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RETIREMENT & LIFESTYLE PLANNING | |
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| ISSUE - 29 - Summer 2007/2008 | |
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Richard to the rescue
Feeling out of your depth when it comes to funding your retirement? Let independent financial planner, Richard Sheargold , throw you a lifeline .
Time and time again I come across people aged 50-plus who are still working, have paid off their mortgage but have very little focus on retirement planning. This usually results in a scenario where they have good income, no debt, a small superannuation balance and their home is their largest asset.
I ask these people, if they were to retire tomorrow, how would they support themselves? This is often met with a look of panic, and some seriously negative body language. Without proper financial planning, most people aged 50-plus are likely to have to rely on Centrelink benefits to supplement their living standards.
Whilst the Age Pension is interwoven with Australians' rights, it just doesn't pay enough to rely upon to make ends meet. You need to take steps as soon as possible to avoid this reliance. Seeking clear and concise advice from a fully qualified professional (that is, a fully qualified and licensed financial planner) can really help you achieve self-funded retirement, or at least garner additional income to supplement the Age Pension. It can make the difference between chicken breast or chicken nuggets!
There are a number of different strategies and combinations of strategies that can be used to increase your nest egg prior to retirement. Most focus on the most tax-effective vehicle in Australia: superannuation; that is, you should generally concentrate on bolstering your super balance so that you can turn it into an income stream (allocated pension) in retirement.
By seeking advice you should be getting access to people who can manipulate your situation to take advantage of current legislation, providing you with a tax-effective, flexible, estate-planning friendly strategy. Key areas your financial professional should be looking at include salary sacrifice, the Government's super co-contribution and the Pension Bonus Scheme. Others include using superannuation wisely if you have a lump sum of cash from an inheritance or sale of an investment property, or using Transition to Retirement (TTR) to unlock tax effective superannuation income.
My favourite strategy by far is TTR; I provided a comprehensive look at this in the previous (Spring 2007) edition of Your Life . In that article I talked about reducing your hours of work so that you can transition to retirement. Let me clarify things by adding that there is no legislative requirement for you to reduce your hours. Provided you meet the normal conditions of release from superannuation (generally that you are more than 55 years old) you can access your superannuation in the form of an income stream (aka allocated pension) and work as many hours as you like. Let's look at a couple of examples to show how the strategies I am suggesting for building your retirement nest egg can work.
Consider Dave and Helen
Dave is a self-employed carpenter (age 59) and Helen (age 56) manages his business. Neither has considered superannuation as a viable investment vehicle until now. Dave earns $65,000 and pays Helen $35,000 to manage his affairs. They own their own home and have $120,000 in a term deposit and $10,000 in the bank. Helen has $45,000 in super from a previous employer and Dave $25,000. They want to live comfortably in retirement but understand that if they retired today they would not be able to live the lifestyle to which they are accustomed. What should they do?I believe that, above all, they should be using superannuation to its full potential. To do this they should:
1. Move the term deposit (once matured) into superannuation as a non-concessional contribution (no tax at entry). This should be done in Helen's name so that she can apply for the Government's co-contribution; to be eligible, people must be earning less than $58,980 and also make contributions from their own funds. For every dollar that Helen contributes, the Government will match it with $1.50 (to a maximum of $1500) provided Helen earns less than $28,980. If she earns more (and she does) the Government will reduce that $1.50 by five cents per dollar of Helen's. On this basis, her co-contribution will be $1199.
2. I also suggest Dave and Helen try to salary sacrifice as much as they can to super whilst maintaining a reasonable living standard. Remember, once they turn 60 they can access their super tax free, provided they meet other conditions for release (e.g. entering TTR arrangements, full retirement, permanent disability or a condition of financial hardship). They can turn their super into an allocated pension, keep their super open to salary sacrifice and substitute the income lost through the salary sacrifice with the tax-free allocated pension (once they are 60). This is the
Transition to Retirement strategy.In summary, they should consider additional non-taxed contributions to super to bolster their super balance, look at the Government's co-contribution, salary sacrifice into super and start TTR. This should provide them with tax-effective income, build their wealth at an accelerated rate and keep their living standard. It will probably also help them access more Age Pension once they are 65 as an allocated pension is only notionally tested for the Centrelink Age Pension Income Test.
