RETIREMENT & LIFESTYLE PLANNING      Baby boomers need to plan their transition into retirement for  Financial Security     Active Health Management  Emotional Wellbeing  Maximum Self Esteem ISSUE - 22 - Autumn 2005/2006

Retirement savings

How to double your nest egg

It's easy to embrace retirement planning with a lot of money in the bank and a robust share portfolio.
But what if you're one of the majority of Australians who simply don't have sufficient savings to live on in your later years? The answer is, don't panic – because strategies like the five Kaye Fallick describes here can dramatically improve your financial future.

In the last issue of Your Life we looked at a three-step method of financing your retirement. But what happens when, after you've done the sums, you find you simply won't have enough to survive on if you stop working? Does this mean you have to work for the term of your natural life – no longer three score years and ten, but now with increased life expectancy, probably 80 years, 90, perhaps even a century? And who's going to employ you when you're 101? Sound like bad news?

No, firstly because increased longevity has to be good news – you're going to stick around longer, that's the most important thing, so the challenge is to make your money last. And there is always SOMETHING you can do about the yawning black hole which currently represents your retirement savings. In fact there are at least five useful strategies you can adopt immediately to produce a far better lifestyle in the second half of your life.

Let's start with a reality check. These five strategies are not magical remedies for the black hole. They are ways of turning a negative scenario into a positive one – but like all other major issues in life, there is no quick fix. These strategies will require a sustained adherence to better money management policies.
But for those willing to put in the effort and change bad habits, they can and will produce a substantial turnaround in your retirement funding prospects.

If you are prepared to make a genuine commitment to getting your financial act in order, and to exercise discipline, you will need to gain an understanding of the key aspects of retirement funding. The good news is that it's not rocket science, more like common sense. And, far from being alone, you're in great company – in fact the current average annual income per Australian retiree is $22,380 1 , so if we believe a ‘good' retirement is funded by 60 per cent of pre-retirement income, the vast majority of Australians have underestimated or failed to save for a ‘liveable' retirement.

Now is as good a time as any to decide if you want to stick with the crowd (safe, but not very fulfilling), or make a break from bad habits, and get your act together! In fact, for today's Australians, responsible ‘retirement planning' is less about planning to stop work, and more about sustainable and efficient money management for the rest of their lives, working or not. Many of us will work longer, not only for the extra income, but most importantly because we like what we do, the social connection is important, and doing something meaningful is the best reason to get out of bed every day!

So if you do wish to increase your later-life income, how do you get started? First, create a snapshot of how much you are likely to have.

If, as discussed in the last issue of Your Life , you do require about 60 per cent of your immediate pre-retirement income to live on when you stop work, how can you achieve this? To help you do your sums as we explain the five strategies, we will follow Geoff's situation. Geoff is a typical Australian male, in fact he is so typical we have given him the average salary ($897 per week, or $46,644 per annum) 2 , and superannuation savings of $122,300, which are average for his age segment and gender. 'Average' Australians can, therefore, benchmark their situation against his. If he was to retire on 60 per cent of his current salary, he would need about $27,986 per year. This is seven thousand dollars less than the suggested amount required for a ‘comfortable' lifestyle (see box on page 51). We have chosen the example of someone who is single because too much retirement planning literature seems devoted to cosy couple planning, and too little recognises the growth of the single household as typical of a large proportion of the population aged over 50. There are blank rows in Geoff's planning for you to enter your own details and test how a few changes to your current financial arrangements might dramatically increase your final income possibilities.

So rather than berating yourself for being a naughty baby boomer and spending too much, let's look at how your savings scenario might change using one or, better still, two or more,
of the following options.

In a nutshell, to increase your retirement income, you will need to:

1. save more

2. cut all fees

3. convert savings into super

4. work longer

5. downsize your house.

