Tag Archives: Retirement Planning
Should you use property to fund your retirement?
By Robert Wright /February 18,2022/
Superannuation, shares, property, cash, other investments; a dizzying number of options are available when it comes to living comfortably through retirement.
Financial advisers often promote a diversified portfolio to reduce the risk of concentrating ‘all eggs in one basket’. Still, Aussies love their property, with more than 2.2 million of us opting for investing in property, with almost 60% of those aged 50 or over holding property investments.
Aside from simply owning a secure place to live through retirement, investing in property can also provide regular post-work income and might offer some assurance as a ‘safe’ investment option. Property is a physical asset and can seem less volatile than other investments, particularly when heading into a phase of life that holds uncertainty and where you may think: “What happens if I outlive my savings?”
But different risks and tax obligations in retirement can alter the attractiveness of investments and, when it comes to property, there are a range of strategies that offer different pros and cons when using it to fund retirement.
Living off rental income from an investment property
On the surface, living off rental income in your retirement is an attractive prospect. But you may need to first make sure the lifestyle you want doesn’t exceed your investment property’s returns, taking into consideration any mortgage repayments, taxes and maintenance costs, as well as factoring in for times when the property may not have tenants.
Many people find they need multiple properties in their investment property portfolio to generate enough income to support their retirement lifestyle.
Pros of living off rental income
Capital appreciation: If you’ve owned a property for a while or have made significant improvements, chances are it may have grown in value – and may continue to do so. Growth in value can also mean higher rental rates and returns.
Interest rates are at all-time lows: Which means low mortgage repayments, if you have them.
Outgoings can be low: If you’re healthy and handy, you can leverage your free time in retirement to save maintenance costs by doing your own property management and minor repairs.
Holiday ahoy: Many Australians choose to purchase investment properties in holiday locations. When leased, your tenants provide an income stream; when not, you have an instant holiday house for yourself or perhaps a short-term rental.
Cons of living off rental income
Ongoing costs can pile up: In addition to anticipated outlays – property management, insurance and rates – you risk unexpected costs like emergency repairs and oft-forgotten long-term appliance or structural replacements.
Income from your investment property may be subject to income tax: This will depend on the net amount per financial year – and the amount and type of any other income.
Liquidity is restricted: If you need funds unexpectedly e.g. for medical costs, to take a holiday, or for emergencies, you can’t sell a single room of your investment property as you can with shares of stock – the whole thing has to go, and it will take some time before you get the actual sale proceeds.
Your income isn’t guaranteed: the rental market can change, and it might mean that your property can be empty for periods of time.
Living off equity
This option essentially sees you paying-off as much as you can on your property while working (reducing the loan-to-value ratio) and then funding your retirement by borrowing against the equity (the value of your home, less any mortgage) if and when you need it. A number of strategies are available, including home reversion, reverse mortgage and home equity release.
Keep in mind that the amount of money you can access depends on your age, the value of your home and the type of equity release.
Pros of living off equity
It’s tax free: You don’t have to pay tax on this ‘income stream’ as it is effectively a loan.
You can tailor the amount of equity you borrow: Whether it’s regular payments, a lump sum, line of credit or a mix.
You don’t have to sell: If the equity is in your own home, you get to keep living there and you don’t have to make repayments while you do.
Negative equity protection: means you will never end up owing your lender more than your home is worth if you take out a new reverse mortgage.
Cons of living off equity
There are costs involved: Application, service and end-of-agreement fees may apply. Check with your lender as they may vary from lender to lender.
A volatile market: This strategy only works well if your property is increasing in value.
You are converting capital to debt, for yourself or your beneficiaries: Some dub this investment strategy “spending wealth, rather than cash flow.”
The amount you can ‘borrow’ is restricted: If you’re 60, you can only access 15-20% of the value of your home. As a guide, add 1% for each year over 60. Over time, your payback interest rates may be greater than an average home loan. With home reversion, you ‘sell’ a share of your home usually for well under market value.
Selling property to fund retirement
To sell or not to sell? It’s a question many Australian homeowners face as they enter retirement, regardless of whether it’s the family home or an investment property. If this is to be your major income through retirement, check that any profits you reap will equate to comfortable golden years. Also consider the effects of re-buying or renting in the same market if you’re downsizing.
