Tag Archives: Retirement

Five ways to create a reliable income in retirement

By Robert Wright /June 28,2016/

With interest rates at record lows and little chance of a change in sight, creating a reliable income in retirement can be challenging.

With the cash rate at just 2% since June 2015, Australian interest rates are lower than ever before. And according to the Commonwealth Bank economics team, there’s little prospect of rates lifting before the end of 2016.

That’s a problem for investors looking for a secure and reliable income in retirement, without putting their money at risk.

The good news is that there are alternatives. Here are five options to consider, with some of the pros and cons of each.

Option 1. Account based pension

An account based pension is a superannuation account that pays a regular income, with the freedom to choose your own investment strategy.

Pros. You can choose between investment options and set your own pension payment amount (within government rules). You can also adjust your pension payment in response to your changing needs and your account’s investment performance. You can even make lump sum withdrawals when you need them (a limit may apply). And if you’re 60 or over, you usually won’t have to pay any tax on your pension payments.

Cons. Your income isn’t guaranteed — so if your investments don’t perform, you could earn less than you’d planned.

Option 2. Annuity

Available from insurance companies and superannuation funds, annuities give you a fixed, regular income for a set period of time or the rest of your life, depending on the product that you chose.

Pros. You enjoy the security of a pre-defined income, no matter how markets perform. And you generally won’t need to pay tax on your annuity income after you turn 60.

Cons. You don’t have the flexibility to withdraw a lump sum if you need extra cash, and you won’t get to choose where your money is invested.

Option 3. Bonds

A bond works a little bit like a loan. When you buy a bond, you are effectively lending money to the issuer — usually a government or a company. In return, they generally pay you a regular income until the bond matures, at either a fixed or a floating rate. When the bond matures, you get a payout at the bond’s face value.

Pros. Depending on the investment you choose, a bond can offer a higher level of income than cash, with less risk than alternatives like shares or property.

Cons. In Australia, most bonds can be difficult for individual investors to access, which is why many investors choose to invest through a managed fund or super fund. And bonds are not risk free, particularly higher-yielding company bonds.

Option 4. High yield shares

As at 27 October 2015, CommSec data showed that 21 of Australia’s largest companies offered dividend yields of 5% or more, covering sectors as diverse as banking, resources, infrastructure, telecommunications and more. For those looking to earn an income, recent market falls could offer the opportunity to pick up high-yielding stocks at lower prices.

Pros. Carefully selected shares can offer comparatively high levels of income, with the added bonus of franking credits — which are like a tax credit for tax the company has already paid on your behalf.

Cons. Unfortunately, higher returns tend to involve higher risk, and shares tend to be more volatile than other investment options. And while a regular dividend income can help to offset the impact of any future share price falls, there is also no guarantee that a company will continue to pay dividends at the same rate.

Option 5. Property

Residential property is a very popular choice for those looking for a secure, income-generating asset.

Pros. Property offers the potential for rental income today and capital gains in the future. And a buoyant housing market has made property a rewarding investment for many.

Cons. Rising property values have driven rental yields to record lows in many parts of Australia, with the national average yield falling to just 3.3% in August 2015, according to the CoreLogic RP Data Home Value Index. Remember too that house prices can and do fall, especially after a period of strong gains.

Getting the balance right

Not sure which option to choose? The good news is that you don’t have stick to just one. A financial adviser can help you build a portfolio of investments both inside and outside super, with the right mix for your individual income needs and preferred level of risk. That could help you avoid the greatest risk of all — running out of money in retirement.

 

Source: Colonial

Financial scams target over 50s

By Robert Wright /June 28,2016/

Australians aged over 55 who may be looking for ramped up returns are most likely to fall prey to scams.

Over the last year 105,000 Australians have fallen victim to financial scams, collectively losing $85 million to fraudsters – an average of $26,408 per person. This represents a 15% rise in the incidence of scams over the previous year. But these figures are believed to be the tip of the iceberg because many people are too embarrassed to report being stung by fraudsters.

