(Australian Associated Press)
Many Australians fear they won't have enough money to retire on, but a new study says that's not so.
The Grattan Institute research found the vast majority of retirees today and in future are likely to be "financially comfortable".
"Even after allowing for inflation, most workers today can expect a retirement income of at least 91 per cent of their pre-retirement income well above the 70 per cent benchmark endorsed by the OECD," it said.
Grattan CEO John Daly also argues low-income Australians will effectively get a pay rise when they retire, through a combination of the age pension and their compulsory superannuation savings.
"The financial services industry 'fear factory' should be shut down, because it encourages Australians to worry unnecessarily about whether they'll have enough to retire on," he said in the report released on Wednesday.
But life could certainly get tougher for the poorest Australians, who are on low incomes, or don't work, and rent their homes.
To boost retirement incomes for the poorest Australians, the report calls for a 40 per cent increase in the maximum rate of Commonwealth Rent Assistance worth more than $1,400 a year for a single retiree.
The Grattan Institute also calls for legislated increases in the superannuation guarantee awarded to workers, which will rise to 12 per cent from a current 9.5 per cent, to be scrapped.
Workers would be earning the full 12 per cent by July 2025, at a cost of $2 billion a year.
The report argues this will ultimately cheat workers because it would "take away more money from working-age Australians that could be used to pay down the mortgage", potentially leading to larger household debt in retirement.
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Money and Life
(Financial Planning Association of Australia)
By the time you retire your super may be one of your biggest assets. So when it comes to a divorce, it's a very important part of a financial settlement. Find out from legal and financial experts what you need to know, and what to keep in mind when it comes to super and separating your family finances.
Splitting your financial assets during divorce is often a complex and difficult process. In the first in our series of features on sorting out money matters after a relationship ends, we take a look at super.
Just how important is my super?
As something that many of us won't actually benefit from for many years, super can end up taking a back seat in the settlement carve-up. But according to our two experts, Alison Fischer, CFP®, Private Client Adviser for Crosbie Wealth Management and Donal Griffin, Director of Legacy Law, you'd be wise to give some very careful thought to how super should be treated in your financial settlement.
"The family home is the asset that's often the most emotional and hard fought," says Donal. "It represents stability and security, here and now, while super can seem invisible to people while they're still far away from retirement. And for that reason, paying out from super to a spouse is often preferred because it won't have an impact on your immediate financial position. But thanks to the super guarantee and contribution strategies from advisers, we're now seeing super balances that are close to equal in value to property held in the marriage. So it should be a front and centre issue for discussion in any settlement."
Alison agrees that people going through divorce are usually more focused on securing their finances in the present. "It's the future value of your super you need to bear in mind when you're weighing it up against other assets," says Alison. "Earnings within super are likely to be more tax-effective than income from other assets or investments, so it has the potential to grow faster. The difference is that you can't tap into that value any time you like. But by trading off super to stay in your home and preserve your current income level, you could be making a choice that has significant impact on your lifestyle in retirement and your choice of when to retire."
Can my ex claim some of my super (or vice versa)?
"Super is just like any other property of the marriage," says Donal "In a financial settlement, it's pooled with all the other assets a couple share and have contributed to their home and its contents, savings and investments. And as with these assets, both direct and indirect contributions are taken into account when determining how super is split. Your indirect contribution to your partner's super might come in the form of raising kids and managing the family home while they're earning and this may translate to a claim on their super."
"On the other hand, if you've been the main income earner and made significant, regular, contributions to your partner's super fund, then it could be argued you've already been dividing super between you in an equitable way. If the matter goes before a court, these are all things to be considered in deciding whether there will be a transfer of super from one partner to another."
Should I go to court to get my fair share?
"In my experience, people are generally quite worried about the cost of taking their financial settlement to court," says Alison. "So in most cases, they're quite motivated to come to an agreement between them on their super and other assets too. If their solution involves splitting super in an existing fund, then they will need to have a lawyer draw up a binding financial agreement to inform the fund trustee. In doing this, the legal representatives will certify that each party has been provided with appropriate legal advice in coming to this arrangement."
"But even if each partner has reached agreement, their financial split may not be in both their interests in years to come. Without comprehensive legal and financial advice, you may not have a clear view on the long-term impact of dividing assets in the marriage between you now."
Things to bear in mind with super and separation
Based on expert tips from Donal and Alison, we've put together six important things to be aware of when you're exploring options and making decisions about super and your financial settlement.
1. Check the value of super assets
Before making any decisions about how super will be retained or shared, take some time to get a full and up-to-date valuation of all super assets, whether they're held in an accumulation fund, defined benefit scheme or SMSF.
2. How long until you retire?
If you still have many years to go until retirement, you may be in a position to build up your super again through SG contributions. But by reducing your super balance now, you are sacrificing potential investment earnings on that amount. So you may wish to consider budgeting to make extra voluntary contributions going forward to compensate for this.
