Tag Archives: Retirement Planning

New opportunities to grow your Super from 1 July 2022

By Robert Wright /May 25,2022/

Both older and younger Australians, as well as low-income earners, are set to benefit from some upcoming super opportunities.

From 1 July 2022, there will be some changes made to super to make it easier for people to grow their retirement savings. These changes will create opportunities for both older and younger Australians, as well as low-income earners, by removing some of the barriers that currently exist in the super system.

Here’s what’s changing:

• The $450 Super Guarantee (SG) threshold will be removed, meaning that employers will start paying super for low-income earners.
• The SG contribution rate will rise to 10.5% p.a. for all employees.
• People aged 65-74 will no longer have to meet the work test to make voluntary contributions to super.
• The ‘bring-forward’ rule age limit will increase to 75, so more people can make lump sum contributions to super.
• The minimum age for downsizer contributions will reduce from 65 to 60, giving more flexibility to people who are selling their home.
• First home buyers can now save up to $50,000, and any deemed earnings, to use as a home deposit through the First Home Buyer Saver Scheme.

Here are some more details about how each of these changes will work, and how you can take advantage of these opportunities to boost your retirement savings.

Employers will start paying super for low-income earners

SG contributions are the mandated contributions that your employer puts into your super on your behalf. For a lot of people, these are the only super contributions that go into their account.

Until now, employers haven’t had to make these contributions if an employee earns less than $450 in a calendar month. Because of this, if you work casually, or you work part-time across multiple jobs, you may not have received any contributions at all from your employment.

From 1 July 2022, the $450 threshold will be removed. Employers will have to make SG contributions regardless of how much the employee earns (unless they are under 18 and working less than 30 hours per week).

Of all the upcoming super changes, this one has the potential to make the most difference, because it means low-income earners will finally have super contributions going into their account without having to make voluntary contributions themselves. These regular contributions can go a long way towards building up retirement savings.

For example, someone who currently works three jobs, earning $400 per month for each job, will now have $1,512 contributed to their super in 2022-23, which will then accumulate further earnings. Over a 40-year period, this could add up to over $84,000 or even substantially more, depending on how their super is invested. 

SG contribution rate will rise to 10.5% for all employees

The SG contribution rate is currently 10% p.a. of your wages or salary. This rate will increase to 10.5% from 1 July 2022, and it’s scheduled to increase progressively to 12% by July 2025.

Each of these incremental changes is great news for people who are paid SG contributions by their employers, because it means your super balance will grow faster without you having to make any extra contributions.

People aged 65-74 will no longer have to meet the work test to make voluntary contributions to super

People aged 65-74 currently have to satisfy the work test (or qualify for an exemption) to be able to make voluntary contributions to super. This means proving you worked for a minimum of 40 hours, during a period of 30 consecutive days, in the financial year for which you want to make a contribution.

Contribution acceptance:

From 1 July 2022, you won’t have to meet the work test for the super fund to accept any type of contributions you make to your super, or any contributions your employer makes to your super, while you are under age 75.

From age 75 the only type of contribution that can be accepted into your super account are downsizer contributions or compulsory employer superannuation contributions.

Personal deductible contributions:

From 1 July 2022, if you are aged 67 – 74 at the time you make a personal super contribution, you only have to meet the work test, or work test exemption, if you wish to claim a tax deduction for those contributions.

A work test is not required to claim a tax deduction for personal contributions made while you are under age 67.

This change gives older Australians more flexibility to be able to contribute to super and boost your retirement savings, regardless of your employment status, in the years leading up to your 75th birthday.

‘Bring-forward’ rule age limit will increase to 75

The ‘bring-forward’ rule allows you to use up to three years’ worth of your future non-concessional (after-tax) super contribution caps over a shorter period – either all at once or as several larger contributions – without having to pay extra tax.

The non-concessional contributions cap is currently $110,000 per year. So, if you use the bring-forward rule, you may be able to contribute up to $330,000 in a single year as long as you don’t exceed the total cap over the three-year period. This strategy is mostly used by people nearing retirement, who want to contribute as much as possible to super before they stop working, or people who receive an inheritance or other type of windfall.

