A comfortable retirement: what and how achievable is it?

According to the Association of Superannuation Funds of Australia (ASFA) numbers, released for the September 2017 quarter, a couple will need $60,457 per annum to fund a comfortable lifestyle in retirement, assuming they own their own home and have no debt and a single person would need $44,011 per year.

So how can the income required for a comfortable retirement be funded, and how much should be put aside each year prior to retirement to accumulate the funds required to fund a comfortable retirement?

Funding a comfortable retirement

ASFA calculates that $640,000 is sufficient to fund a comfortable retirement lifestyle. Their calculations assume a couple owns their own home and will receive Government age pension support when they retire.

It is assumed that $640,000 is held in a superannuation fund and used to commence an account-based pension. However if the funds were held outside super in joint names, there wouldn’t be any significant change in the outcome, as the couple are unlikely to pay any income tax on the portfolio returns. It is also assumed that the couple’s home contents and car are valued at $25,000.

The couple, both aged 67, would only draw what they need from their superannuation account-based pension to top up their age pension income to the required level for a comfortable retirement. The level of income needed, based on ASFA’s model, decreases from approximately $60,000 per year prior to age 85, to approximately $55,000 per year – this reflects a relatively less active lifestyle as age increases.

Although their age pension entitlement is just $12,000 (approx.) per annum in the first year, that entitlement grows over time as their assets reduce – the couple become entitled to the full age pension from age 91.

This analysis indicates that the income needed could be maintained until age 99, well beyond the life expectancy of a 67 year old female (age 87.3 years) or male (age 84.6 years). The couple’s account-based pension would run out by age 101.

This outcome is sensitive to the earnings rate assumption (6.7 per cent per annum). ASFA’s assumption of 7.0 per cent per annum increases the age to which the income level can be maintained by a year, to age 100.

Other sensitive assumptions include the amount of non-financial assets ($25,000) and financial assets, for example cash holdings ($nil). These assumptions may affect the couple’s age pension entitlement, hence the amount of pension payments that need to be drawn from the account-based pension. Note that financial assets may have a net positive impact due to the additional income produced.

Saving for a comfortable retirement

Taking ASFA’s numbers ($640,000 for a couple, $545,000 for singles) as appropriate funding targets, then a natural question is:

How much should be saved each year to reach the relevant funding target?

We are focusing on a single person reaching the $545,000 (in today’s dollars) funding goal by age 67, which is the Government age pension eligibility age for those born on or after 1 January 1957.

A key feature of retirement funding for Australian employees is the compulsory superannuation contributions employers are required to make on behalf of certain employees – the Superannuation Guarantee (SG) system.

The current SG rate is 9.5 per cent of an employee’s Ordinary Time Earnings (OTE). Generally, OTE relates to ordinary hours (excluding overtime), and includes commissions, shift loadings and certain allowances. The 9.5 per cent rate will increase by 0.5 per cent per annum from 2021 to 2025, ultimately to 12 per cent.

The Average Weekly Ordinary Time Earnings (AWOTE) for the October 2017 quarter was $1,567.90 or $81,755 per year. In our modelling we have used $80,000 per year. Employees with this amount of income will have SG contributions of 9.5 per cent ($7,600 per year, paid quarterly) paid by their employer to a superannuation fund. These contributions are generally taxed at 15 per cent, so $6,460 is available to be invested by the superannuation fund each year.

Table 1 below shows that a 30 year old with earnings of $80,000 per year may accrue $536,000 in superannuation between now and retirement at age 67 from their future SG contributions alone, assuming no breaks in their employment. This amount is only slightly short of the comfortable retirement target of $545,000.

Table 1: future SG contributions accrual to age 67

Current age Current Ordinary Time Earnings
$40,000 $80,000 $120,000
       
20 $419,000 $837,000 $1,256,000
30 $268,000 $536,000 $804,000
40 $159,000 $319,000 $478,000
50 $81,000 $163,000 $244,000
60 $25,000 $51,000 $76,000

 

Table 2 below shows the amount the same individual in Table 1 would need to contribute to superannuation on an after-tax basis (non-concessional contributions) to reach the funding target of $545,000, assuming they have nothing in super currently. The 30 year old individual considered above would need to contribute only $124 per annum

Table 2: After-tax super contributions per annum to reach retirement goal at age 67

Current age Current Ordinary Time Earnings
$40,000 $80,000 $120,000
       
20 $1,109
30 $3,773 $124
40 $8,723 $5,114 $1,495
50 $20,024 $16,506 $12,988
60 $64,940 $61,765 $58,587

These charts show that many Australians may be in a position to achieve a comfortable retirement, based on ASFA’s definition and assumptions. The Australian Superannuation Guarantee system is a significant part of achieving this outcome, which relies on the currently legislated increases in the SG rate to 12 per cent.