Pros of selling property
Selling your property may mean you have an increased cash flow: You can use it to pay off debt or invest in shares or in managed superannuation funds, which may provide additional tax benefits and liquidity.
You may not have to pay capital gains tax: This may apply if your property is your primary residence, or you purchased it before September 1985.
Cons of selling property
Capital gains tax: When selling an investment property you’ve never lived in, you may be liable for capital gains tax on any profit.
All those costs of selling a property: Real estate agent fees, legal fees, moving costs and so on.
Timing: If you need to sell in a hurry to fund your retirement, you may not be selling into the best market. Liquidating during a market downturn can mean a significant hit to your retirement income.
On the other hand, selling at the top of the market could mean boosting your super balance with a large lump sum, but remember the pension transfer balance cap limits the amount you can invest in a tax effective retirement pension.
Your bank balance: Selling your home may impact the amount of Age Pension you receive.
No one-size-fits-all approach works when it comes to using property for retirement. With so many factors influencing your decisions, it’s wise to consider your options and speak to your financial adviser.
Source: AMP
How does your pension live on after you die?
By Robert Wright /February 18,2022/
Account-based pensions offer a flexible and tax-effective method of drawing a regular income stream from superannuation. They are an essential part of your overall retirement strategy and are usually used from retirement until death. But what happens to your tax-free account-based pension when you do die?
Superannuation does not automatically form part of your Will unless a Death Benefit Nomination is completed to that effect. In this article we examine the nomination of an individual beneficiary, where the nomination of a member’s estate and a reversionary beneficiary nomination is not in place.
What are your beneficiary’s options?
The short answer is it depends. To receive your account-based pension your nominated beneficiary may have two options:
- Commencing a death benefit pension; or
- Receiving a lump-sum payment.
Both options are subject to additional eligibility criteria. Let’s briefly explore both options with our focus being option 1, commencing a death benefit pension.
Option 1: Commencing a death benefit pension
Features of a death benefit pension
A death benefit pension can basically be considered as allowing your account-based pension to live on after you die, for the benefit of your eligible beneficiary. Features of this pension are much the same as those for an account-based pension. Arguably, the most attractive feature is the tax-free nature in which the assets will reside. Recipients are required to receive a minimum cash pension payment each year which is based on their age and pension balance as at the previous 30 June.
Death benefit pensions can also be rolled into another fund at any time, however, they retain their identity as a death benefit. Therefore, a death benefit pension cannot be combined with other pensions or rolled back to the accumulation phase.
Is your nominated beneficiary eligible?
Generally, only your spouse is eligible. Adult children and your legal personal representative (your estate) would have to receive the benefit as a lump-sum withdrawal, i.e., the assets are removed from the superannuation environment and subject to tax on the taxable component. A dependent child (or children) may also receive a death benefit pension in limited circumstances; if they are under age 18; under age 25 and financially dependent on you; or have a prescribed disability.
Transfer Balance Cap
Another important matter to consider is your eligible beneficiary’s Transfer Balance Cap (TBC). To reiterate, the TBC is a lifetime limit on the total amount of funds that can enter the tax-free pension phase, currently at $1.7 million. Where your beneficiary has already commenced an account-based pension and does not have a sufficient remaining TBC to receive the death benefit pension, they may roll back their existing account-based pension into the accumulation phase to create room for the death benefit pension.
Option 2: Receiving a lump-sum payment
The alternative is to receive the amount as a lump-sum payment. With this option, the funds exit the superannuation environment. The benefits may be cashed as either in-specie or cash depending on your fund’s governing rules.
Conclusion
The death benefit pension option presents an opportunity for your eligible beneficiary to maximise the total amount of funds held within superannuation. While there are limitations on who can exercise this option and matters complicated by TBC, it is still worth considering as the assets will reside in a concessional tax environment.
Source: Bell Potter
Demand for financial advice doubles in five years
By Robert Wright /November 23,2021/
If your car engine sounds dodgy, you see a mechanic. If you’re unwell, you see a doctor. If you’ve got a tooth ache, you see a dentist. But what about when you’re looking to better manage your finances?
