Why investing for retirement is different
By Robert Wright /March 07,2023/
When you’re still employed and earning a salary, there’s money coming in you can rely on. In retirement, in the absence of a regular salary you’ll need to find a new way to secure enough income to cover your living costs.
Investing your money is one way to make the most of your savings and provide an income in retirement but if you’re expecting savings and investment earnings to help cover your expenses, it’s important to get your strategy right.
Why timing matters
When accumulating super for retirement, you can afford to be patient. With years ahead to top up your super, you can stay invested during falls in the share market and wait for markets and your assets to bounce back. For the few years just before and after retirement, it’s a different story. This period, known as the ‘retirement risk zone’, is the time when you have most to lose from a fall in the value of investments. Your super has likely reached its peak in value and you want to make the most of these savings for your future retirement income.
In order to protect your savings and provide you with income throughout your retirement, it’s important to be aware of three key risks:
1. Living longer
Australians are living longer than ever before. Life expectancy has grown by more than 30 years in the last century1. Living off retirement savings for 20-30 years or more introduces the very real risk of running out of money. So it’s no wonder more than half of Australians aged 50+ are worried about outliving their savings according to a 2019 National Seniors Australia survey.
We’re lucky that we live in a country that if your retirement savings run out; the Age Pension is there as a safety net but these regular payments may not be enough to maintain the lifestyle you’ve been enjoying in retirement. You could also be left with limited funds and options for aged care, if you should need it. That’s why it’s so important to make a financial plan early in your retirement so that you can help to protect your income now and in the future.
Inflation measures the change in the cost of living over time and represents an important and often underestimated risk to your financial security in retirement. Given your retirement could last 20 plus years, there’s a good chance your savings and income will be affected by inflation. At an average annual inflation rate of 2.5%2, a dollar today is worth roughly half what it was 25 years ago. Even this modest year on year rise in the price of goods and services can put you at risk of having an income that no longer covers your living expenses from year to year.
3. Share market performance
Share market performance is a risk for investors with exposure to investments such as shares, bonds and commodities. If you’re worried about market collapses similar to the Global Financial Crisis (GFC) in 2008, you’re not alone. A 2018 National Seniors Australia survey found that 7 out of 10 older Australians share your concerns.
Falls in the value of investments are impossible to predict and can make a big difference to income and financial security throughout your retirement. When investments earn negative returns, your retirement savings are falling in value. Crucially, if you also need to make regular withdrawals to pay for living expenses, it’s a twofold blow for your overall financial position in retirement. Less savings now means more potential for outliving those savings later in life.
Protecting your income and future in retirement
Diversifying your investments – balancing growth and defensive assets for example can limit the impact of market risks and inflation on your retirement savings. However, even with a well diversified portfolio, your super and Age Pension may not provide you enough income for your entire retirement. If you’d like the peace of mind that comes with a regular income for life, a lifetime annuity might be right for you.
Using a portion of your savings or super, you can invest in a lifetime annuity and receive regular income payments for life. It can act as a safety net ensuring that you will receive income for life, regardless of how long you live.
Talk to an adviser about the benefits of a lifetime annuity and whether it might be right for you.
 Australian Bureau of Statistics, Life Expectancy improvements in Australia over the last 125 years, 18 October 2017.
 Australian Bureau of Statistics, 70 years of inflation in Australia, Andrew Glasscock, 2017. Fig 2.
Tips for Managing Money in Retirement
By Robert Wright /September 08,2022/
Aussies are living longer than ever before, with men expected to live until age 80 and women until age 85.
However, an increased life expectancy also means Australians may spend longer in retirement than previous generations, and in turn, need more money to fund retirement during those extra years.
When you’re retired and no longer earning money, it can be difficult to know how much you can afford to spend and what you need to preserve for the future, without the fallback of a regular retirement income.
You may also have added pressures in the mix, such as paying off debt, healthcare costs, and dependants in the form of kids or elderly parents.
Striking the right balance between enjoying your retirement and having enough to live on can be tough. However, you don’t have to go without – you may just need to consider your budget a bit differently.
If you’re planning your retirement , here are some money management tips that may help you get off on the right foot.
Look into having a U-shaped budget
Rather than a linear budget, where your expenses remain the same year after year, it may be worth considering a ‘U-shaped’ budget in your retirement. This is where your spending over the period of your retirement resembles a ‘U’, with the highest expenses in the first years of retirement and your later retirement years.