Before making any financial decisions you should seek personal financial advice from an Australian Financial Service licensee.

 

 

Source:  Macquarie

USING SUPER TO BUY YOUR FIRST HOME

In the 2017 Federal Budget, the government announced its intention to introduce legislation that would allow first home buyers to access part of their super to purchase a home. The proposal is referred to as the First Home Super Saver (FHSS) scheme.

The relevant legislation was introduced into parliament in early September 2017 and at the time of preparing this article (late October 2017), the legislation is before the Senate.

How the scheme will work

The FHSS scheme will allow people to withdraw up to 85% of voluntary concessional contributions and up to 100% of non-concessional (after-tax) contributions, with the associated earnings on those contributions and use them towards the purchase of their first home.

Voluntary contributions include concessional contributions – contributions other than compulsory employer contributions, such as the 9.5% superannuation guarantee contributions – and non-concessional contributions – those made from after-tax income. A voluntary concessional contribution may include additional employer contributions made under a salary sacrifice arrangement and/or personal tax-deductible contributions.

The scheme will only allow access to voluntary contributions made from 1 July 2017. Voluntary contributions made in past years cannot be accessed under the FHSS scheme.

Contributions that may be withdrawn are limited to a maximum of $15,000 per annum, capped at a total of $30,000 plus associated earnings. This limit is ‘per person’. A couple may, therefore, have access to up to a combined $60,000 plus earnings.

Withdrawals under the FHSS scheme cannot be made before 1 July 2018.

Amounts withdrawn (other than non-concessional contributions) will be taxed at the individual’s marginal tax rate, however, a tax offset of 30% will apply.

Eligibility

There are a number of conditions that need to be met for a person to be eligible to participate in the FHSS scheme, including:

1. A person must not have previously held a freehold interest in real estate property in Australia in the past. This not only includes a principal residence but also extends to investment and commercial property.
2. While people under the age of 18 are able to make contributions to superannuation and are able to participate in the scheme, only a person aged 18 or over will be able to request the release of funds.
3. A person will only be able to submit a request for release of benefits provided they haven’t previously submitted a request. That is, payments under the scheme can only be accessed once.

Associated earnings

A person participating in the FHSS scheme may withdraw their contributions, plus associated earnings.

Rather than having to calculate the actual investment earnings on each contribution made under the scheme, a simplified approach is used to calculate the earnings.

For voluntary contributions made under the FHSS scheme during the 2017/18 financial year, the associated earnings will be calculated as if the contributions were made on 1 July 2017, irrespective of the date they are actually made. From 1 July 2018, associated earnings will be calculated from the first day of the month in which the contribution is made. Therefore, where contributions are made at different times during the year, associated earnings will need to be calculated in respect of each contribution.

Associated earnings have nothing to do with the actual investment earnings that may be derived by a superannuation fund in respect of the contributions. They are merely used to determine the amount that may be withdrawn from super under the FHSS scheme in addition to voluntary concessional contributions.

When calculating associated earnings, the ‘shortfall interest charge’ is used, and compounds daily. The shortfall interest rate is the 90 day Back Accepted Bill rate plus 3%. At the time of writing, the shortfall interest rate was 4.7%.

Releasing contributions

When a person wishes to withdraw contributions under the FHSS scheme, the Australian Taxation Office (ATO) will make an FHSS determination. The ATO will calculate the person’s eligible voluntary contributions and the associated earnings. The total amount is referred to as the ‘FHSS maximum release amount’.

If a person then wishes to withdraw that amount from the super, they will need to request the ATO to issue a release authority. This will then be given to their superannuation fund. A fund will be unable to release benefits under the FHSS without the release authority.

After funds have been released

Once the funds have been released, they must be used to assist with the purchase of a first home.

A person will have 12 months from the date of release to use the funds to enter a contract to purchase or construct their first home. The 12 month period may be extended at the ATO’s discretion.

Once the purchase is complete, the purchaser must live in the property for a period of at least six months in the first year. The FHSS scheme is not intended to be used to purchase an investment property.

Where a property is not purchased within 12 months, the released amount must be re-contributed back to super, or additional FHSS tax becomes payable. The tax payable on the released amount is equal to 20% of the amount released.

Is the FHSS scheme a good thing?

