Retirement should be your time to enjoy the good life. Here are 10 ways to reduce your financial concerns.
There are many issues which need to be considered to help reduce the financial stress associated with the change in lifestyle commonly known as retirement. Most should be tackled as early as possible, but for those already retired, it still may not be too late to plan ahead. Here are some important tips to help you reduce financial worries and/or reduce the chance of being in a situation later on where your choices are limited.
1. Understand Government Income Support entitlements
This may seem only logical, but it’s surprising how many older Australians are potentially missing out on entitlements. Even if you are not eligible for such an entitlement when you reach Age Pension age, it does not mean that you will never receive one. Changes to legislation, a decrease in your assets or income, a change to your personal circumstances or more commonly, the indexation of thresholds can mean that you may become eligible for an Age Pension or concession card. It’s important to keep in touch with Centrelink and know your situation as payments generally cannot be backdated.
2. Consider your tax situation
Many older Australians do not need to pay tax as the combination of the Low Income Tax Offset (LITO) and the Senior Australian Tax Offset (SATO) means that your effective tax free threshold is much higher than that of the average taxpayer. This doesn’t mean that you will never pay tax, as circumstances may change, or poor decision making may have an impact. The most common example of this situation in recent times is where a couple had a large amount in an Account Based Income Stream (ABIS) which was experiencing high volatility due to market conditions. Tired of the worry, they withdrew their ABIS and placed the funds in a term deposit where they felt the funds were more secure. Unfortunately they didn’t consider taxation as an issue and went from a tax-free environment to one where all earnings form part of their taxable income. This meant that they would now have a small tax bill each year and due to their age and work status, they could not get those funds back into super. All they needed to do, to avoid negative tax implications, was look at less volatile (conservative) options within the existing fund. Another example of a potential tax trap occurs with share ownership. Often older shareholders fail to claim franking credits to which you may be entitled. In order to claim these credits if you don’t normally pay tax, you simply need to complete a claim form from the Australian Taxation Office, and quote information from your share dividend statements on an annual basis.
3. Budget and plan… continuously
This is so important. The more thoroughly you budget, the better understanding of your cash flow situation you will have. Budgeting also highlights where you can make savings or cut backs, it reminds you of upcoming expenses and it clarifies how long it will take to pay off debt or save for future goals. Done regularly, this process, along with considering your future needs and objectives, will help you to cover your living expenses and achieve your long and short term objectives. The other benefit is that, if your situation changes (and, it is often the case that it will) you will be better equipped to deal with that change.
4. Consider superannuation and income streams
The actual purpose behind superannuation is to accumulate funds to create an end benefit in retirement. There is a myth that super is a type of investment. For those who have had a bad experience, due to market conditions, it seems a very bad ‘investment’. It is important to understand that super is merely an investment ‘vehicle’ and investments held within this vehicle are those that can be accessed outside superannuation. The real benefits of superannuation (and subsequent super income streams) are:
• potential tax advantages
• the ability to choose and change investments in that environment
• potential Government Income Support advantages
• an investment with the sole purpose to accumulate funds for retirement with payments spread over the retirement years
• potential estate planning advantages.
5. Accessing the equity in your home
As superannuation has only been compulsory since 1993, the family home was previously the prime investment throughout most Australians working lives. So many senior homeowners do not have the super savings to generate sufficient income throughout their retirement years. One popular way to increase liquidity is the use of equity release products such as reverse mortgages. This course of action does not suit everyone but for older Australians who need to access funds to maintain or improve their standard of living, equity release products might provide a useful vehicle.
6. Plan for future aged care
Aged care is an issue that we will all need to consider at some stage in our lives. Sadly, planning for such events is often left until the last minute, or for other family members to deal with. Understanding aged care costs can be confusing. There are many different types of care packages available with various fees and charges which apply, depending on the type of care required and the financial situation of the aged care recipient. These fees include daily care fees, income test fees, accommodation bonds, accommodation charges and extra services fees. Some would argue that consideration for aged care should be done as early as when you first retire, as the type of investments and strategies chosen for retirement can affect your access to funds. These investments may also potentially impact on how much you will need to pay for aged care. Other decisions you may need to make include the possible need to downsize your residence, and access to public amenities, doctors, hospitals
7. Consider estate planning
Estate planning is another important issue which is too often overlooked in retirement planning. This involves creating and regularly updating a will and appointing an Enduring Power of Attorney (EPA). Both of these actions can reduce the burden on family and friends when dealing with your estate upon death or your financial affairs during illness. If no will exists, then delays could result in distributing the estate and it may not be distributed according to your wishes. An EPA can also avoid the issue of not having someone who can act on your behalf if you become incapable due to accident or, ill health. Another area that should be addressed is the potential nomination of dependent beneficiaries (binding) and/or reversionary beneficiaries. These are nominations you can make to your superannuation and/or income stream funds to avoid those funds being passed through the estate. For example, nominating a partner as a reversionary beneficiary on an income stream can mean that the surviving partner will continue to receive payments until their death. Existing tax and Government Income Support concessions continue to your partner.
8. Plan your funeral
There are number of ways to cover funeral expenses.
• saving through a funeral bond
• prepaying with funds already available
• taking out a funeral insurance plan.
There are advantages and disadvantages to each option but, regardless of your choice, planning for your funeral will reduce the burden on surviving family and friends, saving them from sourcing funds to cover the costs and being out of pocket until the estate is distributed. Be sure to look at all options before proceeding as the features and benefits of each option suit different individuals.
9. Steer clear of scams
Sometimes easier said than done, but we’ve all heard the adage ‘if it seems too good to be true then it probably is’.
Scammers are always coming up with new ways to rip off consumers and are not concerned about who they target or hurt. One of the main target groups is seniors as scammers feel they are more vulnerable and can be easier led into a ‘dodgy deal’. Consumers should regularly check for scams through their state or territory Department of Fair Trading, the Australian Competition and Consumer Commission (ACCC) on 1300 302502 and the Australian Securities and Investment Commission (ASIC) on 1300 300630 or via their websites to see what scams are being pushed and if there are any updates available. Scams can come in many forms and scam artists are quite creative with marketing and promoting them. Remember you should never sign up or divulge personal or financial information to anyone unless you are sure that it is for a legitimate reason.
10. Access information, seek professional financial advice and don’t be afraid to ask, ask, ask
Many consumers often feel intimidated or overwhelmed when making major financial decisions and this can lead to rushing in and making the wrong decision or, not making a decision at all, which can be just as detrimental. Many financial institutions and government departments have a lot of useful information on their websites. If you are not confident in making your own financial decisions, you should seek professional advice from a licensed financial planner. Yes there may be a cost to seeking professional advice but it can offer you peace of mind and put you in a better financial position down the track. When speaking to a financial planner don’t be afraid to provide as much accurate detail as possible and ask questions. Don’t feel that you might look silly or that you are being a pain, you should keep asking questions until you understand the situation. A good planner would prefer to know that you fully understand the situation than have misunderstandings that may arise in the future.