Sadly, Australians aged over 55 who may be looking for ramped up returns ahead of, or during, retirement are most likely to fall prey to scams. Two-fifths (40%) of scam victims are aged 55-plus.

It can be easy to blame the internet for the growth of scams. However a recent report by the Australian Competition and Consumer Commission (ACCC) found two out of five scam victims were contacted by fraudsters over the phone. This compares to 27% by email and 11% via the internet and social media.

In fact, over the last year one of the main types of scams reported to our investment watchdog ASIC, involved overseas cold calls about bogus investment opportunities.

You may think you’d easily recognise a scam. But make no mistake, today’s fraudsters employ sophisticated techniques that include call scripts, false paperwork and fake websites to convince their victims of a genuine opportunity.

The bottom line is that none of us are immune, so it pays to know the warning signs.

Typically, investment and financial scams promise high, quick returns and even tax-free benefits. Expect offers of big rewards for a small upfront payment coupled with discounts for early bird investors that create a sense of urgency.

Adding to the credibility of the scam, you may be given phone numbers for referees. Disregard these. The so-called referees are likely to be part of the scam network.

ASIC is warning Australians not to send money overseas for an investment offer that has come out of the blue. If you are cold called about an investment the best thing to do is hang up.

If you’re not sure about the legitimacy of the person or company making the call, ask if the company or scheme has an Australian Financial Services Licence (ASFL) or an Australian Credit Licence (ACL). In particular, ask what the licence number is. You can check this against the Professional Registers on ASIC’s website (www.asic.gov.au).

Scams are ever-evolving and it pays to stay up to date by regularly checking the government’s Scamwatch website (www.scamwatch.gov.au). If you think you’ve been scammed, contact your financial institution immediately.

 

Source: AMP

Would downsizing be worthwhile for you?

By Robert Wright /December 01,2015/

It seems to make logical sense. You retire, sell the now cavernous family home, buy a cosier place and use the cost difference to boost your retirement income – win-win right? The answer is – “it depends.”

Downsizing can be an excellent strategy to supplement your income and simplify your lifestyle, but it’s not right for everyone.

Here’s what you need to consider to see if downsizing is the right move for you.

Where you could save

Super: If you own your home outright and choose to downsize, that extra money could substantially improve your retirement income. The attraction of contributing money into super is that investment earnings on money in a super fund are generally taxed at 15%, representing a potential tax saving of up to 34%. This is because when you hold an investment outside super, the earnings are generally taxed at your marginal tax rate which could be up to 49%.

Mortgage: If you’re still paying off your home, downsizing could help you minimise your repayments or eliminate them entirely. You could even downsize and continue to make the same repayments to pay off your mortgage much sooner.

Utilities: A smaller home typically runs more economically. Why pay to heat or cool space you no longer need? If your new home provides renewable energy options such as solar power, you may even be able to sell energy back to the grid and make money.

Maintenance: Less space to occupy means less space to maintain. In the case of larger properties, downsizing could offer substantial savings on cleaning and garden maintenance.

Travel: Downsizing can help you relocate to a more convenient location. If the local shops, public transport and amenities are all within walking distance, you could make substantial savings on fuel.

Garage sale: Selling your home is a great time to sell any items you no longer want, need, or will fit into your new house. Any money you make could be contributed towards moving costs.

Costs to consider

Home value: If you sell your home during a market lull, you could lose some or all of the equity you’ve built up. This could eat into, or erase entirely, the cost saving you make by purchasing a less expensive property.

Fees and commission: Home selling is a highly competitive market. To ensure your home is positioned favourably to sell, you may need to appoint a real estate agent and potentially pay for marketing services, which can cut into your profit margin.

Moving costs: If it’s been a while since your last move, you might be surprised at how much it costs to pack up and transport all of the items you’ve accumulated. That’s why it’s a good idea to offload all the items you can live without before your move. Why pay to transport items you no longer need?

Strata fees: If you purchase an apartment you’ll have to pay quarterly strata levies. Although these fees can end up saving you money in the long term, compared to paying for the maintenance of your home and yard, they will eat into your profit margin in the short term.