Currently, you need to be under age 67 at any time in a financial year to use the bring-forward rule. From 1 July 2022, the age limit will increase to 75. This is great news for people who want to put as much money as possible into their super before they retire, without being penalised for it.

Eligibility for the bring-forward rule will depend on your total super balance at the most recent 30 June, and the amount of your personal contributions over the past two financial years.

Minimum age for downsizer contributions will reduce from 65 to 60

The downsizer contribution is a strategy aimed at helping older Australians put all or part of the proceeds of the sale of one qualifying home into super to boost your retirement savings. You can only make this type of contribution, and the maximum amount you can contribute is $300,000. However, by combining it with the bring-forward rule, you could potentially contribute $630,000 to super (or $1.26 million as a couple) in a single year.

Currently, you can only make a downsizer contribution if you’re 65 or older at the time of the contribution. From 1 July 2022, the minimum age reduces to age 60. This will provide more flexibility to people in their early sixties who are planning to sell their family home and want to move some or all of the proceeds into super.

Although the work test has never applied to downsizer contributions, other eligibility rules apply and it’s important to submit a downsizer contribution form to your fund at the time you make this type of contribution.

First home buyers can now save up to $50,000 using the First Home Super Saver Scheme

People saving up for their first home can use the First Home Super Scheme (FHSS) to grow their deposit amount. It takes advantage of the favourable tax treatment of super contributions and earnings to help you save a deposit faster than if you save outside of super.

You can currently use this strategy to release up to $30,000 in eligible voluntary super contributions, along with any deemed earnings, for the purchase of your first home.

From 1 July 2022, the maximum amount of eligible contributions that may be released will increase to $50,000. However, the annual limit of voluntary contributions eligible for the scheme remains at $15,000 per financial year. This means it would take at least four years of maximum contributions to have the maximum $50,000 available for release.

Given the substantial rise in property prices we’ve seen all around Australia over the past year, this change will help first home buyers save a larger deposit using this strategy – albeit over a longer time period.

Source: Colonial First State

Volatility Bites: How Retirees can manage Jumpy Markets

By Robert Wright /May 25,2022/

The 2020 COVID-19 share sell off and recent equity market volatility shows just how quickly share prices can move.

Volatility can have different meanings for different investors, those with a long-term horizon can be less concerned, knowing they have time on their side. But what about retirees? How can they manage the mental challenge of watching their hard-earned capital shrink before their eyes? And do it without becoming so conservative they have to downgrade their lifestyle?

It’s a pertinent question right now because higher inflation, rising interest rates and the Russian invasion of Ukraine are making markets nervous.

Perpetual Private’s Associate Partner, Daniel Elias says volatility is more tangible for retirees. “The numbers on your portfolio spreadsheet aren’t theoretical – they pay your bills. Because that capital is so important, the challenge for retirees is reining in the fear and anxiety that can lead them to irrational decisions.”

In the years around retirement, the risk that a market downturn occurs right before you retire, or soon after, is called sequencing risk. To manage sequencing risk, having a diversified portfolio of assets can help dampen the effect on your portfolio when markets fall.

That’s when things go V-shaped

When COVID-19 lockdowns first hit in March 2020, markets fell, quickly and sharply. As people stayed at home and started upgrading their Netflix accounts, economists and analysts were arguing about the shape of a potential recovery.

Would markets fall even further, then bump along the bottom before gradually rising again (U-shaped)? Or stay down for years (the dreaded L-shape)?

Ultimately, we surfed a dramatic V-shaped recovery. Writing in January 2022, Mano Mohankumar from superannuation researcher Chant West said, “Since the market low-point at March 2020, growth funds have surged an astonishing 31%, which now sees them sitting 16% higher than the pre-COVID-19 crisis peak.”

Investors who looked through the dramatic market falls associated with COVID-19 were rewarded for sticking to their strategy. But many who reacted emotionally paid a price.

