SAVING FOR RETIREMENT
Have you worked out the amount of superannuation and other savings that you will need to finance your retirement?
A major part of the financial planning process is to complete a fact find that identifies your income and expenses and therefore gives an indication of what lifestyle you may have currently. Whatever lifestyle you’ve been used to, it is very difficult to answer the question “what is your lifestyle going to look like once you retire?”
It is very important to identify during pre-retirement all of your debt. Household debt, motor vehicles credit cards and geared investment properties. From this point, you can consider Your Options At Retirement.
What will happen to these accounts upon your retirement? Once you have ceased earning taxable income whether that be from business or employment, the opportunities to refinance and borrow from banks become increasingly difficult.
Property owners may have an opportunity to leave open a line of credit for emergencies. Or a credit card with low fees for the same purpose. Property owners could also consider a reverse mortgage, but we recommend obtaining advice from a financial planner before making such a step.
Day-to-day Living Expenses
The first stage of the process is to identify what current costs you have for your day-to-day living expenses.
This will form the basis of your requirements. This gives you a chance to identify spending that is discretionary (in other words you can choose to spend or not it’s up to you).
Your discretionary spending is where difficult choices arise.
One big question is: Do you have a need or wish to have holidays? Are these in Australia or overseas and how much do you want to spend. Are your holidays every year or once every five years?
In addition: What type of car do you want to run? New or Retro? What maintenance jobs are there around the house that you know are coming up and you can’t avoid?
Age Pension Assets Test Has Become Stricter
How you structure your assets now holds greater importance now that the Age Pension assets test has become stricter for those seeking a part Age Pension to supplement retirement savings. Since 1 January 2017, rather than losing $1.50 of Age Pension for each $1,000 over the FULL Age Pension asset threshold, a retiree will lose $3.00 of Age Pension for every $1,000 over the threshold.
Speak to us about how we can assist you in maximising your pension entitlement.
What if you’re a home-owning couple with a superannuation balance of $535,000
A couple can expect to enjoy a ‘comfortable’ lifestyle in retirement if they retire with a combined superannuation balance of $535,000 (assuming investment returns of 5%pa) in conjunction with a PART Age Pension. At these levels, it is likely neither partner would be paying income taxes. Over a 20 year period an account based pension of $1,765 each per month from the combined superannuation account would drain the balance of the superannuation account to zero.
In addition to this, each partner would be receiving an age pension of approximately $910 per month each (2017 figures) at the beginning and a full pension towards the end ($1,432 per month each). On the other hand, choosing more conservative investments, say 3% per annum, using the above example your account based pension payments monthly would be $1,483 per month each over 20 years which would drain the account to zero. These figures are general only and subject to variation depending on your individual circumstances.
From the analysis it is possible to see the impact of overly conservative returns, particularly when regard is given to the rate of inflation if that is around 2%.
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