When you first retire, your spending will most likely be higher as you take that trip of a lifetime, splash out on that caravan or boat, or pay off your home loan (or all of the above) and engage in an active, and possibly more expensive, social life.
Your spending is then likely to settle into a more regular pattern in mid-retirement, before increasing again in your later years when greater healthcare costs and aged care expenses come into the mix.
Tips for paying off debt in retirement
Carrying debt into retirement isn’t ideal, but it’s a reality for many of us. If you find yourself owing money on your credit card, a personal loan or home loan once retired, there are things you could look into to help manage your repayments and minimise the amount of interest you pay.
Consolidating your debts by bringing them together into one loan could mean you pay less in interest, fees and charges. You could also contact your providers to try to renegotiate your repayment terms.
How much super should I have, and can I use this to pay off debt?
Some Australians withdraw their superannuation as a lump sum once they reach their super preservation age and use it to clear their debts, to avoid having any repayments and interest during retirement.
If you’re considering this, think about whether you’ll still have enough to live on in retirement, and the tax implications of doing this. In this case, it’s a good idea to speak with a financial adviser to weigh up your options.
Consider where you can save money
Although you may not have a steady income like before, it’s still possible to save money so you have more to spend on what’s important to you during your retirement. You can do this by leveraging some of the government’s benefits and subsidies, or by reducing your expenses.
Here are a few ideas to get started:
Consider selling your second car (if you have one), and take advantage of public transport concessions available to seniors instead. You may be able to save on car registration, insurance and maintenance costs, plus you’ll be doing a bit for the environment.
Take a look at government websites to learn about benefits and payments you may be able to access, such as pensions, allowances, bonuses, concession cards, supplements and other services.
Consider bundling your phone and broadband to save on technology bills, and your electricity and gas to save on energy costs. Compare providers’ rates through comparison websites and ask if they offer a seniors discount.
Think about ideas to entertain more at home instead of going out, such as dinner parties, game nights or movie nights. It also may be handy to subscribe for newsletters to your favourite restaurants and shops, or invest in a coupon book like the Entertainment Book, so you can take advantage of any offers and special deals when you do go out.
It may be worth putting your bills onto direct debit rather than paying them month by month. This way, you may be eligible to qualify for the pay on time discounts and avoid late fees if you forget a payment.
Groceries are a necessary expense, but it’s possible to save money here as well. Consider researching online for sales ahead of time, buying seasonally for fruits and veg, or buying in bulk and sharing with family or friends.
Tips if you’re helping your family financially
If you’re part of the ‘sandwich generation’, with elderly parents who are dependent on you and adult kids who are still at home or continue to need a bit of financial assistance, it’s still possible to have a good quality of life in retirement.
In order to do so, it’s all about finding balance. It’s important not to lose sight of your own goals during retirement, while still helping the ones you love. You may consider having some conversations with your children on the limits of what you can provide, and spend more time to help them understand the benefits of financial independence: for example, instead of financial assistance, perhaps you can help them with some invaluable financial education.
Tips if you’re estate planning
Estate planning is also an important part of your financial planning in retirement. Estate planning goes beyond just making a will. It can also be valuable to think about who your super beneficiaries are, and how you want to be looked after (both medically and financially) if you can’t make your own decisions later in life.
If you get your estate in order during the early years of retirement, it means more peace of mind in the long term and could potentially help prevent some family tensions in the future.
When planning your estate, here are some key things to think about.
Who will get your assets?
Making a will plays a big part in estate planning. A solicitor or estate lawyer can help you draw up a legally binding document that advises who should receive your assets after you pass away. If you don’t have a valid will, your estate will be distributed in line with the law in your relevant state.
Who is your executor?
An executor is the person responsible for making sure your assets are distributed according to your wishes, as well as paying bills, closing any banks accounts, and so on.
Who are the beneficiaries for your super?
Your super is often treated differently to the other assets in your will, so it can be useful to think about this as a separate aspect. Consider how you want your super to be distributed after you’re gone and try to keep your super beneficiary nomination up to date. If you don’t, there’s a risk that your super money may end up in different hands.
Who is your enduring power of attorney and/or guardian?
If you have an enduring power of attorney, you are allowing someone to make financial decisions on your behalf. In some states, your power of attorney holder can also make lifestyle decisions, such as health and medical choices and where you live, while in others you’ll need to appoint a separate guardian to do this.
Your super checklist for EOFY
By Robert Wright /June 03,2022/
The lead up to 30 June can be a good time to maximise tax benefits that may be available to you inside super.
