Tag Archives: Retirement

Retirees, COVID-19, and options on the table during a market crash

By Robert Wright /April 14,2020/

The spread of coronavirus has been followed by some of the biggest plunges in share markets since the Global Financial Crisis (GFC), both here in Australia and around the world.

There’s nothing new about a market correction, but for those close to retirement it can be a nerve-wracking experience. If you’ve checked your superannuation balance over the last week, you may need a stiff drink.

For investors, or anyone with super, the general advice is to hold your nerve. Selling out at a low will lock in losses. Market corrections are quite normal and share market pullbacks provide opportunities for investors to buy cheaper stocks that will rise in value over time.

Yet “hold tight” may be easily said to younger or middle-aged Australians accumulating wealth in the super system; but what about our ever-increasing pool of retirees? Do they have the luxury or the option to weather corrections such as this?

For younger Australians currently making regular contributions to super, the impact of large sell off is minimised for two key reasons. Firstly, there is plenty of time to wait until markets recover, and secondly, they also may benefit from buying cheaper assets at the bottom of the cycle.

Yet for retirees there are no such luxuries. While markets are down, every dollar of income drawn on from super is crystallising the loss at a market low point, this is commonly referred to as ‘sequencing risk’ and is the reason why retirees need to be more careful than those in accumulation phase.

We as a species have evolved with embedded natural instincts to flight or fight in times of crisis. The tendency for retirees to watch their investments closer and have a greater care-factor for their investment outcomes makes a lot of sense – they are less capable of replacing these savings. However, as a result, there can be a flight to safety at the worst possible time. Known as ‘behavioural risk’ this is the observation that investors tend to switch out of risky assets near the lows of the market cycle.

The spread of coronavirus and the resulting fall in markets highlights the importance of investors understanding how much risk they are holding in their super or pension account. Australians in or approaching retirement, who have sat up and taken notice of the recent market plunge, may now be wondering, what is the right amount of risk to hold in their investments?

Our view is that the decision to reduce risk needs to be traded off with the impact of potentially lower long-term returns.

With record low interest rates and bond yields, the future return expectations on traditional safe-haven assets is lower than ever, strengthening the concept that if risk equals return, no risk equals no return! And with our life expectancy ever increasing with advances in medicine, science and technology, our retirement savings need to support our lifestyle longer.

Investors looking to reduce downside risk, but concerned about the impact on long term returns, could consider some of the following options:

• Diversifying into non-traditional income generating assets, such as infrastructure assets
• Remaining in equities, but adding protection
• Checking investments are being optimised for retirement tax treatment
• Remaining in growth assets but increase diversification into growth-alternatives
• Consider a strategy that dynamically adjusts the asset mix based on the environment

But most of all, with any of the above, our view is that right now is most likely not the right time to make a reactionary switch. Let the dust settle and move gradually over time.
Retirement is about enjoying life without the obligation to work. For your investments retirement is also about considering your own personal appetite and capacity for risk, the cost of suffering large portfolio losses, and the impact of not earning sufficient return.
It’s a balancing act, but with the right help, entirely achievable.

Source: AMP Capital

9 tips for a successful retirement

By Robert Wright /July 01,2019/

Despite the obvious benefits, only 44% of Australians over age 40 feel prepared for retirement. That’s why we’ve pulled together a nine-point retirement planning checklist to help make sure you’re on the front foot when it comes to financial planning for retirement.

1. Do I have to retire by a certain age?

The retirement age in Australia isn’t set in stone. You can retire whenever you want to, but your health, financial situation, employment opportunities, individual preferences, superannuation plans and partner’s needs could play a big part.

2. How much money will I need for retirement and where will I get it?

Saving for retirement can help you prepare financially for the future. Industry figures show that individuals and couples around age 65 who are looking to retire today need an annual budget of $43,317 and $60,977 respectively to fund a comfortable lifestyle (assuming they own their home outright and are in relatively good health).

To live a modest lifestyle in retirement, which is considered better than living on the age pension, an individual would need an annual budget of $27,648, and a couple an annual budget of $39,7753.

These figures are helpful when thinking of retirement planning strategies. Think about how you want to live your life in retirement and add up any potential income sources you may have to support yourself. This could include things such as a superannuation fund, government entitlements, investments, savings or an expected inheritance.

3. What recreational activities are on my to-do list?

When you retire, you’ll likely have more time for the things you enjoy most. Australians are living and remaining active for a lot longer – in your financial planning for retirement, spare a thought for your physical and mental wellbeing, and whether you’ll need a bit of extra money to do the things you enjoy, such as various sports and hobbies, travel and eating out.