In May 2021, the McKell Institute estimate that those who redeemed via the Early Release of Super scheme at the nadir of the COVID-19 crisis gave up nearly five billion dollars in lost returns during the markets’ rebound.

Remaining rational in times of crisis is a difficult challenge for all investors, but ensuring you listen to the financial advice and don’t react with emotions is the key to not making the wrong decision during times of market stress.

Ask yourself – how much risk is right for you?

The key to investment selection and portfolio management is optimising ‘risk efficiency’ by choosing the right mix of assets to give you the maximum return for the level of risk you’re able to absorb.

Before making any changes to your investment strategy, ask yourself, “Am I still comfortable with the level of risk I originally implemented in my portfolio.”

Understanding your risk tolerance will help you find the right mix of assets that will have enough risk to grow your portfolio, but not so much that you can’t sleep at night or you are led to sell at the wrong time.

As you approach retirement, you have fewer years of earnings to save and invest and may need to draw down on your savings. This shorter time horizon limits the ability to overcome a market downturn. As a result, the amount of investment risk in your portfolio matters.

Diversification – your best defence

The other great weapon retirees can wield against market volatility is diversification. Whilst the volatility in January and February 2022 was felt in the majority of retiree portfolios, losses would have been lower than the broader equity market because many retiree portfolios are diversified across other asset classes including bonds, credit assets, property and increasingly, alternative assets.

Diversification helps to smooth returns across different economic conditions. This is because of the low or negative correlation between certain asset classes, so if one asset class falls in value in response to an economic or geopolitical event, another might rise.

Bonds can also play an excellent role in protection against equity market risk in times of market volatility and help to minimise sequencing risk.

There are alternatives

In times of ultra-low interest rates and share market volatility, alternative assets can add another source of income and an additional layer of diversification to an investor’s portfolio.

Alternatives include things like private equity, venture capital, opportunistic property and private debt. They can add returns to clients’ portfolios but must be considered in context of each retiree’s overall investment goals, portfolio size, time horizon and their appetite and tolerance for risk.

Investors must clearly understand the risks associated with investing in alternative assets as they can have long lock up periods, and are less liquid than more traditional assets, meaning they can’t be sold as quickly and converted into cash.

Building a resilient portfolio

Volatility will persist while the world adjusts to a changing economic and geopolitical order. That could mean a wider range of returns – but not necessarily a poorer real-life outcome if you stick to a robust, diversified strategy that’s attuned to your needs.

Remaining diversified across asset classes can help ensure you have the optimal blend of assets in your portfolio to weather a variety of market conditions. When it comes to ensuring you don’t let your emotions influence your investment decisions, your financial adviser can really help.

Source: Perpetual

Five ways you can start to bridge the super gender gap today

By Robert Wright /February 18,2022/

In terms of gender equality, we’ve come a long way over the past few decades. Australian homes and workplaces are very different places than they were in previous generations.

But there’s still a long way to go. When it comes to superannuation there isn’t a level playing field for Australian men and women.

Before we look at the gender super gap it’s worth looking at the gender pay gap. In May 2021, women working full-time earned $1,575.50 a week on average while men earned $1,837.00 – a gap of $261.50 or 14.2%

Not only do women tend to be paid less, they’re usually the main caregivers, with a staggering 93.5% of all primary carer leave taken by women. In 2018-19, among parents of children aged five and under, only 64.2% of women were in the labour force, compared with 94.6% of men. 

And women can suffer long-term financial effects from starting a family. Women with a child aged two or younger in 2001 experienced an average 77.5% reduction in earnings over the next 15 years, compared with those without children. Men with young children on the other hand faced no significant earnings penalty.

This all adds up to a significant shortfall in retirement savings. The average super balance for a 60-year-old Australian man is $198,482, compared with $165,986 for a woman.

The Federal Government’s Retirement Income Review sums it up: “On average, compared with men, women have lower wages, are more likely to work part-time, take more career breaks, and experience worse financial impacts from divorce. These factors contribute to the gender gap in superannuation balances at retirement.

