 |
 |
RETIREMENT & LIFESTYLE PLANNING | |
|||||||||||||||||||
|
|
|||||||||||||||||||||
| ISSUE - 21 - Summer 2005/2006 | |
|||||||||||||||||||||
|
|||||||||||||||||||||||||||||
Your Money or Your Life: a three-step plan for financing your retirement
Organising your finances for retirement often feels like taking medicine. We're told so often that we have to do this that our inner child rebels, we procrastinate, we become our own worst enemies.
There are many other valid reasons for avoidance. These include guilt, feeling overwhelmed by the scale of the task, lack of access to good advice, lack of trust in advisers, lack of time – or all of the above!
So how do you get past this block and kickstart yourself on the road to financial independence?
The popular myth has been that the purchase of the family home is the greatest financial decision you will make in your lifetime. But funding the second half of your life is even more significant. As recent advertisements by industry superannuation funds have shown, a small percentage point or two in fees, and you are looking at hundreds of thousands of dollars extra or less income. If you accept that the decisions you make about funding your retirement years are of primary importance, it follows that your planning will require more than a cursory glance.
The first and best decision you can make is to set aside half a day to be totally devoted to making a start. Commit to this and the rest will follow.
What you will need
Gather together the main financial records before you start, so your four-hour blitz is not frittered away on wandering around the house looking for recent financial information, such as a health insurance invoice. To gain a good understanding of your financial position you will need to have your most recent:
• tax return
• personal bills
• credit card statements (three months is a good start)
• bank statements
• superannuation fund statements
• current investments statementsand a realistic idea of the market value of your assets (car, home, other).
The purpose of the half-day is to provide the time needed to take a proper look at all the different aspects of your life in order to work out how to fund yourself for the next 10, 20 and 30 years.
By taking this time out, you will be able to:
• identify any further research you may need to do
• start to access free and objective information
• make a basic budget and plan.It will then become an easy matter to review annually, say every January, how your assets have increased and how your expenses are matching your current and expected income.
Remember financial planning is not just for the rich – it is even more important for those of us who are less well off, so not a cent is wasted on inappropriate fees or underperforming investments.
And it is not rocket science. Understanding retirement income streams and changes to tax and superannuation legislation may be complex – but understanding what you own, earn and spend is not – and, best of all, the sense of relief is magnificent when the cloud of uncertainty and guilt over financial issues lifts.
Onto the three steps. These are:
1. Stocktake – where am I?
2. Projection – what are my future income needs?
3. Making connections – will I be able to fund future needs?1. Stocktake
This is a snapshot of your current financial situation. On this page there are two simple tables to get you started. One is for current income and expenditure, the other a listing of your assets and liabilities. These tables are also online at www.aboutseniors.com.au (see resource box) for those who like the immediacy of Excel spreadsheets.
Using your collected financial information, fill in, as best you can, each of the rows, adding and subtracting as indicated at the end. If you do not have all the information required then just guess – a close but incomplete snapshot is better by far than giving up. You can always supplement this table with more accurate figures when you have unearthed them.
The point of these snapshots is to show at a glance what you are earning and spending, the net amount of money you own, the amount you have available to save, and the current value of your retirement savings.
2. Projection
What will your future income needs be? Last issue we looked at the detail of how you might wish to live in retirement, and now is the time to cost this.
Start by costing a staged transition-from-work scenario. Project your income based on a three-day working week:
• take 60 per cent of your current salary and enter this into the income box in the table on this page
• adjust transport costs to exclude 40 per cent of work-related expenses
• increase household expenses to cover extra light, power etc. for more time at home
• allow for a decrease (particularly in the phone bill) if adult children are likely to move out during this time.Those at a loss to work out exactly how much you spend on whatever may find budgets for retirement on the ASFA website of assistance.
You may see, at first glance, that there is a nasty black hole which indicates you can't fund your anticipated lifestyle on this reduced income. This is very common, and hardly surprising, so you may need to consider converting at least a portion of your superannuation into a retirement income stream. At age 55, this may be possible. How much will you need and what is the most suitable stream?
By assessing this first year projection you will quickly see whether you have a surplus or shortfall which needs to be addressed. Multiply this figure by five for a short-term indication of how you are travelling.
3. Making connections
By now you have a clearer idea of your current financial situation and a ballpark estimate of your income needs and your expenses for the first five years of your (semi) retirement.
The next step is to work out whether converting super is the best solution, or perhaps working longer, or finding out more about Centrelink options and benefits or a combination of these strategies. How do you do this, and who can assist you?
If you've read Alan Kohler's article on financial planners you may be disinclined to trust anyone, but it's not all doom. There are excellent free and objective services, including Centrelink's financial information services and the National Information Centre on Retirement Investments (NICRI). Other resources to help you understand all your options are listed in the box at the end of this article.
You may also wish to pay your accountant a fee per hour to have some of these options explained in plain English, or you may wish to avail yourself of some excellent online calculators to do your own sums.
Next steps – what do I now need to do to close the gap?
So far this projection has previewed a five-year plan. A fuller financial projection should be extended to cover your expected life span. The current life expectancy for Australians is 78.7 years for males and 81.8 years for females. Subtract your current age from the life expectancy for your gender, and you will have an idea of how many years of income your nest egg and earnings will need to cover. Convert your superannuation into an expected income stream and see if it will make the distance.
This is not as simple an equation as we would like, because most Australians will fund their retirement from a combination of Centrelink benefits and an income stream To ascertain the right ‘mix' for you, you are likely to need professional assistance.
