14th Mar 2019
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Five things you should know about retirement

We can never know too much about the positives and pitfalls of retirement. Financial planner Emmett Wilkinson explains five key concerns, plus some topics you might want to discuss with an adviser.

Two retirement myths
1. The retirement sweetspot
The financial community often talks about the retirement sweetspot – the concept of having sufficient financial assets yet still being eligible for an almost full Age Pension.

For example, a couple who are both aged 66 and with financial assets of $400,000 plus $40,000 in cash could expect to receive an Age Pension in excess of $30,000 per year. Using fairly conservative earnings assumptions, the investments can deliver $28,000 per year (indexed to inflation). Thus, the couple will enjoy a retirement income of close to $60,000, which is comparable to the average Australian income after tax.

A problem with this model is that to achieve this level of annual payment from the investment pool requires drawing both investment income and capital; and the capital will be exhausted within 18 to 20 years.

While that is in line with the statistical life expectancy of a 66-year-old, it represents a risk to anyone living beyond that point. It also doesn’t allow for bequests or unexpected capital expenditure.

2. Retirees spend less
Another retirement myth is that retirees spend less than when they are working. This belief is at the core of a recent report from the Grattan Institute, Money in Retirement: more than enough, which argues that the vast majority of Australian retirees are financially comfortable.

There are any number of reasons that refute the concept of retirees spending less. This was true of the so-called ‘war generation’, but is anything but true for Baby Boomers. The only Baby Boomers who reduce expenditure in retirement are those who have to.

For those who have yet to retire, it would be dangerous to believe either of these retirement myths.

Retirement is not the time for taking investment risks
My father used to say that the best way to make money was not to lose it in the first place. A conservative guy – but the older I get, the more it resonates with me.

Ask yourself what’s more important to you when it comes to investing your savings. Is it preserving and protecting what you’ve got or is it trying to achieve high investment returns and accepting the volatility?

A common approach for people with superannuation income stream accounts is to have two to three years of annual income payments invested in the cash option and to draw down payments from this option. The balance is invested in the chosen investment option/s and is not touched during periods of negative investment returns, assuming these last for less than two to three years!

This strategy is often referred to as the ‘bucket approach’ and has supporters and detractors because during periods of good investment returns there is an opportunity cost involved. My opinion? It provides peace of mind to clients and I like it for this reason.

Retirement is also not the time to invest in Bitcoin, take up share market options, trading courses or get into property speculation or development for the first time.

Going guarantor for property or business loans for the kids can also turn out badly in retirement.

There are often no second chances with your retirement funds.     

The revamped Pension Loans Scheme
The Pension Loans Scheme (PLS) is due to undergo major changes mid-year, which will broaden its availability. This scheme allows age pensioners to borrow against the value of their home and not make repayments until the property is sold.

The unpaid interest accrues and compounds, and will be taken from the proceeds of the home when sold.

The PLS is similar to a reverse mortgage, but borrowings can only be taken as fortnightly income payments and not as a lump sum.

The proposed changes include making the scheme available to anyone of pension age, whether they receive the Age Pension or not, and increasing the amount that can be borrowed.

Previously, full-rate age pensioners could not borrow under the scheme but they will now be able to borrow up to 50 per cent of their annual pension. Higher amounts will apply for part-pensioners and self-funded retirees.

The PLS interest rate is currently 5.25 per cent per annum, which is higher than home mortgage rates but lower than typical reverse mortgage schemes.

Retirees who are looking to top up their income or who are asset rich but cash poor, may be interested in the scheme. But to do so, they must be prepared to dig into the equity in their home.   

My experience has been that Aussies in general are sceptical of reverse mortgages. Will having the Government as the provider reduce some of these concerns? 

Aged care is expensive
For many, the retirement journey will lead to a period in residential aged care. Moving into care is expensive for most people.

Upfront fees, known as the Refundable Accommodation Deposit (RAD), range between $400,000 to more than $1 million. If you cannot pay in full, you are charged interest on unpaid amounts at the current government rate of 5.96 per cent per annum.

There are also ongoing daily care fees that will vary according to the resident’s assessed financial means. Ongoing fees can be as little as $18,490 per year or as high as nearly $60,000 per year in some instances.

Dealing with these costs requires major financial decision-making and, for many, these are made in a crisis environment. My advice is to plan early and ensure that Enduring Powers of Attorney are in place.

Issues can also arise with wills, so make sure that your will is valid and current.

And finally: a journey not an event
Retirement is a major life change for most of us and makes us review most aspects of our lives.