3. Mind the caps
There are annual caps on all your concessional (pre-tax) and non-concessional contributions into super both SG and voluntary payments go towards these caps. So if you're planning to catch-up on super after 'letting it go' in a financial settlement, you'll need to schedule future super payments with these caps in mind.
4. Review insurance and nominations
If your super splitting plans involve winding up or consolidating any of your current funds, check your personal insurance cover is still adequate for the needs of you and your family. As your family dynamic is changing, it's also a good time to review your super and insurance policy beneficiaries and update your nominations as needed. If you were to die following a separation, but without going through a legal divorce, the trustee of your super fund may pay the death benefit to your spouse, unless there is a current binding nomination naming your preferred beneficiary.
5. Impact on Centrelink entitlements
If you're approaching retirement, or retired already, super will likely play a far more significant role in a financial settlement. If your current income includes Centrelink payments, you'll need to consider how any distribution of super or other assets is going to affect your entitlements.
6. How will your super be invested?
You may choose to 'flag' super in an existing fund. This means the value of the fund will be shared between you and your ex-partner at a future time according to a binding financial agreement. And there may be other instances when joint super assets continue to be invested beyond a separation, in an SMSF for example. In cases like these, the two of you will also need to come to an agreement on making investing decisions to maximise the potential future value of your super assets.
Defined benefit schemes and SMSFs
If you or your ex-partner are defined benefit scheme members, or trustees of a Self Managed Super Fund, reaching agreement on what to do with your super, and acting on it, could be more complex. But no matter what super assets you have in your name or in what structure they are held, getting specific, expert and personalised advice on your financial settlement can make a significant difference to your financial security, both now and in the future.
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So far this year, share markets have experienced two episodes of sharp volatility with steep falls recorded in January to March (-6%) and October (-8%). The latter wiped out all share market gains for the year-to-date.
During periods of volatility it can be hard to remember that share market fluctuations are normal and to be expected. This video aims to provide investors with a sense of perspective.
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(Senior Consultant at Milliman)
Some older Australians may be better off diverting savings towards home ownership rather than superannuation, according to research from Milliman.
A retiree renting a one-bedroom unit in Sydney would require more than $500,000 in extra superannuation savings to fund the same lifestyle as a home owner, according to new Milliman research.
The findings form part of the latest Milliman Retirement Expectations and Spending Profiles (ESP) report, which compares six retiree profiles against a 'Nationwide' profile (benchmarked to the top quartile of expenditure). The data is based on the real-world expenditure patterns of 300,000-plus retirees.
The analysis shows that a 65-year-old 'Urban Renter' retiree is forced to spend approximately $15,000 a year more than the Nationwide retiree, with nearly half of their budget allocated to rent (even after Centrelink Rent Assistance).
Figure 1: Urban renter: how much super do I need?
Source: Milliman Retirement ESP 2018 Q1
While retirees spend less on most categories of expenditure (except health) as they age, rental costs tend to continue rising. By age 85, urban renter retirees are spending more than $20,000 a year above the expenditure of Nationwide retirees who own their home.
Retired urban renters are also hurt by policy settings which favour homeowners. Renters receive relatively low levels of subsidy (Centrelink Rent Assistance) while the often-substantial value of the family home is exempted from the Age Pension means test.
The unfortunate result is that the urban renter retiree requires more than $1 million in super to sustain their expenditure to female life expectancy with 95% certainty (assuming an investment in the average balanced super fund investment option1). This is more than $500,000 above the amount required by the Nationwide retiree.
These forecasts are based on Milliman's sophisticated stochastic modelling assessing thousands of scenarios across a balanced investment option including variations in returns, inflation, spending drawdowns and the impact of the Age Pension.
One-quarter of retirees are expected to still be paying off a mortgage or renting in retirement, according to the Productivity Commission.2 Recent trends of declining home ownership suggest an even greater portion of future retirees will face higher housing costs in retirement.
The government's recently launched First Home Saver Super Scheme is aimed at making housing more affordable by allowing people to save for a first home inside their super fund, where contributions are concessionally taxed. However, the scheme, which is capped at $15,000 annual contributions over two years, is not expected to make a major difference to home ownership levels.
Other policy changes have been proposed by the Labor party such as changes to capital gains and negative gearing concessions for home owners.
While saving for retirement is important, the Milliman analysis reinforces the importance of quality financial advice tailored to individual's personal circumstances and goals.
It also underlines the importance of super funds delving deeper into their membership to understand their circumstances before offering general advice. In some cases, older Australians may be better off diverting savings towards home ownership rather than superannuation.
The Milliman Retirement ESP can help super funds and financial advisers to understand their members and clients by modelling their likely future behaviour and expectations based on hard data.
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Money and Life
(Financial Planning Association of Australia)
So you've finished your degree now what? With more Australians taking time to study for longer, find out if the benefits to your career and earning potential could be enough to make it worth investing in a postgraduate qualification.