1. Save more

Easier said than done, you moan. But not impossible. Sadly, government, the financial services sector and consumers all seem to be in denial regarding the negative effects of rampant consumerism on our economy. The Federal Treasurer, the Hon. Peter Costello, continues to boast about the Howard Government's excellent management of the economy when much of the growth has come from overspending by consumers who have credit card bills beyond their control, and are now dipping into equity in their houses. Financial services companies are speaking with forked tongues, encouraging saving for retirement on one hand while offering higher and higher credit card limits on the other. And consumers have seized the opportunity to “have it now” because “you've worked for it, and you deserve it”. Well if you'd really worked for it, you wouldn't need credit to pay for it.

Anyway, enough of the Sermon on the Mount, what is the best way to save more? Simple – spend less. And where better to start than the credit card bill? Take your credit card statements for the last three months, and use three different coloured highlighter pens to code your expenditure. Green is essential (rates, power, petrol etc.). Orange is negotiable (food, clothing, books). Items which are negotiable may be necessary, but could be purchased more cheaply. For instance, we all need food, but were the Baci chocolates really essential?

And pink is totally discretionary spending – movie tickets, wine, holidays. Total the different colours and assess the percentages of your spending on the different categories. Say 35 per cent is essential, 45 per cent negotiable and 20 per cent discretionary. Set yourself a target to hold the essential, reduce the negotiable by five per cent and discretionary by five per cent. This should result in the next quarter's credit spending being reduced by 10 per cent – a great start to a new savings regime.

2. Cut all fees

Cutting fees is one of the most overlooked strategies connected with retirement savings. Think of the fees you pay as a cancer in the body of healthy retirement. How do you cut out the fees to get your financial health back and your savings' energy up? The first fee you should never get saddled with is the 18 per cent or so credit card interest. Consider using a short-term loan at a lower interest rate to wipe out your credit card debt, then give your card a holiday – in a plastic bag in the freezer. This will allow you and your card to cool down. There is little point getting another loan only to put more goods on credit, so only use this strategy if you are serious about wiping out debt and not reinstating it. Your future goals will be to pay any credit card debt on time, and never again pay interest.

Many Australians by the time they reach age 55 have worked in different workplaces and their superannuation has been put into different funds. If you have a few balances, and think ‘not putting all your eggs in one basket' is a good strategy when it comes to super funds, think again. When every penny counts, having small amounts in a range of different funds may be costing you money. Consider consolidating these savings, but check any potential exit fees before you do.

Fee structures for retirement savings vehicles such as managed funds and superannuation can be complex, hard to isolate and therefore hard to measure. If you have invested on the advice of a financial planner, ask your planner to give you a breakdown of these fees including the Management Expense Ratio (MER), upfront fees, buy/sell spreads and any exit fees, as well as any additional commissions the planner may be earning from this investment. Then ask your adviser to model a comparison, with a fund which is rating well (for super check out www.superratings.com.au or www.selectingsuper.com.au) to see how your current fund rates and what might be a better option. If you are not using a financial planner, pay your accountant to spend an hour or so with you comparing rates. This is not niggling about a minor amount – recent modelling offered by the industry super funds shows their members are often better off by more than $100,000 by investing long term in a low-cost super fund. Similarly with managed funds it may be a better strategy to purchase directly from the fund than via an adviser who will receive years of fees from your investment.

Bank account fees are another area of potential savings – as are mortgage interest rates – there are many places you can start to compare the fees charged on bank accounts and mortgages, but a good website is
www.infochoice.com.au/banking

Let's estimate that, on top of his 10 per cent saving on credit card expenditure of $24,000 per annum, Geoff has also saved an extra $5 week by reducing fees on a managed fund.

3.Convert your savings into super

Putting more money into super is just about the fastest and most tax effective way to improve your prospects of a comfortable retirement.

Geoff's savings of $2400 per annum have now been topped up by an extra $5 per week from cutting fees, boosting his annual total saved to $2660. He chooses to use $1660 of these savings to salary sacrifice $31.90 per week, the remaining $1000 he commits as a co-contribution to his super fund. On his salary level, the federal government will match this co-contribution with $568.

