is as good as any place to start.

 

Source: AMP

How fit are your finances?

By Robert Wright /June 01,2020/

Wearable technology can monitor our heart rate and tell us how much sleep we’ve had, but what about our financial wellbeing? If you could benefit from a Fitbit for your finances, read on.

Just like your physical health, the more you can monitor what’s happening with your finances, the easier it will be to improve your financial fitness.

We all know that financial stress can have a negative impact on our physical and mental wellbeing, leading to stress, anxiety and depression. Research has even shown that employees suffering high financial stress are “more than four times as likely to complain of headaches, depression and other ailments.”

So, if you could get a Fitbit for your finances, what would it track? Keep an eye on these key metrics and you could be feeling financially fit in no time.

1. Spending

Expenses are a fact of life, but this is one area where things can easily get out of hand. Much like overeating, it’s all too easy to buy too much and spend on things you don’t really need, especially if you’re not keeping track of where your money is going. And technology sometimes makes it even easier to overspend.

Buy Now Pay Later and tap and go payments make it harder than ever to keep track of what’s leaving your account.

What to do:  

Make a list of your essential costs, such as rent or mortgage, utilities, food, fees and regular bills.

Try using a spreadsheet or budgeting app to make tracking your spending as easy as possible. Many banks now offer breakdowns of your spending by category in their apps, so take advantage of these free tools. By monitoring where you’re actually spending money each day, you’ll quickly get a true picture of your financial health. If your spending habits are putting you on the wrong path, learn how to plan and stick to a budget.

2. Debt

Like carrying a few extra kilos, debt can creep up on you and weigh you down more than you realise.

Reserve Bank data shows consumers have nearly twice as much household debt as income. Meanwhile, the average Aussie tips the scales at $3271 in credit card debt, adding huge pressure to their daily lives.

What to do:

• Detox your debt. The first step to financial health includes keeping levels of personal debt to a minimum.
• Look at consolidating your debts onto one card or personal loan, so that you’re only dealing with one repayment each month.
• Take advantage of interest free periods to pay down your debt.
• Put a repayment plan in place – and stick to it!

3. Savings

Once your debt reduction strategy is underway, you can focus on another key aspect of your financial health: Savings. How much you have stashed for a rainy day is a strong indicator of your overall financial health.

What to do:

Open a dedicated high-interest savings account that’s separate from all of your other accounts.

Make regular, consistent deposits – weekly, fortnightly or monthly. Add any extra cash windfalls to your savings account, such as tax returns or bonuses. Sit back and watch the power of compound interest at work.

4. Superannuation

If you want to stay financially fit and healthy into your old age, you need to lay the groundwork now. That means knowing how much you need to maintain the lifestyle you want and working towards that figure.

The Association of Superannuation Funds of Australia (ASFA) estimates that for a couple to have a ‘comfortable’ lifestyle they need at least $640,000, while a single person needs $545,000.

5. Emergency fund

Like health insurance for your finances, having an emergency fund gives you a buffer against unexpected hard times. You should aim to have enough in your emergency account to cover six months of living expenses, including housing, to protect you in the event of losing your job, falling ill or any other major disruption.

6. Insurance

If you should lose your income for longer, or permanently, there are several types of personal insurance that can help protect you and your family from financial hardship.

Life insurance, total and permanent disability (TPD) and income protection all have a role to play in your financial wellbeing. Depending on your stage of life, financial situation and responsibilities, it’s worth ensuring that you have a mix of all three types of insurance.

A financial planner can help you understand what you need and get the right level of cover to protect your lifestyle.

7. Credit rating

A good third-party check-up of your financial health is your credit rating. Compiled from your personal financial information by a credit reporting agency, it’s one important indicator of your overall financial fitness.

Several things can affect your credit score, including your borrowings, number of credit applications and whether you make repayments on time.

 

Source: Money and Life

Planning, not panic: managing retirement portfolios through the pandemic

By visual /May 13,2020/

Despite the recent wild ride for markets coping with the uncertainty of the coronavirus pandemic, many investors are well-versed in the need to “sit tight”.

They understand that moving out of positions in falling markets risks crystallising losses at the bottom and missing out on the recovery.

For retirees it’s not so simple, where portfolios are particularly vulnerable to sequencing and behavioural risks that are not so apparent for those in the accumulation phase. If investors continue to contribute to their super fund in the current environment, they are potentially buying into the market at bargain prices every time they receive their salary.

Gains might take some time to materialise and losses some time to overcome, but with a long-time horizon there is more opportunity for an investor’s portfolio to recover.

If, on the other hand, investors draw down on their portfolio they may experience the sharp end of sequencing risk. Losses affect the entire nest egg, a proportion of which will be invested in assets acquired at higher points in the market cycle. In our view, most retirees have less of an opportunity to buy back in and take advantage of the future upside to current low prices. Crucially, most also have no choice but to draw-down to fund their costs of living – meaning they have to liquidate positions in a falling market.

Watching the dollar value of their life savings fluctuating over the course of a single day can be gut-wrenching for retirees, and these emotions are compounded by the ongoing health and societal crises raging around us. The fight or flight instinct is very strong in times like these. In our view, it creates a very strong behavioural risk for retirees who may act against their own best interests by switching out of growth assets at the worst possible time to “protect” what remains of their nest egg.

Shoring up your position without selling the silverware

These two risks create a conundrum for the retiree. On one hand, there is an imperative to reduce their exposure to market falls in order to minimise sequencing risk, and on the other hand there also exists a significant behavioural risk in shifting to lower risk asset classes at this point in time. It’s a tough time to make a decision but investors should be aware of the options available to them.

Diversify into other value assets

We believe one way to manage risk and lower an investor’s exposure to falling equity markets is to diversify. The key at the moment is to look to other asset classes where discounted pricing might be available, diversifying into areas such as infrastructure, property, credit and other alternatives.

Use protection

There are a number of funds and products offering forms of protection for capital or income. Investors retain some level of exposure to market gains, but could also be insulated from more significant losses to their portfolio.

Adjust expenditure

Research shows that one of the most powerful tools retirees have to secure the stability and sustainability of retirement income is to know how much they can safely spend. This depends on many variables such as age, health, social security, wealth – to which a financial advisor can guide retirees. It also might surprise retirees that even a large fall in markets may only require a small adjustment in weekly expenditure to ensure their retirement income lasts.

Reconsider what is ‘defensive’

The traditional approach to retirement investing is to move further into traditional ‘defensive’ assets such as cash and bonds. We would like to emphasise that while these assets in the short term have the least likelihood of a negative return and therefore could be considered ‘safe’, the future returns of cash and bonds are relatively low. A large allocation to this group may reduce long term returns and jeopardise the sustainability of a retirement income strategy.

Investors stand to lose when they move a large proportion of their assets to defensive positions such as cash and bonds in the current environment, locking in lower returns for their portfolio. It may feel comfortable in the short term, but over the long run it could seriously jeopardise the longevity of their retirement income.

We believe an investor could improve their retirement strategy over time by considering the steps above and always on the basis of sound financial advice.

Source: AMP