Try to plan ahead. Any plan has to be based on assumptions and these will always be challenged by reality. It is therefore vital that a review is an integral part of the plan, particularly with regard to finances.

You should develop a relationship with a financial adviser who specialises in retirement planning. A good adviser will discuss such things as:

  • how your super or investments have performed and how they can be expected to perform going forward
  • is the approach/risk that you are taking still appropriate?
  • what are your likely expenses over the next 12 months? Can you spend more or should you spend less?
  • how are you affected by changes to super, tax or social security rules?
  • have there been any changes in your personal or family situation that will have an effect on your financial situation?

Emmett Wilkinson is a Certified Financial Planner who specialises in providing advice on aged care and retirement planning at Advisersure Pty Ltd in Melbourne. He has worked as a financial planner for 20 years and previously worked for the Australian Taxation Office and the Reserve Bank of Australia. Advisersure Pty Ltd and Emmett Wilkinson are Authorised Representatives (424041/319614) of MyPlanner Professional Services Pty Ltd AFSL 425542.

Are you eligible for an Age Pension? Do you know your rights? The PensionChecker™ tool has all the information you need.

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    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.





    COMMENTS

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    Ted Wards
    14th Mar 2019
    9:58am
    Emmett do some research about residential care. The reality is less than 5% of the population end up in residential care, meaning 95% stay at home and get care at home. With CHSP & packages this reduces the cost to the person.
    sunnyOz
    14th Mar 2019
    11:11am
    One reason so many people stay in their own home, is simply down to the fact there are not enough places available in residential care. It also relies on the number of Aged Care places available. Currently that is only 113 places per 1000 people over 70 years. This will increase to 125 by 2021-22.
    I hear and read of so many people who think they can just walk in to an aged care place. The reality is there are simply not that many places available. I currently have a neighbor (wife) who really needs to be in aged care. But husband would have to sell house to get in - where would he go? So he struggles with her at home. Wife is taken to hospital at least once every 10 days..Hospitals are becoming fake Aged Care Facilities.
    tams
    14th Mar 2019
    1:54pm
    50% of the population who reach 85 enter residential aged care.

    Re the neighbour - he needs advice - nobody can be forced to sell their home to enter aged care.

    Nationally aged care occupancy is 92%.

    It's possible his wife may be fully/partially supported by Government
    tams
    14th Mar 2019
    1:54pm
    50% of the population who reach 85 enter residential aged care.

    Re the neighbour - he needs advice - nobody can be forced to sell their home to enter aged care.

    Nationally aged care occupancy is 92%.

    It's possible his wife may be fully/partially supported by Government
    KB
    14th Mar 2019
    10:38am
    People on pensions who rely alone on pensions go into government run homes because they cannot afford top quality nursing homes. I agree with you that retirement is a journey.
    KB
    14th Mar 2019
    10:38am
    People on pensions who rely alone on pensions go into government run homes because they cannot afford top quality nursing homes. I agree with you that retirement is a journey.
    The Sheriff
    14th Mar 2019
    10:42am
    YLC seemingly continues to advocate the necessity for retirees to use financial planners who, in my view, are parasites and bludgers. Any financial prognostication they give comes from a computer screen, which one can read just as well as these work shy folk.
    ozrog
    14th Mar 2019
    11:32am
    Totally agree. $8,000 pa for advise is wasted money and over many years it adds up.
    Greg
    14th Mar 2019
    2:37pm
    Yep, problem is there are people in the community who just have no idea about money, they need any help they can get. I feel for them as they would often be the ones who had a lower paying job so have less super and then have to pay some leech what they can read about. I know, my MIL is one, no idea at all, she reads some Centrelink information and she's just totally confused.
    OlderandWiser
    14th Mar 2019
    5:45pm
    Constant changes in rules making it harder and harder for self-funded retirees create a situation where if you don't have a super-great and highly affordable financial adviser, you need to be an investment guru. Labor and its supporters keep saying if Labor kills your income with its disgusting policy, change your investments. In other words, oldies have to become investment gurus! Not reasonable at all! Especially while the taxman is contributing millions to the super funds of people earning $300,000 a year, fabulously wealthy retirees pay very little tax, and despite Labor's lies, nobody with $2.4mil or more in super loses a cent under their unfair policy, but couples with less than $1 mil and no pension or concessions get slugged VERY hard.
    OlderandWiser
    14th Mar 2019
    5:45pm
    Constant changes in rules making it harder and harder for self-funded retirees create a situation where if you don't have a super-great and highly affordable financial adviser, you need to be an investment guru. Labor and its supporters keep saying if Labor kills your income with its disgusting policy, change your investments. In other words, oldies have to become investment gurus! Not reasonable at all! Especially while the taxman is contributing millions to the super funds of people earning $300,000 a year, fabulously wealthy retirees pay very little tax, and despite Labor's lies, nobody with $2.4mil or more in super loses a cent under their unfair policy, but couples with less than $1 mil and no pension or concessions get slugged VERY hard.
    ozrog
    14th Mar 2019
    11:32am
    Depends
    Cheezil61
    14th Mar 2019
    11:57am
    The first 2 paragraphs (Myth # 1). referring to a couple aged 66 being able to derive $28,000pa from investments seems difficult to believe/ understand! I would love to know where to invest (if i even had anything to invest)to receive this sort of incom on top of $34,000pa pension (which also seems over-estimated-i tive been of the belief that pension only pays around $400pk), i would retire immediately. Assets of $400,000 (assuming house etc) are not an investment & don't derive income. Or is the $400,000 referring to superannuation/allocated pension??? I've got a lot to learn before i can retire, obviously. Am 57 but with working difficulties affecting my health will prob be forced into early retirement & am so worried about how i will afford to eat/heat/live/pay bills etc.. Seriously considering euthanasia/suicide etc as cannot afford living in this expensive country/world (& I've got it good compared to many, tho no health insurance, can't afford to get sick). Can't afford a financial advisor either (& don't trust them anyway).. Anyone else in same situation/feel the same??
    Sundays
    14th Mar 2019
    1:28pm
    Cheezil. The article refers to a couple with their money in Super. Ignore it. It’s all doom and gloom