Certain contributions, which we cover below, may have the ability to reduce your taxable income, or see you pay less on investment earnings.
Contributions that could create tax benefits:
- Tax-deductible super contributions
You may be able to claim a tax deduction on after-tax super contributions you’ve made, or make, before 30 June this year.
To claim a tax deduction on these contributions, you’ll need to tell your super fund by filling out a ‘notice of intent’ form. You’ll generally need to lodge this notice and have the lodgement acknowledged by your fund, before you file a tax return for the year you made the contributions.
Putting money into super and claiming it as a tax deduction may be of particular benefit if you receive some extra income that you’d otherwise pay tax on at your personal income tax rate (as this is often higher).
Similarly, if you’ve sold an asset that you have to pay capital gains tax on, you may decide to contribute some or all of that money into super, so you can claim it as a tax deduction. This could reduce or at least offset the capital gains tax that’s owing.
- Government co-contributions
If you’re a low to middle-income earner and have made (or decide to make before 1 July 2022) an after-tax contribution to your super account, which you don’t claim a tax deduction for, you might be eligible for a government co contribution of up to $500.
If your total income is equal to or less than $41,112 in the 2021/22 financial year and you make after-tax contributions of $1,000 to your super fund, you’ll receive the maximum co-contribution of $500.
If your total income is between $41,112 and $56,112 in the 2021/22 financial year, your maximum entitlement will reduce progressively as your income rises.
If your income is equal to or greater than the higher income threshold $56,112 in the 2021/22 financial year, you won’t receive any co-contribution.
Also, you’ll generally need to have at least 10% of your assessable income coming from employment/business sources to qualify.
- Spouse contributions
If you’re earning more than your partner and would like to top up their retirement savings, or vice versa, you may want to think about making spouse contributions.
If eligible, you can generally make a contribution to your spouse’s super and claim an 18% tax offset on up to $3,000 through your tax return.
To be eligible for the maximum tax offset, which works out to be $540, you need to contribute a minimum of $3,000 and your partner’s annual income needs to be $37,000 or less.
If their income exceeds $37,000, you’re still eligible for a partial offset. However, once their income reaches $40,000, you’ll no longer be eligible for the offset, but can still make contributions on their behalf.
- Salary sacrifice contributions
Salary sacrifice is where you choose to have some of your before-tax income paid into your super by your employer on top of what they might pay you under the superannuation guarantee.
Salary sacrifice contributions (like tax-deductible contributions) are a type of concessional contribution and these are usually taxed at 15% (or 30% if your total income exceeds $250,000), which for most, means you’ll generally pay less tax on your super contributions than you do on your income.
If you’re in a financial position to set up a salary sacrifice arrangement, you may want to do this before the start of the new financial year, so talk to your employer or payroll division to have the arrangement documented.
Important things to consider
Contributions need to be received by your super fund on time (ie, before 30 June) if you’re planning on claiming a tax deduction or obtaining other government concessions on certain contributions when you do your tax return.
There are limits on how much you can contribute. If you exceed super contribution caps, additional tax and penalties may apply. Read more about super contribution types, limits and benefits.
Currently, if you’re aged 67 to 75 and wanting to make voluntary contributions, a work test applies unless you meet an exemption. Changes to the work test are coming more on this below.
The government sets general rules around when you can access your super, which typically won’t be until you reach your preservation age and meet a condition of release, such as retirement.
7 age pension traps to avoid
By Robert Wright /June 03,2022/
After a lifetime of hard work, it’s important you maximise your entitlements in retirement. So you need to structure your finances carefully to make sure you don’t lose your age pension. After all, you’ve earned it. Here are some common traps to be aware of.
Helping loved ones out
It’s only natural to want to help younger family members get a leg up financially. But if you’re nearing or already in retirement, you need to be careful how you go about this, as you could inadvertently affect your age pension entitlements.
If you’re thinking of giving money, the rules are you can gift $10,000 per financial year, and no more than $30,000 over a five-year period.
Any excess amount is counted as an asset, and deemed to earn income, for a full five-year period from the date of the gift.
With house prices so high and home ownership getting out of reach for younger Australians, it’s no surprise that many parents want to help their kids get a foot on the property ladder. But with property you need to be extra careful in how you set things up.
Let’s look at an example. A couple aged 55 want to help their daughter buy her first home. Without taking advice they buy a 50% share of a house worth $500,000 so she can obtain a loan.