These dollars do NOT have to go into super – they could well be invested in many other ways, but there is no doubt you will get more bang for your buck by utilising the super incentives put in place by the Federal Government. Given the tax penalties if you withdraw from your super fund, your saving is in relatively ‘safe' hands.

4. Work longer

It's a no-brainer that working longer means you will earn more money. But the news is better than that. Working longer means more dollars if you go beyond the age at which you might apply for the Age Pension as every year you work beyond the age at which you could have drawn a pension means you may be able to apply for the pension bonus scheme. By choosing to work until 70 (i.e. five years beyond pension age) singles can receive the maximum entitlement of $30,531.70. You MUST however register for this amount, and cannot claim it until you retire and apply for the pension and the bonus. Unfortunately, at his salary level, Geoff does not qualify for the pension bonus scheme, but will reap the obvious benefits from working longer – by staying more active, and retaining more purpose. And the financial reward is the significant boost to his nest egg with the extra five years' income. (See Table 3.)

5. Downsize your house – literally, or with a reverse mortgage

Planning your housing needs ahead of when you might need to move/change your situation will give you a better idea of your options. Downsizing might be physical – you literally sell a larger, more expensive house and buy something cheaper, pocketing the difference. Or it might mean you consider using an equity release product to fund your later years. These products are more fully explained in the special report beginning on page 53. Like most mature Australians, Geoff is happy to stay in his current home, but plans at age 70 to access $20,000 to purchase a caravan and hit the road for a few months each year. He is also

prepared to withdraw a further $20,000 in his 80s should he require extra dollars for home maintenance, medical bills or a dream holiday.

The ramifications of supplementing his income with a reverse mortgage product are also shown in Geoff's plan.

The application of the above suggestions will obviously vary from individual to individual, but hopefully give you a good sense of how you can fine-tune your own planning to take advantage of some of the ways of increasing your retirement savings. Delaying full-time retirement is a wonderful way of adding dollars to the kitty, but not available to all for reasons of health, employment opportunities or family obligations. Next issue we'll look at how, when you do retire, you can access your superannuation via a retirement income stream.

Footnotes

1. Citibank Retirement Index, January 2006, conducted by Newspoll November 2005.

2. Australian Social Trends 2004, Household income , Australian Bureau of Statistics.

But I still don't understand how much I will need

Using a formula of 60 per cent of pre-retirement income is one indicator of living expenses in retirement. Other useful benchmarks are:

•   The Age Pension. The full Age Pension is currently $12,992 for singles and $21,694 for couples.

•  The Westpac-Association of Super Funds of Australia (ASFA) living standard benchmarks model a ‘modest' and ‘comfortable' living standard for retirees. Their latest research suggests the following incomes per annum:

Modest lifestyle – single	$17,756
Modest lifestyle – couple	$24,919
Comfortable lifestyle – single	$34,563
Comfortable lifestyle –couple	$46,297

A breakdown of the types of costs associated with these incomes can be found on the ASFA website at www.superannuation.asn.au .

Retire debt first!

Debt in retirement is not advisable. One huge issue people have in retirement is losing the ability to produce their own income (PAYG income). They usually have to drop dramatically in income and having a debt to meet can be very burdensome. Usually people have debt due to investment properties. One way to close out any debt is to sell investment properties and roll the difference into super as an undeducted contribution (no contributions tax)... but check with your accountant or financial adviser if this makes sense for you!

Table 1

Geoff is 59. He lives by himself in a villa unit valued at $330,000 which he owns outright. His annual salary is $46,644. His current superannuation balance is $122,300. If he retires at 65 and does NOT adopt the five suggested strategies, this is how his nest egg will grow.

Geoff's age	$ value (to the nearest dollar)
Super balance	SGC contributions	Savings before interest	Increase due to compounding – interest rate of 8%
59	122,300	3568	125,868	135,938
60	135,938	3568	139,506	150,666
61	150,666	3568	154,234	166,574
62	166,574	3568	170,142	183,753
63	183,753	3568	187,321	202,307
64	202,307	3568	205,875	222,345
65	222,345	3568	225,913	$243,987

Note: The growth of Geoff's nest egg due to interest on his retirement savings has been estimated at a conservative 8 per cent per annum in all three tables.

