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Have a question about retirement? You’re in good company!

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When I speak with people who have either retired, or are planning to retire in the near future, there are some similar themes that emerge when it comes to the financial side of things.

There appears to be five key questions that regularly come up in the conversation.

Will we have enough money to enjoy our retirement?

Many people have an idea about what they would like their retirement to look like – where they would like to live, how they will spend their days, the type of car they would like to drive, and the places they would like to visit.

However not many people have considered just how much their ideal lifestyle will cost.

Sure, the government will pay the age pension, however that does not allow you to have a particularly ‘flamboyant’ lifestyle.

The maximum age pension for a single person is just $22,804 p.a., and for a couple it is $34,382 combined. To put this into context, the poverty line for a single person in Australia is $426 per week (pw), or $22,152 a year.

The latest figures in the Retirement Standard published by the Association of Superannuation Funds of Australia show that a modest retirement lifestyle costs a single person $23,767 per annum (pa), while the cost for a couple is $34,216. By contrast, a single person wishing to enjoy a comfortable retirement lifestyle will spend just on $43,000 – when a couple will be shelling out close to $60,000.

Will I ever be able to retire?

For those wishing to maintain more than a basic retirement lifestyle, some form of continued participation in the workforce after ‘normal’ retirement age is a decision some will be willing to consider in order to fulfil their retirement dreams.

However, undertaking work that generates an income in retirement doesn’t necessarily mean working the 9-to-5 grind from Monday to Friday. Work may be part-time, casual or seasonal. For some it may even mean self-employment – taking a hobby or a skill and turning it into a small business.

Retirement becomes a trade-off. If we have dreams of a certain lifestyle but don’t have the means to support it, it will either be a case of trading down our lifestyle – nobody wants to do that – or find a way to afford it.

In addition to providing a source of income – ongoing workplace participation provides a social outlet (and also helps to keep individuals mentally in check!).

What about the increasing costs of health care as we age?

It is a fact that as we age; we become more reliant on the health care system, and that all costs money.

For those who are eligible for a part or full age pension (approximately 2.5 million Australians) the Pensioner Concession Card provides access to a range of services including bulk-billed doctor’s visits, access to hearing services, reduced cost of pharmaceutical items, and a range of other concessions.

Even if you don’t qualify to receive an age pension, self-funded retirees of age pension age may be eligible to receive a Commonwealth Seniors Health Card which can also provide concessions for health care and pharmaceutical items.

We need to understand what benefits we are entitled to. Sadly, many Australians are missing out on accessing benefits and services that are freely available simply because they are unaware of their entitlements.

What if I run out of money?

This is a very real concern for many people as we don’t know just how long we are going to live, and that makes planning very difficult.

With life expectancy in Australia steadily increasing, retirement is likely to span 25 to 30 years for many. With the money we do have it must last a very long time.

Recent research has found that many Australians are actually under spending in retirement so as to ensure the money lasts.

Managing the retirement budget requires some careful planning. Some very good advice is available to assist in that process.

Even if you were to run out of money, the age pension is there to provide a safety net. Most Australians will be entitled to receive the age pension at some point during their retirement.

The government rightly expects people to use their own financial resources first, before drawing on the public purse. As a result, and as a consequence of an ageing population, we can expect to see government policy being tightened more to restrict the age pension, and other government welfare payments to those truly in need.

And that might include raising the age of entitlement at which we can begin receiving the age pension.

Will I be able to leave a legacy?

Being able to leave a legacy to children and grandchildren is something that many people earnestly aspire to. But, at what cost?

There are many stories of people living in poverty simply so they preserve their modest savings to pass on to the next generation who, are often living a far more luxurious lifestyle than their parents ever imagined.

While being able to leave something for the next generation is a noble ideal, I am sure that a significantly large proportion of potential beneficiaries would prefer to see their parents enjoy their retirement years.

Leaving a legacy would be wonderful ideal, but would your kids want you living on baked beans for the rest of your life? There has to be some balance.

Enjoying a comfortable lifestyle, and being able to afford it, is a very fine balancing act.

There is no simple answer, but perhaps the lesson is to start planning as early as possible, understand what entitlements are available, and seek the appropriate advice.

 

Source:  Peter Kelly – Centrepoint Alliance

Amended Government superannuation package

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The Government has released an amended superannuation package.

Note: these changes are not yet legislated and still have to be introduced and made through Parliament.

Some measures remain largely unchanged while others such as the lifetime $500,000 non-concessional cap and the removal of the work test for over 65s have been replaced or scrapped altogether.

Once legislated, most measures will take effect from 1 July 2017. There are still many unanswered questions around the practical operation of many of the measures. We await the draft legislation for further details.

Objective of superannuation

The primary objective of superannuation is to provide income in retirement to substitute or supplement the age pension.