Fast forward 12 years and the house is now worth $1,000,000, of which their half share is $500,000. Their other financial assets are worth $700,000 so they believed they would be eligible for a part age pension. To their dismay they discover their equity in their daughter’s home has taken them over the assets test cut-off point, meaning they won’t be getting any age pension from the Government.
So what can they do? If they transfer their ownership share to their daughter the capital gains would be as high as $125,000 after the 50 per cent tax discount, on which capital gains tax could be as much as $50,000. And they would have to wait five years to qualify for the pension because Centrelink would treat the $500,000 as a deprived asset. The total value of the capital gains tax and the lost pension could be as much as $150,000!
If they’d been aware of the trap, or taken advice, they could have gone guarantor for their daughter, possibly putting up their own home as part security, and this would have had no effect on their future pension eligibility. Alternately, they could have transferred their ownership to their daughter at least 5 years before they became eligible for the age pension. They still would have had a capital gains tax liability, but at least the 5-year period for counting the gift would have elapsed by the time they applied for the age pension.
Borrowing against the family home to invest
If you’re already, or about to be, on the age pension, purchasing an investment property with the loan secured against your family home (primary residence) can be a trap.
Normally, the debt against an investment asset—for example, an investment property—is deducted from the asset value when working out whether you’re eligible for an age pension. But if the mortgage is secured against another asset like the family home, then the gross amount is counted. So this may affect your age pension as the full value of the investment is counted as an asset.
A way to avoid this could be to secure the asset against the investment instead.
Downsizing the family home
If you’re thinking of selling your family home and buying a smaller place, there’s an added incentive as the Government is allowing downsizer contributions into super for eligible Australians of up to $300,000.
But there could be a Centrelink sting in the tail, as you’re converting an exempt asset (the family home) into a counted asset (money left over) that could affect your eligibility for the age pension.
Let’s look at an example. Ray (70) and Gina (67) receive close to the full age pension, based on their assets and income.
They want to downsize their family home, which they could sell for $2.5 million. They’d prefer to buy an apartment closer to their kids for around $1.5 million.
If they go ahead, they’d have surplus assets of up to $1 million, which will either considerably reduce their age pension, or cut it off altogether.
By consulting their financial adviser, Ray and Gina could decide either to proceed as planned, or perhaps buy a more expensive replacement property and have less surplus capital, with less of an impact on their age pension.
And their adviser could help to invest the surplus capital to generate an income—for example, by making downsizer contributions into super and starting an account-based pension.
There’s plenty to think about if you’re looking at downsizing, so you might want to get some advice.
Leaving a bequest in your will
Many retired couples leave all their assets to each other in their wills if they pass away.
While this is perfectly understandable, it could cause grief to the surviving partner if their age pension is reduced or lost altogether. The asset cut-off points for singles and couples are quite different—$595,750 for a single person and $901,500 for a couple.
Let’s look at an example. Jack and Jenny have assessable assets of $740,000 and are getting around $11,800 a year in age pension payments. Jack dies suddenly and leaves all his assets to Jenny, taking her over the assets test limit for a single person and she loses the pension entirely.
Unfortunately, Jenny can’t get around this by passing the assets on to their children. If you’re a named as a beneficiary in someone’s will, and you gift it away to, say, your children, it’s still counted as part of your assets and subject to the income test for the next five years.
If Jack and Jenny had consulted a financial adviser, one solution could have been to leave specific assets to their children and bypass the surviving spouse altogether.
Starting a super income stream early
If you start a super income stream once you reach preservation age and before you reach age pension age—for example, as part of a transition to retirement strategy—it could affect your entitlements to Centrelink allowances like Jobseeker. So it’s important to get financial advice.
Advice can make all the difference in how you set up your super and pension arrangements in general. If you have a younger partner, one option could be moving assets into super as a non-concessional contribution for the spouse who is underage pension age.
The amount placed in super for the younger spouse is preserved until they meet a condition of release. This may work well if their condition of release is only a few years away but could be a concern if there’s more of an age gap.
Changing account-based pensions
If you’ve been receiving an account-based pension (ABP) for a while, you should be aware of a change made on 1 January 2015 which impacted how much income from the ABP is counted towards the age pension income test.
If you were in an existing ABP you were exempt from the new rules—but only for as long as you continued with the same provider.
So if you change providers you could inadvertently reduce your age pension entitlements.
A financial adviser can help work out the best option for your particular circumstances—the benefits of a new ABP or the higher age pension.
Setting up a family trust
If there’s a family trust or private company involved in your affairs, the rules are even more complex, so you’ll need expert advice before applying for the age pension.