Starting your working life with a sizeable HECs debt might not be the best thing about studying for a qualification in Australia, but it's definitely not deterring young people from continuing with their studies after high school. Figures published by the Australian Bureau of Statistics in 2016 showed that nearly two thirds of Australians have completed a university degree or apprenticeship. And what this is leading to is a rise in educational standards demanded by employers in many industries.
So perhaps it's not surprising to learn that in 2017 more than 20% of graduates went on to do additional full-time study or research instead of entering the job market straight away. And given the growth in overall postgraduate enrolments in recent years, it seems postgraduate study is also a priority for mid-career professionals too. In the five years to 2017, there has been a 46% rise in the number of people with postgraduate degrees and a 123% increase since 2006.
Resisting the wage slump
So what can postgraduate students hope to gain from continuing with their studies at uni? In terms of earning potential, wage growth for workers with postgraduate qualifications definitely puts them ahead of the pack. In the four years to 2018, wage growth in Australia has been flat, even though unemployment figures have been reasonably stable. The Wages Price Index (WPI) for the year to April 2018, for example, rose by just 2.1%. Compare this with wage growth figures for postgraduate qualified workers collected in the 2017 Graduate Outcomes Survey and the picture looks much rosier. Full-time salaries for postgraduate coursework degree holders rose by 12.5% over the three years to 2017, an average of just under 4.2% per year.
You might think this compares pretty favourably with the rest of the working population. But looking at how salaries have grown for postgraduate research degree holders in the same period, our coursework graduates might feel quite hard done by. For workers with a PhD or Masters by research, the median increase in salary over the three years was a whopping 24.8%.
The value of research skillsIf these figures are anything to go by, not all postgraduate students can expect the same return on investment from their extra study. In a job market where creativity, critical thinking and problem-solving are highly valued, it seems a research degree may be giving postgraduate qualified candidates the edge for employability and earnings. A recent research project from the Australian National University (ANU) and CSIRO has backed this up by showing just how many employers are on the lookout for strong research skills. The project team created a search engine to analyse content from thousands of ads supplied by job search company SEEK. The engine found that over half the jobs advertised required research skills, even though many did not expect candidates to have a PhD.
"The PhD was originally designed to train the next generation of academics, but most graduates today find jobs outside of academia," said Dr. Will Grant, one of the lead researchers on the project. "The machine found a large hidden job market in Australia for people with PhDs, with half of the job ads scanned specifying the need for a high level of education, including research skills."
Making sure it all adds up
Your future earning potential is just one part of the equation when it comes to deciding whether to invest your time and money in further qualifications. Making sure you can cover living expenses while you study is important, as financial stress can become a major distraction. Taking some time to plan how you'll finance your next career move, whether it's studying or starting a new business, can help you enjoy the transition and have more confidence in your future.
Thinking about getting your next qualification? Discover why investing in yourself is important and how you can go about it.
ABC News, Why top companies are ditching degree requirements for some jobs, Joshua Krook, 18 April 2017, "At the end of 2016, the Australian Bureau of Statistics (ABS) revealed close to two-thirds of all Australians had completed a degree or apprenticeship."http://www.abc.net.au/news/2017-04-18/why-top-companies-are-ditching-degree-requirements-for-some-jobs/8449236
Council of Australian Postgraduate Associations, Media Release: Postgraduates get a raw deal despite top graduate outcomes, 12 January 2018, "The Graduate Outcomes Survey also established that 21% of those with undergraduate qualifications opted to go on to full-time postgraduate study immediately after graduation."http://www.capa.edu.au/media-release-postgraduates-get-raw-deal-despite-top-graduate-outcomes/
The Australian, Battle for jobs triggers postgraduate surge, 23 October 2017, Tessa Akerman, "Competition in the job market has pushed Australians into further education like never before, with a 46 per cent jump in the number of people with postgraduate degrees over the past five years and a 123 per cent increase since 2006."https://www.theaustralian.com.au/higher-education/battle-for-jobs-triggers-postgraduate-surge/news-story/edfa72a58f9fc9283482e7e1fc687be8
ABC News, Australian workers continue to see wage growth mired near historic lows, Stephen Letts, 16 May 2018, "On seasonally adjusted basis, the Wage Price Index is up only 2.1 per cent over the year"http://www.abc.net.au/news/2018-05-16/wage-price-index-march-quarter-2018/9766438
Graduate Outcomes Survey 2017, "Median full-time salaries for postgraduate coursework degree holders rose by 12.5 per cent between 2014 and 2017"https://www.qilt.edu.au/about-this-site/graduate-employment
Graduate Outcomes Survey 2017, "Median-full time salaries for postgraduate research degree holders increased by 24.8 per cent between 2014 and 2017"https://www.qilt.edu.au/about-this-site/graduate-employment
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