Stamp duty: You’ll have to pay stamp duty to buy a new home or apartment so you’ll need to include this cost in your calculations.

Storage costs: One drawback of buying a smaller home is you have less space to store your treasured belongings. If you run out of room, you may need to purchase additional storage which can add up quickly.

Doing the sums

Balancing the potential savings and costs of downsizing can be tricky, and that’s before you take all the potential lifestyle impacts into consideration. A financial adviser can help you work out if downsizing makes sense for you as a part of a tailored financial plan.

Source: MLC

3 key considerations for SMSF investors in the lead up to Retirement

By Robert Wright /December 01,2015/

Australians are enjoying longer and more active retirements than ever before, so what can you do to help make sure your money lasts?

Baby boomers are retiring in greater numbers and many have taken more control over their retirement savings by self managing their super. Over a third of self managed super funds (SMSFs) are in the pension phase and 56 is the average age of SMSF members[1], which means that many are approaching retirement.

What’s more, Australians are living longer and healthier lives than previous generations[2]. This means that it’s important to have plans in place to help ensure your money lasts when you stop working.

So how can you try to make sure that your investment strategy caters for your long and healthy retirement? You may need to take a fresh look at your investment choices, as well as consider what your lifestyle and spending habits will be like when you retire.

Here are three key factors to consider.

1. The diversification of your assets

Investing in a mix of defensive and growth assets may lower the risk that all your assets will underperform at the same time. For Laird Abernethy, Head of Investment Sales at Colonial First State, the fundamental principles of a diversified investment portfolio stand no matter what your superannuation structure – and it’s something that SMSF investors need to be mindful of.

“If you look at SMSFs as a whole sector, there’s a significant portion in Australian direct equities and a significant portion in cash – and that’s not a diversified portfolio. I think SMSF members need to consider other areas to invest in and how they structure their portfolio to last them over the next 15, 20 or 25 years.”

Referring to the global financial crisis, Abernethy suggests that “baby boomers may be carrying an element of caution with investment decisions they’re making into retirement. They may not get the returns they need just by investing in cash and fixed income. They may also need some level of equity exposure to ensure they minimise the risk that they outlive their retirement savings.”

It’s also important to keep in mind that equities are tied to the ups and downs of the market, so they are generally considered to be a riskier investment than cash or fixed interest, although they offer the possibility of higher returns. It’s wise to seek professional financial advice to help you work out what types of investments are right for you.

2. Your lifestyle and financial needs when you enter retirement

The early years of your retirement are likely to be the most active, which means you’ll probably be spending money on things like recreational activities and travel.

“You don’t automatically stop your lifestyle when you enter retirement,” says Rick di Cristoforo, Head of Retail Sales at Colonial First State. “In fact, it might actually be more expensive because you’ve got more free time to spend money on your enjoyment.”

Abernethy agrees. “That first phase of retirement is probably where you’re pulling out the most in terms of your pension or other income streams, so it may be worth considering growth strategies and market linked strategies.”

For Abernethy, the trick is doing that in a way that ensures you don’t draw down your capital too early and protects against market risk.

“You want to lower the volatility of your investment returns so you have more certainty around the possible outcomes, especially if you’re investing in assets that are linked to the ups and downs of markets, like equities. What we’re seeing now are a lot of products that are focused on minimising volatility and products that minimise draw downs.”

3. How your needs may change during retirement

Your lifestyle goals and spending habits are likely to change as you get older, so you should also adapt your investment strategy.

“You’ve got to think about how you adjust your asset allocation as your needs change during retirement and that’s where advice is really important,” says Abernethy. “It can take into account not just the income stream you require, but also your goals, such as taking a trip every year.”

“Everyone’s different, so talking to a financial adviser is important.”

 

Source: Colonial

[1] Source: ATO: Self-managed super funds: A statistical overview 2012–13.

[2] Australian Federal Government: Intergenerational Report 2015.