According to 2020 figures from research group Investment Trends, 2.6 million Aussies said they intended to seek help from a financial adviser over the next two years, up from 2.1 million in 2019 and double the levels seen in 2015.
Findings also revealed that COVID-19 had prompted greater engagement between Aussies and financial advisers where a relationship already existed.
Demand for advice is on the rise
Talking about the report findings, Investment Trends Senior Analyst King Loong Choi said, against a backdrop of economic uncertainty and volatile markets, a record number of non-advised Australians realise they need assistance from a professional.
“Among these potential advised clients, the pandemic has been a major catalyst, with 44% saying the COVID-19 situation had increased their likelihood of seeking advice,” he said.
Greater engagement between advisers and clients
The research also showed three in four financial advice clients had been in contact with their adviser to discuss the impact of the COVID-19 pandemic.
“Most financial planners have proactively engaged with their clients during this period of volatile markets, and clients themselves acknowledge these efforts,” Choi said.
The topics Aussies want advice on
There might be particular goals, events or circumstances that prompt financial advice, including unexpected situations like redundancy, death or divorce.
According to a survey by ASIC, the most common topics that participants had received advice on, or were interested in receiving advice on, were:
- investments (eg shares and managed funds) – 45%
- retirement income planning – 37%
- growing superannuation – 31%
- budgeting or cash flow management – 22%
- aged care planning – 18%
Other topics also included risk protection, self managed super funds, debt management, switching or consolidating super, and estate planning.
What’s involved when you see an adviser
You may opt to receive simple advice on a particular issue, broader financial advice, or ongoing financial advice.
After you’ve discussed your goals, objectives and attitude to risk, your adviser can then provide you with recommendations and a product disclosure statement for any product they’ve recommended.
As part of this process, it’s important to understand how you will be charged and you’ll also need to assess whether the advice provided is right for you. After all, it is your money.
Source: AMP
Retirees: How to beat Inflation before it beats you
By Robert Wright /November 17,2021/
Investors with long memories – or a good education – will recall the bad old days when inflation was the economic bogeyman. It broke Germany’s Weimar Republic in the 1930s and nearly cratered America’s economy in the 1970s.
Fortunately, inflation has been a non-issue in Western economies for decades. But is that about to change? In the first quarter of FY2021, Australian inflation ran at a comfortable 1.1%. By the second quarter it had leaped to 3.8%.
Perpetual’s recent Quarterly Update summed up the problem: “With very easy monetary policy likely to continue for the next couple of years, and government spending at record-breaking levels, there remains the risk that inflation could become out-of-control. Historically, high levels of inflation have been very difficult to contain once in place.”
Inflation hurts retirees
Inflation is bad news for retirees. “A continual rise in the price of goods and services can really affect someone who’s retired or approaching retirement”, says Malissa Tobias, a Perpetual Private adviser in Melbourne. “Inflation eats your purchasing power – you get fewer goods and services for the same amount of money.”
If you’re still working, your salary can rise to keep pace with inflation. Retirees – especially those with money in low-rate assets like term deposits or cash – suffer because their spending power is cut and the real (after-inflation) value of their capital is falling.
Anti-inflation strategies for retirees and near-retirees
Manage your retirement
By managing the timing and shape of your retirement you can offset some of the inflation threat.
If you work a little longer (either full or part-time) you can earn an income that might go up with inflation. Those extra earning years also give you more time and money to build up the largest possible nest egg to generate your retirement income. Finally, but just as importantly, retiring later delays the day you start drawing on your capital.
Invest in inflation-beating assets
Investing in higher-returning assets – like shares or property – can deliver the same benefits as earning work-income because their value can rise in line with, or above, the rate of inflation. However, the inevitable complication is that higher returning assets are usually higher risk assets.
Plan your spending
Knowing how much money you’re going to need in retirement is a crucial part of retirement planning.
Draw on capital
The recent Retirement Income Review suggested many retirees die with their capital intact. But that’s not the case for everyone. In a world where the threat of inflation is rising, some retirees will need to dip into their capital to fund the retirement lifestyle they want. The key is to do that prudently.
Source: Perpetual