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Do I really need $1million in super to be able to retire?

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Over the years there have been a number of articles published stating people need to have a million dollars or more in super to be able to retire comfortably.

This could be out of the reach for many, if not most Australians.

The real answer to this question is….it depends.

It will depend on several factors including:

1. How much income would I like to receive in retirement?
2. Will my super be my only source of income?
3. Am I entitled to the government age pension?
4. How long will I live?
5. Am I prepared to run down my capital during my lifetime, or do I wish to leave a legacy for the next generation?
6. Do I own my own home, or am I renting?
7. Will I be carrying any debts into retirement?
8. What type of investor am I (conservative, moderate, or aggressive)?
9. Will I need lump sums during my retirement to purchase a new car, renovate the kitchen, or spend on other big-ticket items like overseas holidays?

These are a few of the factors that need to be considered when exploring this question.

Many readers will be aware of the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA).

First published in 2004, the Retirement Standard provides a detailed budget of the likely costs to support both a modest, and a comfortable lifestyle for Australian retirees. The Standard provides figures for both singles and couples. Furthermore, separate budgets are published for those up to age 85, and those over 85.

Not only does the Standard publish an exhaustive budget for each group, it also provides an estimate of the amount of savings (super) a single person and a couple will need to have to support their preferred lifestyle.

The most recent budget, from March 2022, mentioned for a comfortable lifestyle was $46,494 for a single person and $65,445 for a couple. To support this level of spending, it is estimated a single person will need approximately $545,000 in super, and a couple will need $640,000. It’s anticipated that, at least for part of their retirement, retirees will have their income needs supplemented by the government’s age pension.

ASFA’s projected superannuation balances estimate that the superannuation savings will be exhausted when a person reaches their early 90’s.

The ASFA Retirement Standard has not been without its critics, but up until now it has been the only readily available resource for people wishing to explore the likely costs of living in retirement.

One of the concerns with the ASFA Retirement Standard is it overstates the level of income many people spend in retirement.

Whether this is right or wrong is a question for another day. In the absence of any meaningful alternative, it’s the best we have had to work with. At the end of the day, retirees, and those approaching retirement, will have a gut feel for the level of income they think they will need to support their preferred retirement lifestyle.

Understanding the income, we would like to receive in retirement, is the starting point.

In March 2022, Super Consumers Australia (SCA), an independent, not-for-profit consumer group published a Report “Retirement Spending Levels and Savings Targets”. SCA has partnered with CHOICE.

Like the ASFA Retirement Standard, the SCA report considers retirement spending for singles and couples at a low, medium, and high level. Rather than developing their own budgets, the report relies on spending data available from the Australian Bureau of Statistics.

By comparison, the SCA report suggests the level of income and target savings a homeowning single person and a couple (aged around 67) will need is:

Status Spending Level Spending Savings Required
Single Low $28,000 $70,000
  Medium $37,000 $259,000
  High $50,000 $758,000
Couple Low $40,000 $88,000
  Medium $55,000 $369,000
  High $73,000 $1,021,000

The estimates project the income to be paid through until age 90 and is supplemented by the age pension as it becomes available.

While more research will enable advisers and their clients to make more informed decisions, the issue is an individual one.

We generally have a rough expectation of how much income we would like in retirement.
When that is coupled with other questions around our desire to leave a legacy and importantly, how long that income must last, the amount we need to have saved for our retirement becomes a very fluid number. One size certainly does not fit all.

Planning for retirement is complex and involves many “moving parts”. As most people only get one chance at getting their retirement planning right, the support of a qualified financial adviser is highly recommended.

 

 

Source: Peter Kelly | Centrepoint Alliance

The “New” Government Pensions Loans Scheme – Do I Need Extra Income?

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It’s time to review the Pension Loans Scheme (PLS), how it operates, how it can assist either long term or short term and tell you about some new features.

Why did I think it is worthwhile revisiting the Pensions Loans Scheme (PLS)?

A couple of reasons.

1. The Government announced a couple of changes to the scheme in the May budget.

2. I have been receiving questions on how the PLS operates.

3. The increasing value in age pensioners homes.

Let us have a closer look at point 3 first.