Non-concessional contributions (NCCs)
From 1 July 2017:
• the annual non-concessional contributions (NCC) cap will be reduced from $180,000 per year to $100,000 per year
• individuals under age 65 will be eligible to bring forward 3 years ($300,000) of NCCs
• individuals with a total superannuation balance of more than $1.6 million will be unable to make NCCs.

$1.6 million eligibility threshold
The $1.6 million eligibility threshold will be tested at 30 June of the previous financial year.
This means if the individual’s balance at the start of the financial year is more than $1.6 million they will not be able to make any further NCCs.

Individuals with balances close to $1.6 million will only be able to bring forward the annual cap amount for the number of years that would take their balance to $1.6 million.

Under transitional arrangements, if an individual has not fully utilised their NCC bring-forward cap before 1 July 2017, the remaining bring forward amount will be reassessed on 1 July 2017 to reflect the new annual caps.

The $1.6 million eligibility cap will be indexed in $100,000 increments in line with the consumer price index (CPI) ie the same as the $1.6 million pension cap.

Broadly commensurate treatment will apply to members of defined benefit schemes.

Work test
As currently, the work test will continue to apply for individuals aged between 65 and 74. This was previously proposed to be removed.

Individuals aged between 65 and 74 will be eligible to make annual NCCs of $100,000 from 1 July 2017 if they meet the work test (ie gainfully employed for 40 hours in 30 consecutive days) but cannot use the bring forward option.

Worked examples (provided by the Government)
Example 1 – bring-forward rule
Kylie’s (age 58) superannuation balance is $500,000. She sells an investment property and makes a $200,000 NCC in October 2017.

As Kylie has triggered the bring-forward option, she can make a further $100,000 NCC in 2018/19.

Kylie’s NCCs would reset in 2020/21 and she could make further contributions from then.

Example 2 – bring-forward rule
Molly (age 40) has a superannuation balance of $200,000.

In September 2016, she receives an inheritance of $250,000, which she contributes to superannuation, triggering the $540,000 3-year bring forward option.

From 1 July 2017, Molly can make a $110,000 NCC in 2017/18 and $20,000 in 2018/19. She can then access the new bring forward option from 2019/20 and contribute up to $300,000 in NCCs.

Note: This may mean an individual under age 65 in 2016/17 can trigger the current bring-forward option (subject to eligibility) and contribute an entire $540,000 in NCCs. It is unclear exactly how the remaining bring forward cap will apply from 1 July 2017 where less than $540,000 is contributed.

Example 3 – work test
Gary (age 72) a retiree, works around 40 hours in September every year and has a superannuation balance of $450,000.

As Gary meets the work test, he can make a $100,000 NCC in 2017/18.

However, as Gary is over age 65 he cannot access the 3-year bring forward option.

Example 4 – $1.6 million eligibility threshold
Eamon (52) has a total superannuation balance of $1.45 million. He can make a $200,000 NCC in 2017/18.

He cannot access the full 3-year bring forward option as this would take his balance over $1.6 million.

Eamon would also not be able to make any further NCCs.

CGT cap
Separate to the NCC cap, the current CGT cap of $1,415,000 (2016/17) continues to apply for small business owners.

Concessional contributions (CCs), contributions tax and catch up CCs
The annual concessional contributions (CCs) cap will be reduced to $25,000 (currently $30,000 and $35,000 if age 50 or over) from 1 July 2017 for all individuals.

The cap will index in line with Average Weekly Ordinary Time Earnings (AWOTE).

Individuals with adjusted taxable income of $250,000 (currently $300,000) will incur 30% tax on their concessional super contributions from 1 July 2017.

Catch-up CCs
This measure has been pushed out a further 12 months.
From 1 July 2018, unused CC cap amounts can be carried forward over 5-year periods accrued from 1 July 2018 where total super balance is under $500,000.

Example 5 – catch-up CCs
Anne has a superannuation balance of $200,000 but did not make any concessional superannuation contributions in 2018/19 as she took time off work to care for her child.

In 2019/20 she has the ability to contribute $50,000 into superannuation ($25,000 under the annual concessional cap and $25,000 from her unused 2018/19 cap which has been rolled over).

Tax deduction for personal super contributions
Individuals under age 75 and not just the wholly or substantially self-employed will be able to claim a tax deduction for their personal super contributions from 1 July 2017. This means more people will be able to make concessional contributions and it provides an alternative to salary sacrifice.

Example 6 – tax deduction for personal contributions
Chris has started his own online merchandise business but continue to work part-time at an accounting firm earning $10,000 as his business is growing.

His business earns $80,000 in his first year and he would like to contribute $15,000 of his $90,000 income to his superannuation.

Chris could claim a tax deduction for his $15,000 of superannuation contributions.