4. How and when will I access my super?

Your superannuation plan can make a big difference to your financial planning for retirement, so it’s handy to have an idea of when you can (and will) access your super.

Generally, you can start accessing super when you reach your preservation age, which will be between 55 and 60, depending on when you were born. As for what you do with your super—which from age 60 is typically accessible tax free—you’ll have a few options.

If you want more financial flexibility, you could access a portion of your super balance via a transition to retirement pension (TTR), while continuing to work full-time, part-time or casually.

Alternatively, if you want to retire, you can choose to take your super as a lump sum, or move it into an account-based pension or annuity, if you want a regular income stream. There will be different tax implications for different people, and your super doesn’t guarantee an income for life, so it can be valuable to seek professional advice on superannuation.

5. Will I be eligible for government entitlements?

If you’re thinking about retirement planning in Australia, there are some government payments that you may be eligible for. Along with your savings, government benefits, such as the age pension, Carer’s Allowance and Disability Support Pension, could be an important part of your retirement income.

6. Will I be entering retirement debt-free?

An AMP.NATSEM report found nearly four in five people aged 50 to 65 have household debt. When planning retirement, you may want to consider if you’ll be carrying debt into retirement, and think about ways to reduce it sooner rather than later.

7. Do I have other matters that need addressing?

Insurance – You might have insurance, but it’s worth checking you have the right type and enough of it for your retirement planning. After all, what you require in retirement could be quite different to when you are working.

Investment preferences – Investments are part of many retirement planning strategies, and when you’re retiring, it’s worth reviewing your investment style and the options you’ve chosen. In retirement, you might also consider a more conservative approach, as when you’re younger you generally have more time to ride out market highs and lows.

Estate planning – On top of that, think about your estate planning needs. Have you documented how you want your assets to be distributed after you’re gone and how you want to be looked after if you can’t make decisions later in life?

8. Will I relocate or downsize?

Your living arrangements in retirement should be based on more than just your finances. Your health, partner, family and what activities you decide to pursue once you stop work will all play a part.

If you’re thinking of downsizing to release money from your property, planning ahead can help you feel more in control and provide greater peace of mind as you can assess any out-of-pocket costs in advance.

9. Do I want to make any final super contributions?

The more you can put into super before retiring, the more money you’re likely to have when you retire. And, if you invest some of your before-tax income into super (known as salary sacrifice), these amounts will generally be taxed at 15%, which is lower than the tax most people pay on their employment income. Keep in mind that even if you’re 65 or over, you may still be able to continue to make contributions to your super to fund your future retirement as well.

Source: AMP, June 2019

How much do I need to retire?

By Robert Wright /May 31,2019/

When you plan to retire will often be determined by whether you can afford to stop working and still have enough income to maintain your lifestyle. Latest figures from the Australian Bureau of Statistics show the majority of men (36%) and women (22%) chose to retire at the time when they became eligible to draw on their superannuation and/or the age pension. And their average age at retirement was 63.5 years.

If you’re planning to delay retirement until your super balance reaches an amount you can comfortably live on, just how do you determine what that target should be? There are a number of factors that will affect how far your money will go, including your life expectancy, how your money is invested and other choices you make for managing your income. But one of the most important steps to planning for a secure financial future in retirement is to be realistic about your living costs.

How your living costs might change

As you stop working and have more time to yourself, your routine will change and you might save on some costs as a result. Spending on transport could fall as you no longer have to commute. If buying lunch and takeaway coffees has been a daily habit while working, you could also make significant savings by leaving these out of your retirement routine. Other living expenses, such as buying groceries and clothes and paying household bills are likely to be much the same before and after retirement.

Thinking about how you’ll spend time in retirement and where you’re planning to live will also give you clues about how your spending might go up or down. If a few trips overseas are on the cards, you’ll need to allow for these occasional costs in your overall budget. But if you’re planning to limit travel to domestic holidays only, then you won’t need to allow for these expenses in your financial plan.

Start with a ballpark estimate

How much travel you plan to be doing is just one of the many daily and one-off costs taken into account in the Retirement Standard estimates for annual expenses. Updated every quarter by the Association of Superannuation Funds of Australia (ASFA), these figures can give you a rough idea of what you can expect to be spending day-to-day in retirement.