Let's look at Mary
Mary is 71 and a part-time shop assistant, earning $24,000. She is widowed and has no financial dependents. Mary has $75,000 in super plus $10,000 in the bank. Her husband was the principal breadwinner but died suddenly last year. At that time Mary and her husband had two investment properties worth $500,000 but they had a debt of $420,000 attached to the properties. Mary knew that she couldn't service the shortfall in loans. After consultation with me, she decided to sell both properties. A good rule of thumb is not to have debt in retirement. After agent's fees etc., she had $60,000 left. Now Mary and her husband had registered for the Pension Bonus Scheme several years ago and, as a result, Mary has access to a lump sum from Centrelink on retirement.After the stress of losing her husband and having to sell the properties, Mary wanted to retire as soon as possible. The strategy therefore was once again to utilise superannuation as much as possible to take advantage of the tax-free status of an allocated pension. The strategy involved: contributing the $60,000 into superannuation (tax-free) and combining this with the $75,000 already in her fund; this brought the total up to $135,000, plus the $1500 co-contribution from the Government rolling this balance into an allocated pension and starting a tax-free income stream (remember, as per the example above, an allocated pension is notionally tested for the
Age Pension Income Test) leaving the $10,000 in the bank in an everyday account earning interest, applying for and receiving the maximum Age Pension, applying to Centrelink for the outstanding Pension Bonus Scheme lump sum she is entitled to for foregoing the Age Pension and continuing to work. In this instance, Mary received an extra $22,000 as a lump sum.
The result of the strategy is that Mary can retire, receive the full Age Pension of $13,465.40 per annum, a minimum allocated pension of $6750, plus some interest on her additional cash. At any time, Mary could withdraw a lump sum from her allocated pension to pay for big ticket items without any taxation at all or, on an annual basis, increase her allocated pension monthly payment to correspond to her lifestyle. Obviously, the more she takes from the allocated pension, the faster the balance will diminish, so careful spending decisions are crucial.
Tang and Betty
Tang and Betty are both in their late seventies. They have very little in terms of income-producing assets and rely heavily on the Age Pension. They do, however, have a very nice home in a suburb of Melbourne that has seen significant capital appreciation over the past 10 years. Their house is worth more now than they ever dreamt. They are a classic case of asset rich, income poor. How can we help them?They really need to unlock some of the equity in their property to supplement the Age Pension. They receive the full pension, $22,953, but would like an extra $10,000 per annum for additional expenses and to improve the family home. Their two children are both well established in their careers and want what's best for their parents.
There are at least two possible scenarios. One is that they sell their home and downsize or move to a cheaper home. This would unlock equity that could be used to produce income through a low-risk but well-balanced portfolio.
Alternatively, they could consider a reverse mortgage. Under certain circumstances this is a sensible and appropriate way of gaining access to equity in your home. Care is needed, though, because reverse mortgages are not yet governed as well as investment vehicles like shares and managed funds.
To achieve a relatively risk-averse income of $10,000 per year (say at a rate of six per cent) Betty and Tang will need to borrow at least $167,000. Their children are fully supportive of this, so we go to the market to find a product with the flexibility to fix an interest rate (if desired), and to allow the loan to be paid out prior to death without significant fees, should Betty and Tang wish to do this. We find a number of such products to choose from and even manage to bargain the establishment fee down. Tang and Betty get the loan, do some small renovations and use the bulk of the loan money to produce extra income for themselves through a well-diversified and balanced portfolio of shares and managed funds.
Both scenarios can be appropriate, but both have drawbacks. Selling and buying attract significant real estate fees and that ridiculous stamp duty on the new home. The reverse mortgage scenario is not everyone's cup of tea as it requires people to borrow and potentially leave the debt to the children.
It's worth the effort!
Planning for your retirement can be an onerous and time-consuming task; however, not planning can be financially fatal. The examples above, while hypothetical, are very close to average real-life situations. If each of these people had sought advice at a much earlier age, things would be far better for them. As it turned out, we were able to structure something that fitted with their lifestyles and financial situation and helped them to some sort of financial security. The last thing you want in retirement is constant worry about how to make ends meet. With a bit of planning and research – the sooner, the better – you can help alleviate this. YLDisclaimer: 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. Any scenario provided is for illustrative purposes 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. Bluegum Financial Services Pty Ltd, trading as Stonebridge Wealth solutions.
More
Richard Sheargold is principal at Stonebridge Wealth Solutions.
Ph (02) 9955 9633
Web www.stonebridgews.com.au
Email richards@stonebridgews.com.au
The Australian Taxation Office (ATO) also offers comprehensive information on TTR and other super-related topics.
Ph 13 10 20
Web www.ato.gov.au/super
For information about the Pension Bonus Scheme and to download a free brochure, visit www.centrelink.gov.au and enter the words ‘Pension Bonus Scheme' into the ‘Search' box.
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