Domain’s December 2020 quarterly house price report shows the average price for a home in Australia in December 2020 was $852,940. Melbourne was very close to $1 million, and in Sydney, the average price was more than $1.2 million.

In the first 5 months of this year, the average increase in property across all capital cities was close to 10%, meaning all the average values that I mentioned in the last paragraph have all increased by close to 10%.

So, how does this affect the average age pensioner in Australia? It does not; however, with the increase in the value of their home and the land that it is built on, pensioners may see increases in their annual home insurance and rates.

The government is very keen for retirees whose cash reserves maybe dwindling to access the increased equity in their home to improve their lifestyle, increasing their spending and reducing their reliance on the age pension, which all helps the economy.

The ability to sell your home and buy a smaller property and deposit the difference into superannuation – Downsizer Contributions – is one measure.
However, speaking to age pensioners there appears to be two issues with this measure which they are not all that keen on. Firstly, many have lived in their current home for a long time and are very comfortable where they live. It is a home full of memories. Secondly, selling and moving to a smaller home, and having more money in superannuation, can reduce their age pension, which they do not feel comfortable about.

Let us now look at points 1 and 2.

What does the PLS have to offer? The PLS provides the ability to access the equity in your home, increasing the amount of age pension you receive on a fortnightly basis to an amount of up 150% of the full age pension. For self-funded retirees who need to increase their income, they too can also access the PLS and apply for a fortnightly payment of up to 150% of the full age pension.

In practical terms what does this mean? As an example, a single age pensioner on the full age pension of $952.70 could access the equity in their home and receive up to an additional $476.35 per for fortnight. For a single self-funded retiree, they could access the equity in their home and receive up to $1,429.05 per fortnight.

How much of the equity in my home can I access?

This depends on your age, the value of your property, and how much of the equity you wish to maintain. To explain the process in simple terms I will use an example.

A single 75-year-old in receipt of the full age pension, who has a home valued at $850,000, who would like to retain equity in their home of $350,000. The following formula is the basis for the maximum loan amount:

$3,750 (age component value)* x (($850,000 – $350,000)) / $10,000 = $50,000. This is the maximum amount of the loan.

In practical terms, it means that our single age pensioner could receive an additional $476.35 per fortnight at the current interest rate payable of 4.5% on the loan for approximately 4 years.

This maximum loan amount can be recalculated and increased on a yearly basis, based on an increase in the value of the home and the increase in the pensioner’s age.
The payments made under the PLS are not taxable and are not assessable by Centrelink under the income test.

What are the changes to the scheme that the government announced in the May budget?

1. A person can now apply for a lump sum payment up to the maximum annual amount applicable to their situation. In the example above, this would mean that our single age pensioner could apply for a lump sum on a yearly basis totalling $12,385.10.

The downside to this advance lump sum is that it effectively reduces the extra fortnightly loan payments that they were receiving, after lump amount is paid and the total reaches $12,385.10 for the year to zero dollars.

2. The second announcement was the introduction of a ‘No Negative Equity Guarantee’, meaning that borrowers under the PLS, or their estate, cannot owe more than the value of their property.

I have provided a lot of information that is quite complex to understand. What I would like to point out is that the PLS gives age pensioners and self-funded retirees an extra avenue of accessing the equity in their home with a very credible lender “the Government” at a competitive interest rate of 4.5%.

Before you rush out and sign up for a loan under the PLS, make sure you understand how the scheme works in its entirety, and the pros and cons with regards to your own circumstances. The best way to do this is to speak with a professional.

*The age component value is based on a person’s age and will increase as a person grows older.

 

 

Source: Mark Teale | Centrepoint Alliance

Age pension entitlement… Am I receiving the correct age pension?

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It is a question that is often asked. Unfortunately, it is not always fully explained by the correspondence from Centrelink or Veterans Affairs.

On 20 March 2021 the Age and Service Pensions were increased, the first increase in 12 months. Pensions are normally adjusted or increased twice a year in March and September, but because of a negative CPI figure last year, there was no increase to the pension rates in September 2020.

The single pension was increased from $944.30 per fortnight to $952.70 per fortnight and the couples combined pension was increased from $1,423.60 per fortnight to $1,436.20 per fortnight.