But to start you thinking, an example of how a projected black hole can be supplemented by an income stream, but with the bulk of superannuation still invested and growing: see Jill's dilemma below.
Of course, not everyone will see the ideal result when they do their sums. Next issue, we'll look at how to live with this less-than-ideal reality.
More
@boutSeniors is a seniors' portal on the internet with retirement, budgeting and income streams content and links
Centrelink is not just for those expecting to receive social benefits. It is an agency which provides useful and objective planning information for all Australians. Provision of this advice can be by a face-to-face appointment or via the website
Ph 13 10 21
Web www.centrelink.gov.au or phone 13 1021
FIDO is the consumer site for the Australian Securities and Investments Commission (ASIC). It also contains useful calculations and financial tips and safety checks.
The National Information Centre on Retirement ( NICRI) is a free, independent, confidential service which aims to improve the level and quality of investment information provided to people with modest savings who are investing for retirement or facing redundancy. The website contains many explanatory downloadable documents on retirement income options, or you can speak with a consultant.
Ph 1800 020 110
Web www.nicri.org.au
The Public Trustee is responsible for the making of wills, the management of trust funds, assets, deceased estates, powers of attorney and other related legal and financial services. Each state has its own Public Trustee, but the NSW website is particularly good for life stage planning.
ASFA – The Association of Superannuation Funds Ltd. is a non-profit, non-political, national organisation promoting and researching for Australia's superannuation funds and their members.
Web asfa.com.au
Jill's dilemma
Jill is a librarian aged 53. Divorced, she lives in a $450,000 home which has no mortgage. Jill holds $50,000 in shares and has accumulated superannuation of $52,000. Her current living expenses are $38,000 per year. She hopes to transition into retirement when she turns 55 by reducing her working days to three per week, which will reduce her income to $23,000 per annum. She anticipates her living expenses will be about $31,000.
What are her options?
Jill needs to consider her objectives carefully as her existing financial resources may not be adequate to meet her lifestyle goals. Her current savings are inadequate to support her and she will be reliant on the age pension benefits , but not entitled to receive these until she reaches age 65. The inflationary effect on her lifestyle expenses will mean her existing investments will be exhausted by the time she reaches age 63. What does she live on then? This concern will require Jill either to extend her working life, further reduce her expenses or utilise the equity in her home to fund the shortfall, or potentially all of the above. A female aged 55 has a statistical life expectancy of 29 years but the reality is that she could live longer and not have any support other than the age pension benefits.
Jill will clearly use up the equity in her home and her savings before she reache s her statistical life expectancy , so she needs to consider other options and be prepared to trade off some of her objectives to secure her financial security. For instance , she might :
• Delay her transition until age 60 , giving herself with more time to work her investments harder and less time spent in retirement with no personal exertion income. This is the trade - off decision that she will need to make .
• C onsider the generous co - contribution offer into superannuation . By contributing $1000 p . a . into superannuation she will qualify for a government - sponsored contribution of up to $1500 for each year she contributes.
• Try salary sacrificing part of her salary into her employer superannuation, thus reducing tax (h er current marginal rate of tax is 30 per cent compared to the contributions tax of 15 per cent) .
• Use the higher risk strategy of negative gearing into blue chip shares over the next seven years. Any tax payable on the investment income would be offset by the imputation credits and the interest expense on the borrowings would be tax deductible .
• U se the equity in her home through a reverse mortgage loan. This allows her to continue living in her home whilst having the funds to live her chosen lifestyle. No interest is payable to the lender until Jill either dies or bequeaths her home. This strategy needs to be carefully discussed with family members as it may affect any estate planning already in place.
Most importantly she should seek objective professional advice sooner rather than later .
Suzanne Siah , Intralink Financial Solutions Pty Ltd
Email ssiah@intralink.com.au
|
|
|
Your Life, Your Retirement. PO Box 1150N Armadale North Victoria 3143 Australia
Phone: 613 9824 6901 - Fax: 613 9824 6362
Email: publisher@yourlifechoices.com.auIS PUBLISHED BY
Copyright Retirement Publishing Pty Ltd 2001 -- ISSN 1031-6620 ACN 088 049 218
ALL RIGHTS RESERVED No parts of this publication may be printed, reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the permission in writing from the publishers, with the exception of short extracts for review purposes.
PUBLISHERS NOTE While every effort has been made to ensure the accuracy of the information given in the publication, the publishers do not, in any way accept liability for inaccuracies or for loss of any kind, whether caused through editorial matter or in the form of claims made in advertisements.
Your Retirement is published by Retirement Publishing Pty. Ltd.
IMPORTANT DISCLAIMER No person should rely on contents of this publication or website without first obtaining advice from a qualified professional person. This publication is sold on the terms and understanding that (1) the publisher, authors, consultants and editors are not responsible for the results of any actions taken on the basis of information in this publication, nor for any omission from this publication; and (2) the publisher is not engaged in rendering legal accounting, professional or other advice or services. The publisher and the authors, consultants and editors expressly disclaim all and any liability and responsibility to any person, whether a purchaser or reader of this publication or not, in respect of anything, and of the consequences of anything done or omitted to be done by any such person in reliance, whether wholly or partially, upon the whole of any part of the contents of this publication. Without limiting the generality of the above no publisher, author, consultant or editor shall have any responsibility for any act or omission of any author, consultant or editor.
Financial
Security