$1.6 million pension cap
A $1.6 million cap will apply on the amount that can be transferred into the superannuation pension phase from 1 July 2017. There will be no restriction on subsequent earnings.
Accumulated super in excess of $1.6 million can be retained in a member’s accumulation account (with earnings taxed at 15%) or moved outside super.

The cap will index in $100,000 increments in line with the consumer price index (CPI) and is expected to be around $1.7 million in 2020/21.

Transition to retirement (TTR)
Individuals who have reached preservation age can still access a transition to retirement (TTR) income stream but earnings on the amount supporting it will be taxed at 15%.

Innovative new retirement income stream products, such as deferred lifetime annuities and self-annuitisation products will become eligible for the earnings tax exemption.

Individuals will no longer be able to elect to draw lump sums from their TTR pension to reduce tax.

The tax treatment of income stream payments remains unchanged ie; for recipient’s age 60 or over the payments will be tax free, or taxed at the individual’s marginal tax rate less a 15% tax offset between preservation age and age 60.

Spouse contributions and tax offset
As currently, individuals can only make spouse contributions where the receiving spouse is under age 65 or age 65-70 and working.

The income threshold of a low income spouse for the purposes of the spouse contribution tax offset will increase from $13,800 to $40,000, from 1 July 2017.

Low income superannuation tax offset (LISTO)
The low income super contribution (LISC) will be replaced with the Low income superannuation tax offset (LISTO) from 1 July 2017.

The LISTO will automatically refund tax paid on low-income earners’ concessional contributions. The offset is capped at $500 where taxable income is less than $37,000.

Without the offset, low income earners would pay more tax than if they earned the income directly.

Anti-detriment
The anti-detriment will be abolished from 1 July 2017 as previously announced

Source: Asteron Life

Perspective: the way you see something

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Over time your perspective can change. This is influenced by numerous factors including age, education, your varied life experiences, family, a circle of friends, and no doubt – travel.

I myself am a good example of changing my perspective over time. Especially if I recount my own personal experiences from the last couple of months.

I have just returned from holidays in France and Italy. Before I left on my holiday people were very kind in offering suggestions of what to see, what not to see, what to be careful of, who to be careful of, where to eat, and where to stay.

So before I had even left the country I was concerned about the attitude of the French, gypsies begging in the street, pickpockets, crowds and queues, my own security, terrorists, and the scorching heat of a European summer. My perspective had been altered and I asked myself, “have I made the right decision to go to France and Italy for my holidays?”

The tragedy that occurred in Nice just before I arrived did not help the situation.

After three weeks travelling through France and Italy, I can report that the people I met in France were very polite and helpful, I did see a number of people begging, but was never harassed by any. The crowds and queues can be significant but if you get up early the problem is reduced. It was warm but not unbearable, and security measures were visible in most places so I never felt overly concerned for my own safety.

My perspective had changed once again and was in a very positive mindset regarding my attitude to travel.

However, it did make me realise that the negative comments I had read or listened to prior to my holiday had altered my perspective, and made me question my decision to take holidays in France and Italy. I had, in fact, provoked my own degree of fear.

So my question now is with all the negative press regarding ‘longevity risk’ in retirement, do we run the risk of altering people’s perspective of retirement to one of fear and trepidation?

I do understand that longevity risk is a concern. But have we tipped the scales too far to the point where people are now over-concerned about spending too much money early in their retirement, and trying too hard to adjust spending patterns to ensure they are able to continue to fund their retirement when they do reach their late 80s?

There is no doubt a fine line that a person needs to tread between an appropriate level of spending and saving in retirement. After a recent meeting with older retirees in nursing homes (whose health now precludes them from doing much more than sitting and watching television), a common theme emerged – a regret of not doing a lot more when they were healthy and able.

Yes, I can hear you say ‘hindsight’ is a wonderful thing, and is a great foundation for making a decision but of course never a reality.

Now, I am certainly not saying that when people retire that they should go on a spending spree. But if a person’s perspective of retirement has been tainted by the looming negativity around ‘longevity risk’ and face retirement with a degree of fear and trepidation as an industry, have we now taken all the fun and anticipation out of a person’s pending retirement?

Retirement, as I have often stated, is a lot more than just ensuring a person has enough cash to fund their lifestyle. Let us make sure that when a person is planning their retirement that they do take a more holistic approach and consider their health, their objectives or goals, and their attitude – as well as their need for wealth. Let us make a person’s retirement a time to treasure which is full of memories, so when they are too old to do much more than sit and watch they do so without regrets.

Source: Mark Teale – Centrepoint Alliance

Is retirement a sustainable proposition?

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Most Australians will be reliant on the government age pension to meet all, or a part, of their income needs for at least some of their retirement.

A small number of the population will remain self-funded retirees – for example; having no reliance on government funded income support (except for the Commonwealth Seniors Health Card).