There are two estimates available, a higher one for a comfortable lifestyle and a lower amount for a modest lifestyle. As at December 2018, the amount you’d spend as a single person aged around 65 years enjoying a comfortable lifestyle is $43,317 and for a modest lifestyle the annual budget is $27,648. The estimate for couples is $60,977 and $39,775 for comfortable and modest lifestyles respectively.

To give you an idea of how differences between a modest and comfortable budget might impact on your retirement plans, the annual travel budget is a good place to start. A couple living modestly can expect to spend approximately $2,500, with no allowance for overseas trips. On a comfortable budget, a couple can splash out more than $5,000 each year on travel, with roughly a third going towards international travel.

The cost of lifestyle changes

Although it’s wise to build a budget based on what you expect to be doing in early retirement, your overall plan should also take into account potential for lifestyle changes as you age. Travelling for longer periods, dining out and entertainment and taking part in sports and hobbies could taper off as you grow older. Health and aged care costs, on the other hand, could make up a larger share of your budget in the later years of retirement.

A plan to see you through retirement

Your expenses are just one side of the whole budget planning process. Taking a good look at all your retirement income options is just as important to figuring out how much you’ll need and when you’ll be ready to take that step. From the age pension to the equity in your home to retirement income products such as annuities and account based pensions, there are all sorts of ways to support yourself financially towards having the lifestyle you want.  A qualified professional who specialises in retirement planning can support you in exploring these opportunities to manage your income for your whole retirement so you can make better choices for a secure financial future.

Source: FPA Money and Life, 02 April 2019

Six things to consider when investing for retirement

By Robert Wright /February 19,2019/

Many people aged between 50 and 65 are uncertain about being able to cover living expenses in retirement. In the past retirees could rely on the age pension to secure their retirement. Many retirees are now less confident about this source of support, as a growing number of baby boomers are retiring and the number of working people to support them is not keeping pace.

Governments are now encouraging Australians to save and invest on their own, so they can build income streams for retirement to supplement social security payments, and the earlier people focus on how to fund their retirement, the greater their capacity to respond.

How to set retirement goals

The first factor in retirement planning is establishing a retiree’s goals. Not everyone will have the financial resources to meet all their goals, so an adviser must help their client set priorities.

Retirement goals can be diverse, but most belong to one of three broad categories:

 

1. Essential needs

A person’s immediate need in retirement is to have an income to deal with the essentials in life, including food, housing, transport and paying regular bills. This represents the most important set of goals and requires the most pressing financial attention.

Confidence about the receipt of a steady cash flow becomes paramount. An adviser may recommend strategies centred on income-focused securities that deliver sustainable cash flow which keeps up with increases in the cost of living.

2. Lifestyle wants

Retirees may also want to set aside some capital to fund discretionary spending on goods and services such as holidays, hobbies, or the purchase of a new car. Attainment of these lifestyle wants enables a more enjoyable retirement, but the retiree doesn’t regard them as essential to their wellbeing. To help fund these lifestyle wants, investment strategies should grow capital steadily over time and have a low probability of producing a major or protracted decline in value.

3. Legacy aspirations

Finally, retirees with additional financial resources may aspire to leave a bequest for future generations.

Six things to look for when considering investment solutions

There are six key factors that advisors and investors should focus on when considering retirement investments.

1. A predictable and reliable stream of income: Consider strategies that aim to deliver a steady income in the form of coupons from quality bonds, dividends from shares or distributions from Real Estate Investment Trusts (REITs) and infrastructure.
2. Resilient returns: Focus on strategies that are designed to exhibit greater resilience in challenging market environments.
3. Inflation protection: It’s important that the overall portfolio seeks to grow with the cost of living to maintain purchasing power over time.
4. Tax effectiveness: Even though most retirees have an income tax rate of zero per cent in retirement, franking credits attached to the sustainable dividends of quality Australian companies represent a good additional source of retirement income. But it is important to watch out for potential regulatory change in this area.
5. Liquidity: It is easier to redeem money from liquid investments when a change in circumstances may require it.
6. Transparency of strategy: Seek strategies that are easy to understand and where the manager offers regular communications and insight into how funds are performing against retirees’ goals.

Set up success

The key is to understand retirement goals: what does success and failure look like? What do retirees want at this point in life and how might that evolve over time? What constitutes a ‘must have’; what is ‘nice to have’ and what is ‘aspirational’?

By answering those important questions, various goals can be matched with investment strategies that meet the unique challenges and risks of retirement.

 

Source: AMP Capital