Making voluntary contributions to super with the view of withdrawing them to help purchase a first home will depend on an individual’s personal circumstances. Making additional voluntary contributions to super provides discipline. The money can’t simply be accessed for other purposes such as an overseas trip or a new car. It is set aside for the purchase of a first home, or it is locked away for retirement.

In the end, individuals will need to consider their own situation when deciding if the scheme is appropriate for them. Appropriate financial advice will be essential.

 

 

Source: Peter Kelly | Centrepoint Alliance

Tree change, sea change, or stay in the big smoke?

What are your plans for retirement?
Are you planning to stay in the general area where you currently live, or do you have plans to go exploring and discover new places and perhaps put down roots somewhere a little less familiar – maybe in Australia or perhaps overseas?

Often retirement to another place is driven by financial reasons. It may be cheaper to buy a place up or down the coast and put a few extra dollars in the bank to help with the costs of living in retirement.

The government have introduced, from 1 July 2018, downsizer contributions which is the ability to contribute surplus proceeds from the sale of the family home to superannuation without being constrained by some of the general restrictions that otherwise prevent older Australians from getting money into super once they have retired.

Many of those sleepy coastal resorts that were attractive retirement destinations a generation or two back have now become just as expensive, if not more so, than the capital cities.

What does the future for retirement living look like for today’s baby-boomers and Gen X?
From what we have observed, there is a trend for people to remain living in a capital city or large regional centres. The idea of relocating seems to have diminished, perhaps brought about by familiarity of surroundings, family commitments, established friends and community involvement, health and other support services, and in some cases the fact that many retirees are deciding to remain engaged in the workforce to some extent, and move into full-time retirement later in life.

A recent study by the Australian Bureau of Statistics found that 71% of people intend to retire after the age of 65, and 23% of people age 45 or older don’t intend to retire until 70 or older.

The tree change or sea change may have been a passing fad. Something that was popular for a time and then faded into the background.

If you are thinking of relocating, whether it is down the coast, interstate, or to another country, move by all means. But before selling up and burning your bridges, think about renting for six months or so. Then, after becoming familiar with the location, if you really like it you will have a lot of local knowledge and even a network of new friends that may make the buying process just that much easier.

 

Source: Peter Kelly | Centrepoint Alliance

What happens when retirement does not go to plan?

We have written on numerous occasions over the last few years of the need to plan carefully for your retirement – financially, emotionally, physically and mentally.

What happens if it does not go to plan, not from a financial aspect but from a health perspective?

What am I talking about?

I have observed two people close to me, a good friend and a brother in law prepare for their retirement and then retire with their first years of “freedom” or “my time” planned.

Both men were in good health and had always been very active. This continuing and increasing level of activity was an integral part of their retirement – competing and training for an Ironman race and a number of endurance bike rides. As both have now retired, finding time to fit in all the necessary training was not an issue. They were excited and looking forward to the challenge.

Both men were diagnosed with “arrhythmia”, palpitations of the heart.

I have no medical qualifications and I am not going to attempt to explain the symptoms, consequences of this diagnosis or the treatment. All I do know from my own observations of these friends was that their training now needed to be curtailed and the initial ongoing treatment, although not necessarily painful, was incredibly frustrating from their point of view.

Understandably, both were upset and feeling sorry for themselves – all the plans and hopes they had for the first few years of their retirement had been disrupted.

So what is the answer?

I did do some reading, and there are a number of common processes which people can take when life’s plans go a little astray

  • Step back and understand that aside from this one glitch their lives are in fact generally quite great – never dwell on the question of “Why me?”
  • Moping is not allowed. Sit down, reassess your plans and then attack them with the same vigour. Get busy!
  • Understand that your plan does not define who you are. The people who surround you still love and respect you.
  • Accept your limitations and reassess the plan or activity- in this case taking into account the issue

I am not saying that this is the answer, and I do know that if I were in the same situation and someone quoted these to me I would be extremely sceptical.

However, I believe it is important to remember that retirement is a 20 to 30 year period of your life and to become self-observed and continue to ask the question of “why me” is not going to make this part of your life any more enjoyable.

 

Source: Mark Teale | Centrepoint Alliance

Raising resilient, passionate children

People often say that their biggest worry is what will happen to their children and their grand-children when they are gone. It is one thing to hand on a substantial estate – generally built through years of hard work, discipline and planning. It is another to be confident that our children and grand-children will themselves have the discipline and the emotional resilience to make the most of the opportunities that they are presented.

Growing resilient, passionate kids in affluence

We all as parents are doing our best to raise self-disciplined, appreciative, and resourceful children who are not spoiled by the prosperity around them. So why does it seem that the more we give them, the more ungrateful and entitled some children become? How can we use the advantages they already have to move them from striving to thriving?