Different strokes for different folks

Of course, we’re all different and everyone’s situation is Getting your retirement plans back on track unique. There are many households in which the woman earns more and the man takes on the bulk of the domestic responsibilities. And many Australians are happily single or childfree.

But the facts speak for themselves. On average, Australian women tend to earn less, spend more time out of the workforce raising a family and have less retirement savings as a result.

So whatever your personal circumstances – single or partnered, kids or no kids – you could be faced with a challenge when it comes to generating enough income to enjoy a comfortable retirement, particularly if you dipped into your savings to get you through COVID as part of the Federal Government’s early release of super scheme in 2020.

Getting your retirement plans back on track

But all is not lost… here are five ways women – and men – can start to rebuild their super balance.

1. Search for lost super. You may have a few old super accounts from previous jobs. Now’s the time to find them – and even look at bringing them together into one account if that’s right for you.
2. Personal contributions. Lockdown has been tough on everyone. And if you’re suffering the financial impact of continuing restrictions, super is probably the last thing on your mind. But if like many of us you’ve given in to the occasional bit of indulgence to help you through – with spending on home improvements, online gambling and food delivery soaring during the pandemic– then there might be ways to save a bit extra. If you’re able to curb your spending a little, even a small contribution to super could make all the difference.
3. Salary sacrifice. It might not sound too appealing but in the case of super, sacrificing can help you get ahead. Most Aussies will pay less tax on these super contributions than on their income, as well as enjoying the benefits of super’s tax-friendly environment on earnings and eventual withdrawals.
4. Spouse contributions. If your partner earns more, they could make a contribution to your super fund and claim a tax offset of up to $540, if eligible.
5. Low income super tax offset. If you earn $37,000 or less a year – like many women who work part time while looking after their children – and your employer makes super contributions on your behalf, the government may refund the tax paid on these contributions back into your super account, up to $500 per year.

Source: AMP

Constructing a retirement portfolio in a low return world

By Robert Wright /February 18,2022/

Portfolio construction is a much-used term that can be misunderstood. Fundamentally, the term portfolio construction refers to the process of selecting investments to create the optimal balance of risk and return.

By mixing different types of investments and different asset classes, portfolios can be built in a way that maximises the return for any given level of risk.

This concept of risk is fundamental to portfolio construction. The key to effective portfolio construction is understanding that each individual experiences risk differently and investment needs change dramatically as people’s priorities change over the course of a lifetime.

Risk tolerance

Depending on what stage of life they are at, individual investors can have quite different goals.

An investor early in their career can afford to seek higher returns from their investment portfolio by taking a higher level of risk because they have more time to make back any downturns in markets.

They also have less need for income from their investments than someone approaching or in retirement and can weight their portfolio towards growth assets.

A younger investor can be less concerned about inflation than a retiree because they can rely on wages growth that can maintain their purchasing power. They can also afford to lock up investments for a longer period without worrying about liquidity because they have time before they need to draw down on their assets.

In contrast, retirees tend to be more concerned about capital preservation because they need to draw on their asset pool throughout their retirement.

As they are no longer earning income from work, they need to draw income from their portfolio. This means they should consider weighting their portfolios towards income-generating assets.

Any increase in inflation erodes a retiree’s purchasing power as it costs more to maintain standard of living which means their capital can be eroded faster than planned.

And liquidity is critical for a retiree as assets may need to be sold quickly – for example if there is a medical emergency – without punitive valuations.

The concept of sequencing risk is also a critical difference between early and late-stage investors.

Sequencing risk

Sequencing risk refers to the risk of being forced to sell investments after a fall in valuations. A younger investor can typically ride out market volatility and even buy more assets when valuations are low.

However, late career investors and retirees who are forced to sell assets at low prices to fund their lifestyles have no way of regaining the lost value. A sensible portfolio construction process can protect against this.

