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Are you adjusting your retirement expectations?

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A recent global survey conducted by HSBC[1]  found that only 21% of working age Australians believe they will be financially comfortable in retirement!

In fact, the report suggests, of those surveyed,

  • 58% believe they will have to work longer and continue working to some extent in retirement
  • 75% were willing to defer retirement for two years in order to have a better retirement
  • 65% are concerned about declining state pensions, like the Australian Age Pension because of mounting national debt and an ageing population.

This report paints a rather bleak picture of the future, not only for the baby-boomer generation, but also for Generation X (1966 – 1979), and Millennials (1980 – 1997).

The report sets out some practical steps when planning for retirement. While these are more directed towards the Millennials, I believe they apply to all generations:

  • Be realistic – start saving earlier, and save more
  • Consider different sources of funding – balance savings to spread risks and maximise returns
  • Plan for the unexpected – include worst case scenarios when planning
  • Embrace new technology – use online planning tools, and seek professional advice.

While on the topic of retirement planning, the Association of Superannuation Funds of Australia has just released its March 2017 Quarter Retirement Standard figures.

The March 2017 figures show a small increase in costs over the previous quarter’s figures. The factors that led to the most recent increases included petrol, medical services and electricity. Offsetting that were savings in international travel and accommodation, and fruit, with a small fall in clothing and footwear reflecting discounting during the post-Christmas sales.

The Retirement Standard budgets for March 2017 are:

Couple Single Female
Comfortable Modest Comfortable Modest
Weekly $1,150.13 $668.45 $837.41 $465.07
Annual $59,971 $34,855 $43,665 $24,250

So, my tips for those who are considering retirement in the foreseeable future;

  1. Consider deferring retirement if possible – even if it means continuing to work on a part-time basis for a while
  2. Understand exactly how much it will cost you to live in retirement – prepare a realistic budget, and account for contingencies (like new hot water system, or roof repairs)
  3. Know what government benefits you are entitled to
  4. Seek some really good financial advice from a financial planner experienced in retirement advice

As was highlighted in the HSBC report, starting to save earlier, and saving more, will be the secret to being best placed to enjoy the type of retirement you have always dreamed of.

 [1] Reproduced with permission from The Future of Retirement Shifting sands, published in 2017 by HSBC Holdings plc.

 

Source:  Peter Kelly | Centrepoint Alliance

Your Home – how attached are you?

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I am going to look at home ownership from an older generational point of view.

For the majority of age pensioners, their home is the largest asset they own and in most situations the most expensive asset. The costs associated with owning a home are not minor, from council rates which can be quite high depending on where you live through to water rates, the ongoing maintenance and of course the yearly home insurance premium.

For a single age pensioner, with very little other income outside a full pension, these costs can prove quite high, but in all my years of talking to retirees, suggesting a person sell their home and downsize is normally met with a scowl and that this is not an option.
Why is it not an option?

For a large number of people, the house they currently live in has been their home for a lengthy period of time. It is where they have raised their children, it contains special memories or it could be the last place they lived with their spouse who has since passed away. Like their neighbours, they feel secure, they are comfortable with the task of travelling to their local shopping centre or their doctor is close by. Last but not least, if they have extra cash after selling their home and buying a smaller home would this affect their pension?

Accessing the equity in your home via a reverse mortgage could certainly be an option. But again the fear of making the bank your silent partner again, holding mortgage papers on your house can be a very daunting thought for an older single age pensioner.

Trying to educate and change a person’s mind and attitude who maybe in their eighties in relation to home ownership and the age pension is not easy. However, for a person in their fifties and sixties approaching their retirement, I believe this education and attitude change is a must, going into the future.

Source: Mark Teale | Centrepoint Alliance

Feel like a sandwich?

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No, I am not referring to a piping hot ham and tomato toastie with cheese oozing out the middle, but rather I am referring to your current lifestyle.

Recently I made an observation about the number of grandparents looking after young children in a local park, and how those of us approaching retirement today often find ourselves playing the role of ‘carer for the young and old’.

For those of us in our 50’s and 60’s, we have become the ‘sandwich generation’. We are caught between our children and their growing families, and in many cases, our own parents who are approaching their twilight years.

As we approach or enter retirement, many of us still have one or both parents alive. This is a product of an increasing life expectancy. According to the World Health Organization, Australia ranks 4th in the world for having the longest average life expectancy.

With the added pressure on young families to have two incomes simply to be able to afford to enjoy the lifestyle they desire, coupled with the spiralling costs of child care, today’s 50 and 60 years olds are also becoming the part-time or even full-time carers for their grandchildren.