    I don’t know where you live but the Salvation Army offer free financial counselling. They will help you sort out your finances. The counsellors are trained and the service free. Practical solutions for real people. Don’t give up! I hope you stay healthy but Medicare in this country is still good and public hospitals offer great care. No waiting list for serious illness or injury.
    Greg
    14th Mar 2019
    2:45pm
    The article actually says to get the $28,000 " A problem with this model is that to achieve this level of annual payment from the investment pool requires drawing both investment income and capital; and the capital will be exhausted within 18 to 20 years."

    So you withdraw some of the capital as well, not just the returns/interest/whatever. The article also said the $400,000 was a "financial assets".
    Sundays
    14th Mar 2019
    3:49pm
    Yes Greg, I don’t understand the obsession with preserving capital at all costs. If you retire at 65 and it would make life easier to spend some of your $400k surely better than hanging onto it until you’re 85.
    OlderandWiser
    14th Mar 2019
    5:58pm
    Maybe worrying about affording decent aged care influences people to want to preserve capital. I saw, recently, what happens to people who don't preserve capital and then need to go into care.
    Cowboy Jim
    15th Mar 2019
    7:52am
    Weekly pension is about $400, Cheezil61, but here they are talking about a couple, so the $34'000 per annum is about right. Then the $400'000 in assets most probably are not in cash. So the figures could be accurate.
    adbob
    14th Mar 2019
    12:09pm
    Actually there very much *is* a retirement sweetspot.

    Most people in my agegroup are in the sourspot - their super does nothing more than pay with their own money for what others get for free from the government - ie out of the taxes that the workers and savers previously paid.

    Don't forget we all find ourselves in this position as a result of following the advice of financial advisers to "top up" our future centrelink pensions through putting money into super (so that they oculd extract fees from it) - that income does not now top up the centrelink age pension - it replaces it - leaving the wokers and savers no better off than those who never worked and those who did work but spent their money like drunken savers.

    A full age pension topped up by some super income for those who saved modestly should be a fine place to be - and it *is* much cheaper to live in retirement - no commuting expenses, lunches, work clothes (not tax deductible) to pay for. Who in their right mind wants to go on endless cruises (like a floating council estate according to a UK commenter in the (AU version of) the Mailonline.

    The current system is bound to change. Recent moves to encourage the use of lifetime annuities will eventually lead to their use being compulsory for all or most of your pension pot. The money has your name on it but it's not really yours to do what you want with - it's there to save the government from paying you an age pension - so they have a war-chest with which to porkbarrel themselves and their cronies. Both major parties are complicit in this - the Greens are no better.
    The Care Bear.
    14th Mar 2019
    1:13pm
    Next election vote Independent and remove the current white ants.
    It might cause some hardship initially, but it will send a clear message.
    adbob
    14th Mar 2019
    2:07pm
    Drunken sailors - not drunken savers - was obviously what I originally intended.
    OTOH we workers and savers might as well have been drunk.

