A superannuation expert discusses how to earn an income after you retire.
The transition to retirement can be financially challenging, but wise use of superannuation helps retirees achieve their desired lifestyle. On YourLifeChoices’ weekly podcast, Mind Your Own Retirement, Retirement Essentials chair Jeremy Duffield shared the tricks of the trade with co-hosts John Deeks and Kaye Fallick . This is an edited transcript.
Kaye Fallick: We all know that saving money for superannuation is very important. You have identified the drawdown phase of superannuation as a key consideration. Can you define it for us?
JD: It’s the transition from being reliant on your income during your working life to relying on your savings and investments as you go into retirement. You need to not only benefit from the income you can earn on those investments but start drawing down on your capital.
KF: Do we start to draw down super when we reach preservation age?
JD: Preservation age is the age the government has established to say when we can start taking money out of super without tax consequences. It’s typically 60 years of age. The other key ages are obviously when you retire and when you’re eligible for the Age Pension, which is now at 66.
John Deeks: When should you stop putting money into super?
JD: It’s hard to know and that’s when you can do with some professional advice. But one of the things we found is that many people leave their money in the accumulation phase much too long and forget to put it into an account-based pension, which has the benefit of tax-free status. So, they continue to pay up to 15 per cent tax on their earnings when they could be getting it tax-free.
KF: Are there are any broad parameters to approach drawdown?
JD: Well, the first thing I would do is learn whether I’m eligible for the Age Pension. For most people, the Age Pension is the foundation of their retirement program. You might get a part pension, you might get a full pension, but it’s very valuable to you. It rises with the cost of living over time and is guaranteed for life. The healthcare card is also very important. You’ve got to wait until you’re 66 before you can get that.
The next thing is to work out much you’re going to need to spend every year and how much you can afford to spend.
John Deeks: The mantra we always use on this podcast is plan, plan, plan. Plan, understand and act.
KF: Many of us don’t know how much we’re spending. We’re not running an old-school budget; we’re using our credit cards and closing our eyes, and hoping it will all work out …
JD: The ‘closing your eyes’ approach really doesn’t work when you’re retired, because all you have left is your savings. People do run out of money and it’s sad when they do. Sometimes it happens because they were frivolous, sometimes because things are tough in investment markets and the cost of living starts to eat away.
You need to put money aside in the first place but then to be relatively conservative when you have retired.
John Deeks: Is there a place you can go to find out if you’ve got money in other super funds?
JD: There’s a lot of people all over themselves to help you find your lost super! But I’d start with government sources.
KF: The ATO tells people to go to the ATO website and put in their name and their details. They will find your lost superannuation. There are companies who say they will find your lost super, but they will charge you money.
KF: When it comes to pension products within super funds, is it easy to compare?
JD: The most important thing is to get your asset allocation between growth and defensive instruments right, so you choose the right portfolio. Then it’s important to keep costs low. Costs are the one thing you can be certain about, so look at performance, but also look at the ongoing costs associated with it.
KF: Is it true that older people become risk averse and become too defensive in their mix of investments?
JD: Yes, it is. All the psychological studies say that people do get more conservative when they get older. But it can be bad for their wealth, because you’ve got to fight inflation over the course of your retirement, and if you don’t have some money in growth investments you’re going to fall behind.
And that’s what’s happening now with interest rates at these record lows. It’s a tough time to be retiring or to have been conservative. We’re seeing a lot of people with cash really struggling.
KF: We saw in our survey that a lot of people are holding relatively small retirement nest eggs in cash or term deposits, which are going backwards.
JD: At Retirement Solutions, we find that one third of applicants have their investments mostly in cash and that’s a tough way to run a retirement.
KF: Back in the day, you could rely on at least five per cent return on cash, so we certainly see a different landscape now.
JD: We’re really in the one to two per cent realm and that’s for people who shop around. For people who don’t shop around it’s less one per cent return.
Do you have a plan for how to transition your finances into retirement?
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Financial disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
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