Table 2

Age 59 start point: a nest egg of $122,300.

Start saving

By saving 10 per cent on his monthly credit card expenditure of $2000, plus $5 per week on other fees, Geoff now has an extra $2660 to invest in super per year.

He will convert these savings into super as follows:

Salary sacrifice – $1660 per year
Co-contribution for five years – $1000 per year plus Federal Government payment of $568.

Geoff's age	$ value (to the nearest dollar)
Super balance	SGC contributions	Salary Sacrifice	Govt. Co-Contrib.	Savings before interest	Increase due to compounding – interest rate of 8%
59	122,300	3568	1411	1568	128,847	139,155
60	139,155	3568	1411	1568	145,702	157,358
61	157,358	3568	1411	1568	163,905	177,018
62	177,018	3568	1411	1568	183,565	198,250
63	198,250	3568	1411	1568	204,797	221,181
64	221,181	3568	1411	1568	227,728	245,946
65	245,946	3568	1411	1568	252,493	$272,692

Table 3

Geoff plans to work longer to supplement his retirement income. As long as his health and boss agree, this is how it will add to
his savings.

Geoff's age	$ value (to the nearest dollar)
Super balance	SGC contributions	Salary Sacrifice	Govt. Co-Contrib.	Savings before interest	I ncrease due to compounding – interest rate of 8%
65	272,692	3568	1411	1568	279,239	301,579
66	301,579	3568	1411	1568	308,126	332 776
67	332,776	3568	1411	1568	339,323	366,469
68	366,469	3568	1411	1568	373,016	402,857
69	402,857	3568	1411	1568	409,404	442,156
70	442,156	3568	1411	1568	448,703	$484,600

Pension bonus scheme not applicable in Geoff's case.

Downsize the house/use equity release product

•  Age 70, $20,000 equity release

•  Age 80, $20,000 equity release

Total nest egg available to Geoff after implementing the five strategies $524,500

Conclusion

Geoff will only get a part pension under the assets test at 65, and will get a very small amount of age pension at age 70. Nearly all his income at age 70 comes from the superannuation (allocated pension).

At age 65, if he opted to do nothing extra to boost his retirement savings, Geoff's nest egg of $243,987 means he would receive a part pension of $8639 and would need to supplement with an income stream from his superannuation of about $14,098, to total $22,737 income per year until his mid-eighties.

This is based on Geoff taking the minimum amount of allocated pension. If he took the maximum, his income would be $33,276. |It is rarely wise to take the maximum as it erodes the value of the allocated pension by taking too much of the capital and it would probably be reduced to zero before Geoff reached his statistical life expectancy. He could take an allocated pension somewhere in between $14,000 and $24,000 to suit his lifestyle.

By working until 70, using the strategies outlined, Geoff retires with a nest egg of $484,600. This has almost DOUBLED his anticipated retirement savings and will enable him to enjoy a greatly enhanced lifestyle and sense of independence in his later years. This will enable an income of about $32,941 (minimum allocated pension) or $58,560 (maximum) per year until age 90, and supplementing it with two equity release drawdowns will add the icing to his retirement cake. He may, of course, decide he does not need to do this.

Disclaimer: Whilst we make every effort to provide up-to-date information that is accurate, this information must not be relied upon without first seeking the appropriate professional advice. The information and scenario provided in this illustration is particular to Geoff's needs, goals and objectives only. Without knowledge of your needs, goals and objectives we could not provide appropriate advice. Therefore this advice is of a general nature only and should, under no circumstances be relied upon to suit your particular situation. Once again, seek professional advice from licensed and authorised professionals.
This table was prepared with the assistance of Richard Sheargold, CPA, B.Fin.Admin, Dip FP, Senior Financial Planner, Financial Wealth Pty Ltd,Crows Nest, NSW.

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