    Drunk on the obsolete notion that we lived in the nation of the "fair go".

    You may recall that the LAbor party was originally the workers' party
    and Menzies original Liberal party was the party for the "forgotten people".

    How times change.

    They are now both self-serving cabals (and serving their donors)
    wedded to neocon economics and cynical vote-buying.
    OlderandWiser
    14th Mar 2019
    6:05pm
    Agree adbob. I was discussing Labor's franking credits policy the other day with someone who took advantage of the offer to downsize their home and contribute to super. They remarked that doing so - in order to remain self-funded for a few more years, might cost them their franking credits for life (over $100,000). They referred to a mutual friend who chose to delay the 'trip of a lifetime' to care for an aging parent until their death. That decision - which saved the taxpayer a small fortune - will probably cost them over $100,000 in franking credit refunds. In both cases, there is additional loss due to forfeiting pension income and concessions. All up, these couples could be $250,000 poorer for having done what is good for the country. And Labor calls this 'fair'!!!!

    Saving for retirement - which Paul Keating urged us all to do - is proving hideously expensive. It's a wonder anyone even tries to save given the rewards for being irresponsible.
    CoogeeGuy
    14th Mar 2019
    1:35pm
    I have been retired for 2 years now, and I am not spending less. Guess what? The bills have not stopped coming in just because I have retired. And the cost of living ie: groceries, energy costs etc have not reduced, they have risen! Thus I agree! Retirees are only spending less, because they are getting less, and are forced to reduce their spending, sometimes acutely. No one has yet discussed the new dilemma, being, how a person receiving the OAP is going to be able to remain in their Sydney Apartment due to their not being able to afford their Quarterly Body Corporate Fee of around $316.00 a fortnight.
    tams
    14th Mar 2019
    1:50pm
    Answer is the Pension Loan Scheme.
    OlderandWiser
    14th Mar 2019
    5:56pm
    Answer is to move to a cheaper area. Those who fund their own retirement have to live where they can afford to live. Why should the taxpayer fund superior accommodation for pensioners? Yes, I know we all want to live where we have formed friendships or can be close to family, but that is a want - not a need. Ideally, taxpayers WOULD fund wants that are reasonable and contribute to health and well-being, but they aren't even willing to subsidize the self-funded to have an income as high as pensioners receive.
    Cowboy Jim
    15th Mar 2019
    7:58am
    Body Corp fees here are $2200 per year, council (with Pension rebate) about the same. Have friends in Sydney - no way I could afford to live there, definitely not Coogee. Stay in Mosman a week now and then.
    Cowboy Jim
    15th Mar 2019
    8:09am
    CoogeeGuy - forgot to mention, just paid the yearly health fund premium for me and the wife $5200. So with the rates and body corp $10'000 is accounted for and of course one is running down the assets. And here they say, the oldies are spending less!!
    Paddington
    14th Mar 2019
    1:51pm
    You do spend less on petrol, clothes and time saving wasters. You have time to cook and make your own meals. You don’t eat out because you are tired and in a rush. Of course it is cheaper to be home and time rich.
    OlderandWiser
    14th Mar 2019
    5:50pm
    We spend a lot more on petrol because we have to travel to medical service providers, and my partner is finally able to pursue a lifelong dream of learning a specialised skill and travels long distances to lessons. "We also spend on meals because we are out regularly at lunch time. Yes, we could pack lunches, but I don't find that saves much really and it's not nearly as enjoyable.

    Home maintenance costs have skyrocketed because we are no longer able to DIY and the house is aging. Same with furniture and appliances and the car.

    We also have to travel to visit children and grandchildren, or have them come and stay - which imposes heavy costs. We care for grandchildren during school holidays because their father is a widower, and feeding teenagers is very costly. Can't ask their father to pay as he is really struggling on one income.

    Overall, our living costs are much, much higher.

    I get really sick of people and organisations who work on assumptions and generalisations.
    JoshG
    19th Mar 2019
    5:21pm
    I invested $90,000 in 72Options sometimes ago with little knowledge about Binary Options. It was accumulated money from my Retirement Plan and Social Security. After investment, withdrawals turned impossible, I was denied access to my account, my emails to the support team was left without reply. I was left terrified, not until I got in contact with a funds recovery expert agent at fundsrecoverydome(AT)protonmail(DOT)com whose contact I got from somewhere on the internet. I'm very glad I did so cause I got all my funds back without request for upfronts. I just want everyone that has suffered to similar binary option scams from retirement investment planning recently or not to get their hard-earned money back soon.


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