However for the most part, at some stage in retirement, we will need to visit Centrelink and submit an application for the age pension.

The Australian age pension first became available to eligible folk once they turned 65 years of age – back in 1909. The Commonwealth age pension replaced pensions previously paid by the colonies (today known as our states and territories – before Federation).

However, the age pension is a relatively recent concept. It was in the mid-to-late 1800s that we started to see pensions introduced in parts of Europe by Otto von Bismarck, and for municipal employees (teachers, police, and firefighters), in the United States.

Like Australia – the American and European age pensions became payable to individuals once they reached a pre-determined age – generally between 65 and 70.

What was equally interesting was the fact that the average life expectancy at the time was around the same as the age of a person who would qualify for the age pension.

The governments back then worked on the theory they would only have to pay an age pension to those who survived until the qualifying age, and then it would only be payable for a relatively short period of time.

The Australian Bureau of Statistics estimated that in 2014 there were over 4,000 Australians aged 100 or older. This represented an increase of more than 260 per cent over the last two decades. In fact, today in Australia there are four living ‘super-centenarians’ (people who have lived up to, or over, 110!).

Even though we may not all live to be 100, Australians are living much longer than previous generations.

Today if someone passes away in their mid-to-late 70s it is seen as a tragedy that they died so young. Twenty years ago we would have said they lived a good and long life.

But what does a long life have to do with the age pension?

When the age pension was first introduced, it was designed to provide income in the final years of life when people were simply too old to work.

However today’s 65 year old is looking at 20 to 30 years of life ahead of them. Future governments simply will not be able to afford to pay an age pension to an increasing number of retirees who are living many years in retirement.

What might the future hold for retirement income and government support?

  1. Expect to see the qualifying age for the age pension increase over time. The age has already increased to 67 for people born after 31 December 1956. There have been suggestions, and even draft legislation supporting increasing the qualifying age to 70.
  2. Expect to use our own money first to support our retirement lifestyle and only then receive a government-funded age pension. Long gone are the days when we can amass large amounts of money in superannuation for the benefit of future generations.
  3. Don’t be surprised if the value of the family home is included when determining eligibility (assets) test for the age pension.
  4. We will all be working longer. Unless we have significant financial resources that enable us to fund our own retirement independently of the age pension, we will need to work longer.

If we desire a comfortable retirement that costs more than the age pension and our super may provide, some continued engagement in the workforce into our late 60s and even our early 70s may become a reality. Whether we remain an employee, or start our own business; and whether we work part-time or full-time; the options are endless.

Whatever we find ourselves doing – let’s make sure we enjoy it to the fullest.

 

Source:  Peter Kelly – Centrepoint Alliance

Are we working till we drop?

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Many of us are coming to the realisation that our retirement dream is just that – a dream. Something that is elusive and perhaps not as attainable as we first thought it might be. We were looking at the world through rose-tinted glasses.

As a result – many of us may be confronted with having to modify our retirement plans. Rather than a luxury Winnebago in which to explore the great outdoors, we may have to ‘downsize’ our dream to a small caravan, a camper trailer, or even a two-person tent!

Perhaps, instead of our dream of a beach-front home – we may need to now look at smaller real estate, probably a street or two back from the beach, or even an apartment.

So how do we survive (and thrive) in an ever-changing world where the goal posts are constantly moving – sometimes due to changes in our own plans and circumstances, but often as a result of things which we have little, or no, control over. These include factors such as our health, the economy, changes to legislation and – even more frighteningly – the political instability of the world in which we live?

The answer lies in being adaptable. It means having the ability to change directions and travel down an altered path when life dictates a move in a different direction – or simply when we wake up one day and make the decision to travel via another fork in life’s road.

For many of us the realisation is that we may not be able to afford the type of retirement lifestyle we have always dreamt of.

So – what are the options?

If retirement is firmly on the agenda (through either choice or circumstance) the option may be to reframe our retirement objectives and pursue a more modest and affordable lifestyle.

However, for some, we may decide to continue to remain in the workforce a little longer than we may have intended – whether on a full-time, part-time, or casual basis. If we love what we do; continuing to work on a little longer may not be a difficult decision.

Of course; continued engagement in the work place delivers a number of benefits. Not only does it provide an opportunity to supplement, replace, or defer drawing down on our super and other savings – it provides an opportunity to remain engaged with other people, to deliver services to the broader community, and to pass on a lifetime of skills to the next generation.

However; there is a word of warning!

If remaining engaged in the workforce, whether it be part-time, full-time, casual, or even voluntary – we must ensure that we love what we do.

As is often said; if we love what we do we will never work a day in our life!

So – what are your plans for retirement? Does some form of continued workplace engagement beyond the ‘normal’ retirement date have a place in your plans?

 

Source:  Peter Kelly – Centrepoint Alliance