Some pensioners will not see any increase in their pension and may in fact see a decrease.

Why would this be the case?

In addition to adjusting the pension rates for movements in the CPI in March and September of every year, Centrelink and Veterans Affairs also automatically review and adjust the value of a pensioner’s investments in Shares and Managed Funds.

Since September last year the share markets in Australia and around the world have grown substantially. For example, the Australian market has grown by approximately 16%, the UK market by 14%, the Hong Kong market by 21% and the US market by 22%.

The downside for pensioners who are receiving a part pension and are invested in these areas either directly or through managed funds is that they may see a decrease in their pensions because of an increase in the value of their investments.

It is extremely important for retirees who are receiving a pension from either Centrelink or Veterans Affairs to remember that your entitlement is based on your income and assets and any movement in these values can have an impact on your entitlement. Therefore it is imperative for pensioners to ensure that the information that Centrelink or Veterans Affairs hold is correct and up to date.

If the market were to fall as it did at the beginning of last year, you do not have to wait for the automatic review by Centrelink or Veterans Affairs in March and September. You can ask for a manual review to be conducted on your entire portfolio.

Please be careful when requesting a manual review. If you have one investment which is not performing, you are not able to request a review of just this investment, the review will be conducted on your entire investment portfolio.

If you are unsure of your correct entitlement based on your current share or managed funds portfolio, please speak to an expert.

 

 

Source:  Mark Teale | Centrepoint Alliance

Commonwealth Seniors Health Card – Do I qualify?

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The Commonwealth Seniors Health Card (CSHC) is a concession card issued to a person who is old enough, but not entitled, to receive either an Age Pension or a Veterans Affairs service pension.  Card holders are entitled to concessions in relation to their health care and the purchase of prescription medication.  Also, depending on location, card holders may also be able to access state or local government concessions as well.

The CSHC, unlike the pension, is not subject to an assets test. In other words, the value of the assets you have invested or own will not stop you from qualifying for the CSHC. However, the CSHC is subject to an income test.

The income test considers both your adjusted taxable income and, if you do have an account-based pension, the assessed deemed income based on the pension balance.

To pass the income test, the combination of your adjusted taxable income and any deemed income assessed on an account-based pension needs to be less than:

  • Single $55,808 p.a.
  • Couple $89,290 p.a. (combined)
  • Couples living separately due to illness $111,616 p.a. (combined)

These thresholds are adjusted on 20 September each year.

The adjusted taxable income is based on your taxable income (evidenced by your notification of assessment from your last tax return).  This taxable income amount is adjusted by any investment losses plus any reportable superannuation contributions, employer fringe benefits or foreign income.

If the notification of assessment references your final year of employment or the last year that your business was operating, you are able to provide an estimate of your income; providing, of course, you are no longer working or operating your business.

Added to this adjusted taxable income is the deemed income on any account-based pension that you may have.  As an example, if the value of your account-based pension was $1.5 million dollars, for a single person the first $53,000 of the balance would be assessed as earning 0.25% and the remaining $1,447,000 would be assessed as earning 2.25% meaning the total deemed income on the pension would be $32,690.  It is important to note that the actual income being drawn from the account-based pension has no bearing on the income that is assessed.

Therefore, provided your adjusted taxable income or the estimate of your income is less than $23,118 for that year, you would be entitled to a CSHC.

I should point out that if one member of a couple reaches the appropriate age and does apply for a CSHC, the partner’s adjusted taxable income is still taken to account, even if they do not yet quality for their own CSHC. The total combined income as a couple would need to be less than $89,290.

Over the last twelve months, the deeming percentage rates have reduced substantially and I believe there may be people of qualifying age with large account-based pensions who may now be eligible for a CSHC. For example, a couple both of qualifying age with no other investments or income other than their account-based pension income stream would each be entitled to a CSHC even if they had a combined balance of $4 million.

For a healthy person, the CSHC may not seem to offer many concessions, but the difference in prescription prices compared to those who do not have a CSHC can be substantial.

If you are unsure if you are entitled to a CSHC, speak to someone who can look at your circumstances and advise you of your correct entitlement.