MISTAKE: We cotton-wool our children from experiencing risk

Our own parents sent us out to play and didn’t call us in until dinner was ready. Someone always came home with a black eye or a nail in their foot. So why has parenting swung so far towards protecting our kids that we are preventing their growth and thriving?

Safety regulations, legal litigation and a heightened awareness of the dangers in our environment have turned us into over protectors. The “safety first” obsession plays into our fear of losing our kids, so we do all we can to shield them from harm. If a child doesn’t play outside, climb too high and fall, they frequently have phobias as adults.

STRATEGY: Let your kids explore their environment rather than the Internet

Let children play in a physically, emotionally stimulating and challenging environments that involve risk, and they may grow into better adjusted and more confident adults.

STRATEGY: Encourage your kids to try a new skill, especially if it frightens them

From public speaking to rock climbing, kids need to fall a few times to learn it’s normal; teens need to break up with a boyfriend or girlfriend to understand the emotional maturity that lasting relationships require.

MISTAKE: We rescue too quickly

Ever been the recipient or sender of a message to a fellow parent trying to sort out your childrens’ friendships? While this may look like sticking up for your child, it deprives them of the chance to stick up for themselves. By swooping in and intervening on behalf of our children, we are depriving them of the opportunity to encounter an obstacle and navigate around it. We are robbing them of the skills needed to solve problems independently. We are offering short-term relief and long-term low self-esteem.

STRATEGY: Let your children solve their own problems

Guide your child through a series of open questions towards finding their own solutions to their challenges. You are there to support and console them, but not to fix the problem. From a tough friendship dynamic to an academic concern, ask your child to brainstorm ways of solving the problem, all the while supporting and nurturing them.

MISTAKE: We praise too easily

Life is about winning and losing, not just winning. When Mum and Dad are constantly telling their children how clever/ pretty/talented they are, they doubt the objectivity of their parents and learn to cheat, exaggerate and lie and to avoid difficult reality.

STRATEGY: Praise for Effort not Result

Praising children’s intelligence can encourage them to embrace self-defeating behaviours such as worrying about failure and avoiding risks. However, when children are taught the value of concentrating, strategizing and working hard when dealing with academic challenges, this encourages them to sustain their motivation, performance and self-esteem.

MISTAKE: We try to be friends with our children and treat them all ‘equally’

Your child doesn’t need a friend in you, they need a parent. We may want them to like us so much that we try to avoid making the tough calls that may disappoint or frustrate them.

With multiple kids, when one does well, we feel it’s unfair to praise and reward them unless we also praise and reward their sibling/s. This is unrealistic and misses an opportunity to enforce the point to our kids that success is dependent upon our own actions and good deeds.

STRATEGY: Parent your children don’t befriend them

Your child does not have to love you every minute. Sometimes they need to be disappointed and frustrated by you in order to understand that conflict and boundary-setting are part of any healthy relationship. Your kids will get over the disappointment of not going to the hottest party or buying the latest gadget, but they won’t get over the effects of being spoiled. So tell them “no” or “not now,” and let them fight for what they really value and need.

STRATEGY: Parent each child according to their needs

Your children have different shoe sizes, different wants and needs and different personalities from their siblings, so you can’t parent them as if they were the same person. Treat each child as an individual and celebrate their uniqueness.

MISTAKE: We don’t practice what we preach

As parents, it is our responsibility to model the life we want our children to live. Children are very capable of pointing out the double standards we have and are the first to catch us out if we tell them to do as we say not as we do.

STRATEGY: Live in your integrity

If we want our offspring to be accountable for their words and actions, we have to be too. Show your kids what it means to give selflessly and joyfully. Work on your own passion and commitment and your kids will learn to be passionate and committed. Communicate clearly, respectfully and honestly. There is no point shouting at kids that they have no manners or respect when you are demonstrating the same trait.

MISTAKE: We give our kids our money, not our time

We work hard and we’re time poor. There is always another email to answer or another phone call to make. We may be doing all this hard work so our kids can benefit but when we rush from the chaos of the day we may miss the ordinary moments that our kids crave with us. We may compensate by buying them wonderful gadgets or throwing them great parties but nothing makes up for time.

STRATEGY: Prioritise time with each other

Turn the electronics off and have a real conversation. Speak about the highlights and lowlights of your day, ask them about theirs. Make your questions count, and listen to the answers. Make a special family time so that everyone knows Saturday afternoon or Thursday evening is just for the family.

 

Source:  LaTrobe Financial