Hedging risk

A question that often comes up is the role of downside protection in portfolio construction. The answer is different depending on where an investor is at in their investing journey.

Take the example of a pre-retiree and a younger investor with portfolios split equally between equities and bonds going into the global financial crisis (GFC) – with and without downside protection using options strategies.

Without downside protection, the retiree would have seen a pullback in the value of their assets of about 25 per cent and, because they were drawing down on their assets to live their life, they would not have been able to fully participate in the subsequent recovery.

Had they used downside protection on their portfolio, they would have been back on track by 10 years later.

The same is not true of the same strategy deployed by a younger investor. Without downside protection, young investors just keep buying into the market through a downturn and continue to accumulate assets.

But with downside protection – which comes at a cost – they see a drag on their returns, lowering their ultimate savings. It’s a reminder of the difference between younger and older investors.

Human beings also have the potential to make mistakes in their investing lives. If a retiree investor facing the same kind of GFC drawdowns suddenly became risk-averse and shifted their portfolio to 30:70 equities and bonds, this would be an understandable and apparently rational decision to preserve assets.

But markets recover. If that retiree waits until the storm passes and takes three to five years to switch back their allocation to 50:50, they would be 30 per cent worse off than if they did nothing at all.

Asset allocation

So, what assets should retirees look for?

In our view, the key is to seek out desirable risk attributes and not simply take the approach of investing by asset class.

In Australian equities for example, franking credits offer a good income stream for retirees by refunding the tax paid by the underlying companies. It should also be noted, however, that in seeking a higher exposure to Australian equities in pursuit of franking credits, a portfolio will acquire other concentrations of risk, for example: exposure to China. Good portfolio construction should consider and diversify away these concentrations.

In direct assets, infrastructure offers good opportunities for retirees. Many infrastructure assets earn a return on an availability basis regardless of actual usage or economic conditions, providing a stable income. The key consideration for direct assets is liquidity, as holding large allocations of illiquid assets could mean having to disproportionately sell down liquid assets, like equities, at an inopportune time if larger sums of cash are needed for, say, a medical emergency.

For bonds, the traditional defensive characteristics may not be available in a world of near zero interest rates and the potential of rising inflation.

In the last 30-40 years we have seen a terrific run in markets, particularly with bond rates coming down from as high as 16.5 per cent in the case of 10 year Australian government bond yields almost 40 years ago to near zero now. The performance was further buoyed by lower tax rates, falling tariffs and the rise of globalisation.

The corollary of this is that throughout those 40 years, forward return expectations have been declining.

In fact, a fund with a traditional asset allocation split 60:40 between equities and bonds is near its highest ever valuation level.

We believe this means return expectations from investment portfolios should be expected to be lower going forward until interest rates normalise.

Inflation is also a looming threat to portfolios. US annual consumer price inflation pushed up beyond 6 per cent in October of 2021 and there is a risk that price pressures associated with deglobalisation and decarbonisation defy the widely held ‘transitory’ thesis and stick around.

Goals-based investing

Given lower expected returns and higher inflation, what’s the right portfolio response?

Doing nothing is one approach – simply accept that returns are going to be lower.

Another approach is to increase risk – adding riskier, more leveraged asset classes will improve the probability of getting a return but also increase the probability of losing money.

A third approach is to lower your expectations. This means not changing how portfolios are constructed but accepting the likelihood of lower returns and perhaps adjusting things elsewhere in your life accordingly. In our view, this isn’t of much use or comfort however to today’s pre-retirees and retirees.

And the final – and more important – approach is to adjust strategy to those areas most likely to achieve objectives. This could include taking a goals-based approach to investing.

For example, a retiree could decide that rather than taking a traditional asset allocation approach to portfolio construction, they instead want to take on the goal of protecting and maintaining their standard of living in retirement. That goal might be measured by providing returns equal to the consumer price index plus 3.5 per cent as an example.

By focusing on the desired outcomes rather than simply considering traditional asset class allocations, investors can consider including alternative investments and strategies that may not be available under a traditional approach.

Source: AMP Capital