 

 

Source:  Mark Teale | Centrepoint Alliance

Aged Care – it’s complicated, and emotional

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This story highlights the complexities of aged care and the financial and emotional stress that can arise for not just one person, but in this case, two.

Here is a brief outline of the circumstances.

  • Mum, Anne is 87 years of age and not in very good health. For the last 6 years she has been cared for by her daughter, Jayne who is now 61 years of age.
  • Anne is in receipt of a full age pension; her only assets are her home which she has lived in for over 50 years (because of its location is worth over $1 million) and $43,000 in a bank account.
  • Her daughter Jayne, is single, a qualified nurse and has not worked for the last 6 years while she has cared for her mum. She is in receipt of a Carer Payment and a Carer Allowance. Jayne does not own a house and has lived at home with her mum since her father passed away 20 years ago.
  • Anne’s health has been in continuous decline, and she now needs to enter residential aged care.

What happens next?

Anne enters residential aged care as a low means resident, meaning she does not have to pay a Refundable Accommodation Deposit (RAD). Her only cost is the basic daily fee of $52.25 per day or $731.50 per fortnight. Anne is in receipt of the full age pension $944.30 per fortnight, so there does not appear to an issue.

At the time of her entering aged care, Anne’s home is exempt because Jayne is still residing in the home, has done so for many years, and is receiving an income support payment – the Carer Payment. Under the legislation Jayne is classified as a “protected person”.

After a period of 14 weeks the Carer Payment ceases as Jayne is no longer caring for her mum and is therefore no longer entitled this payment. Jayne then decides she is going to return to nursing and commences work at her local hospital, continuing to reside in her mum’s house.

Unfortunately for everyone, life is about to become a little more stressful.

As Jayne is no longer in receipt of an income support payment, mum’s home becomes an asset for the purpose of calculating the aged care fees.

Anne’s status as a low means resident remains and she does not need to pay a RAD, however she now is required to pay a Daily Accommodation Charge (DAC) of $58.19 per day or $814.66 per fortnight on top of the basic fee. Mum’s total fees now are the Basic Daily Fee of $52.25 per day plus the DAC of $58.19 or $1,546.16 per fortnight. Mum’s only source of income is the full age pension $944.30 per fortnight, therefore she is just over $600 a fortnight short of being able to pay her fees.

Jayne, who is now working, decides she will pay the difference from her salary, which solves the problem in the short term.

However, two years after mum entered residential aged care, she loses her pension because of her assets, her one-million-dollar home has become an asset for the purpose of calculating her age pension entitlement.

Mum’s cash in the bank has reduced to just over $20,000 and even though Jayne is still working, her salary will not cover her own living expenses and Anne’s total aged care fees. Anne’s fees are no longer around $600 a fortnight short in paying her fees, she is now short $1,546.16 per fortnight.

The options available are not many.

They could sell the home, which is incredibly stressful for Jayne. Even though she has an enduring power of attorney and could sell her mum’s home, she is reluctant. It’s not the financial perspective, but the emotional and sentimental impact of selling the family home. After all, this is her mum’s home and she has also lived in the home for over 20 years.

Jayne considers borrowing against the value of the home and paying a Refundable Accommodation Charge (RAC) of $433,500 to the aged care facility to ensure mum no longer has to pay the DAC. The money borrowed and secured against the value of the home will reduce the value of Anne’s assets to below the threshold and she could then be entitled to an age pension of $591 per fortnight.

Mum’s aged care fees will change to the Basic Daily Fee of $52.25 per day, with a Means Tested Care Fee of $18.27 per day, making the total fee payable $987.28 per fortnight.

Jayne would then be responsible for both the short fall in her mum’s aged care fees as well as the mortgage repayments on mum’s home.

In this particular scenario, Jayne had not spoken to anyone before mum had to enter aged care and so she had no idea of the decisions she would have to make. As such, she was not prepared either financially or emotionally with the issues she had to face.

The aged care legislation is complicated but more than that, it is exceedingly emotional, and people should be prepared for and aware of the decisions that they may need to be make before they have to make them.

Talk to an expert who understands what is required so that you are prepared, and nothing comes as a shock. Don’t leave it until the last moment, decisions made under emotional stress are generally not made with the clearest of heads.

 

Source:  Mark Teale | Centrepoint Alliance