So, where does this leave today’s ‘young’ retirees?

They find themselves providing increasing care for aged parents, whose needs for assistance will only increase with age and, at the same time they are spending time caring for their grandchildren, even if that is just picking them up and providing after-school care.

It’s fair to say that most grandparents love to spend time with their grandchildren – watching them grow and learning to master new skills. But, this can be exhausting, particularly as grandparents start to age themselves.

When coupled with caring for older parents, that can be even more demanding.

Perhaps, for those of us with older parents, some time spent finding out what services are available in the local community is a good starting point. Whether it is the need for help when cleaning the house, mowing the lawns, administering medication, or otherwise helping to manage daily living, exploring what is available, on a short-term or longer-term basis, is worthwhile.

We need to take time out for ourselves, while still acknowledging the need to provide support and assistance where we can.

Drawing on the support of other agencies and services when the need arises should never be seen as a weakness on our part. After all, and despite the perceptions of our families, we are still only human!

 

Source:  Peter Kelly | Centrepoint Alliance

Is the 4% retirement rule right for you?

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Meet the 4% rule

The 4% rule has been around for a long time. It was introduced by financial advisor Bill Bengen in 1994. It says that you can withdraw 4% of your nest egg in your first year of retirement, adjusting future withdrawals for inflation. This withdrawal strategy assumes a portfolio of 60% in stocks and 40% in bonds, and it’s designed to make your money last through 30 years of retirement.

Here’s how it works: Imagine that you’ve saved $500,000 by the time you retire. In your first year of retirement, you can withdraw 4%, or $20,000. In year two, you will need to adjust that rate by inflation. Let’s say that inflation over the past year was at its long-term historic rate of 3%. You’ll now multiply your $20,000 withdrawal by 1.03 and you’ll get your second year’s withdrawal amount of $20,600. The following year, if inflation is still around 3%, you’ll multiply that by 1.03 and get your next withdrawal amount of $21,218.

So what’s the problem with this seemingly super-helpful rule? Well, unfortunately, several things.

Interest rates have fallen: For starters, remember that the rule was created more than 20 years ago, when interest rates were higher. Mortgage rates in 1994 were in the 8% range. In such an environment, the bond portion of a portfolio would have been generating more income than bonds today.

It assumes a certain asset allocation: Then there’s the rule’s assumption that your portfolio will be split 60-40, respectively, between stocks and bonds. You might not have or want that allocation. If your portfolio is split 50-50, or you have 75% of it in stocks, then the 4% rule won’t work as advertised.

People are living longer: Many people are living much longer lives. The 4% rule aims to make your money last for 30 years, but if you retire at 62 and live to 96, your retirement will be 34 years long and you might be quite pinched in your last years.

Should you use the 4% rule?

Clearly, the 4% rule is flawed. But you don’t necessarily have to throw it out altogether.

If you think you stand a decent chance of having a retirement that’s more than 30 years long, you can be more be more conservative, perhaps using a 3% or 3.5% withdrawal rate in the early years of retirement. Don’t be too rigid about it, though. If the market grows briskly in your first few years, you can re-evaluate and perhaps increase your withdrawals.

It is a good idea to reassess your financial situation regularly during your retirement. For example, if you’re 80 and you don’t think you’ll be around in a decade and your coffers are rather full, you could start withdrawing and enjoying more each year, or just plan to leave more to your loved ones.

We all need to plan carefully for retirement.

 

 

Revisiting conditions of retirement

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A self-managed super fund case study the ATO has published highlights the importance of determining whether a person has officially retired for purposes of the Superannuation Industry (Supervision) Regulations 1994 (SIS regulations).

You may question whether it’s necessary to revisit something that has been in legislation for many years. The answer lies in the fact that the tax reforms will affect whether particular payments or pensions are measured against an individual’s $1.6 million pension transfer balance cap. This is particularly the case for transition-to-retirement income streams (TRIS) paid to anyone after reaching preservation age, as they may not realise retirement has or has not taken place.

The ATO’s case study involves Charlie, who is 57 and an employee, as well as a beneficiary of a discretionary trust, which carries on a smash-repair business. Charlie ceased employment with the trust and received his accumulated leave entitlements. As he was no longer considered employed, the trustees were satisfied that he never intended to be gainfully employed for more than 10 hours each week. After his retirement, he continues to perform substantial duties for the trust and receive distributions of trust income. The case study does not provide detail of what those duties are.

In its analysis of the situation, the ATO considers three issues:

  • Whether Charlie meets the definition of retirement in SIS regulations 6.01(7) for someone under age 60
  • The receipt of passive income from the discretionary trust
  • The substantial duties being performed by Charlie in relation to a business operated by the family trust.

The ATO points out that any decision on whether retirement has taken place depends on the circumstances surrounding the case. In Charlie’s situation, the distributions from the family discretionary trust would not normally be taken into account as part of any decision because they are not ordinarily linked to gainful employment. However, the link Charlie has with the business carried on by the family discretionary trust influences the amount of the distribution he ultimately receives. Therefore, the ATO’s interpretation of gainful employment and retirement is broad enough to include activities that could be attributed directly or indirectly to the receipt of the relevant income.

In Charlie’s case, if no retirement is considered to have taken place, the fund may be in breach of the preservation rules and expose itself and Charlie to tax penalties.

Definitions are pivotal

The definitions of retirement and cessation of gainful employment are pivotal to whether a person has met a condition of release in Part 6 and Schedule 1 of the SIS regulations. Retirement is defined in SIS regulation 6.01(7) and gainfully employed is defined in SIS regulation 1.03(1).
The retirement definition is split into the period between preservation age and age 60, and after 60.

If a person has reached preservation age (currently 56) and is younger than 60, retirement occurs when the person has ceased gainful employment and the trustee is reasonably satisfied the person intends at that time never again to be gainfully employed on a full-time or part-time basis. The words full-time and part-time are defined in SIS regulation 1.03. In practical terms, at the time of retirement, the person must not intend to work any more than 10 hours each week. This does not prevent a person from returning to work on a more substantial basis; however, as the case study indicates, retirement should be the severing of the gainful employment link on a full and effective basis.

Once a person is 60 or older, retirement is where gainful employment has come to an end and they were at least 60 when that employment ceased. There is a second arm to the post-60 retirement definition in paragraph (b)(ii), which operates where gainful employment has come to an end, presumably prior to age 60, and the trustee is reasonably satisfied that the person intends never again to become gainfully employed, either on a full-time or a part-time basis. In most cases, a member will meet the requirement that they ceased at least one means of gainful employment after reaching age 60 and be considered retired. There is no requirement that all gainful employment cease, as it is sufficient to cease just one employment arrangement after reaching age 60 to meet the retirement definition.

Broad enough to cover most activities

SIS regulation 1.03 defines “gainfully employed” to mean “employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment”. This definition is broad enough to cover those activities someone undertakes for which a payment is received. It includes anyone engaged as an employee, contractor, professional, religious calling, and so on. The amount of the payment, the level of effort involved and whether it results in a profit or loss is immaterial.

Gainful employment does not include activities for which an allowance or reimbursement is paid for an expense that is merely a coincidence to the activity. This would occur in the case of voluntary work where a person may be reimbursed, in part or in full, for the cost of meals, travel and other incidental expenses. It would also not include a person receiving a government allowance for looking after a disabled relative or a relative who undertakes child minding on an ad hoc basis. As an aside, prisoners who receive an allowance for making goods when serving their time are also not gainfully employed under the definition.

Now let’s look at the impact of the retirement definition on the superannuation reforms. These reforms impose a transfer balance cap of $1.6 million on amounts transferred to commence an income stream from July 1, 2017, and the value of income stream investments as at June 30, 2017. Where the $1.6 million cap is exceeded, a penalty tax applies to any excess. The value of a TRIS is excluded from being measured against the transfer balance cap, as the income on investments supporting the stream will be taxed at 15 per cent from July 1, 2017. However, once a person in receipt of a TRIS meets a condition of release, such as retirement or reaching age 65, it will auto-convert to an account-based pension that is counted against the $1.6 million transfer balance cap.

Anyone who has commenced or is planning to commence a TRIS and is nearing age 60 or over that age needs to be aware of the issues that could arise if they are nearing retirement or age 65. It is worthwhile to have the situation reviewed so they don’t fall into the trap of auto-converting to an account-based income stream. Once the stream has commenced, an alternative for anyone approaching retirement could be to fully or partially commute it to a lump sum and return it to accumulation phase in the fund to help avoid the penalty tax.

The lesson to be learned from not understanding what is meant by retirement for superannuation purposes and, in the broader context, conditions of release, may bring unexpected outcomes in the new world of superannuation reform post June 30, 2017. Anyone who has commenced or will commence a TRIS should be careful that they don’t end up having a super crash.

 

Source:  Graeme Colley | Executive Manager, SMSF technical and private wealth at SuperConcepts