How much do I need to retire?

Posted on 18 July 2019
How much do I need to retire?

Money and Life
(Financial Planning Association of Australia)

How much do you need to save to make sure you have enough to last throughout retirement? It very much depends on what your living costs will be after leaving work.  Find out more about how to budget for the retirement income you'll need for the lifestyle you're planning for.

When you plan to retire will often be determined by whether you can afford to stop working and still have enough income to maintain your lifestyle. Latest figures from the Australian Bureau of Statistics show the majority of men (36%) and women (22%) chose to retire at the time when they became eligible to draw on their superannuation and/or the age pension. And their average age at retirement was 63.5 years.

If you're planning to delay retirement until your super balance reaches an amount you can comfortably live on, just how do you determine what that target should be? There are a number of factors that will affect how far your money will go, including your life expectancy, how your money is invested and other choices you make for managing your income. But one of the most important steps to planning for a secure financial future in retirement is to be realistic about your living costs.

How your living costs might change

As you stop working and have more time to yourself, your routine will change and you might save on some costs as a result. Spending on transport could fall as you no longer have to commute. If buying lunch and takeaway coffees has been a daily habit while working, you could also make significant savings by leaving these out of your retirement routine. Other living expenses, such as buying groceries and clothes and paying household bills are likely to be much the same before and after retirement.

Thinking about how you'll spend time in retirement and where you're planning to live will also give you clues about how your spending might go up or down. If a few trips overseas are on the cards, you'll need to allow for these occasional costs in your overall budget. But if you're planning to limit travel to domestic holidays only, then you won't need to allow for these expenses in your financial plan.

Start with a ballpark estimate

How much travel you plan to be doing is just one of the many daily and one-off costs taken into account in the Retirement Standard estimates for annual expenses. Updated every quarter by the Association of Superannuation Funds of Australia (ASFA), these figures can give you a rough idea of what you can expect to be spending day-to-day in retirement.

There are two estimates available, a higher one for a comfortable lifestyle and a lower amount for a modest lifestyle. As at December 2018, the amount you'd spend as a single person aged around 65 years enjoying a comfortable lifestyle is $43,317 and for a modest lifestyle the annual budget is $27,648. The estimate for couples is $60,977 and $39,775 for comfortable and modest lifestyles respectively.

To give you an idea of how differences between a modest and comfortable budget might impact on your retirement plans, the annual travel budget is a good place to start. A couple living modestly can expect to spend approximately $2,500, with no allowance for overseas trips. On a comfortable budget, a couple can splash out more than $5,000 each year on travel, with roughly a third going towards international travel.

The cost of lifestyle changes

Although it's wise to build a budget based on what you expect to be doing in early retirement, your overall plan should also take into account potential for lifestyle changes as you age. Travelling for longer periods, dining out and entertainment and taking part in sports and hobbies could taper off as you grow older. Health and aged care costs, on the other hand, could make up a larger share of your budget in the later years of retirement.

A plan to see you through retirement

Your expenses are just one side of the whole budget planning process. Taking a good look at all your retirement income options is just as important to figuring out how much you'll need and when you'll be ready to take that step. From the age pension to the equity in your home to retirement income products such as annuities and account based pensions, there are all sorts of ways to support yourself financially towards having the lifestyle you want.

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Government announces cuts to deeming rates

Posted on 17 July 2019
Effective from 1 July 2019, the lower deeming rate will decrease from 1.75 per cent to 1.0 per cent for financial investments up to $51,800 for single pensioners and $86,200 for pensioner couples. The upper deeming rate will be cut from 3.25 per cent to 3.0 per cent for balances over these amounts.


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Income tax cut laws head for Senate battle

Posted on 16 July 2019
Income tax cut laws head for Senate battle

Katina Curtis and Rebecca Gredley
(Australian Associated Press)

Australians earning up to $90,000 look set to get an extra $1000 back in tax within weeks, with the federal government on the verge of winning the Senate support it needs for stage one of its tax package.

The $158 billion package passed the lower house on Tuesday night after about three hours of debate, with Labor failing to secure an amendment to bring forward the second stage of the package.

Labor leader Anthony Albanese said it was a sensible proposition given the central bank's second interest rate cut in as many months.

The opposition also failed to remove the third stage of the tax plan from the bill, which flattens the tax bracket in 2024/25.

"That's all about politics, not about good sound economic policy," Mr Albanese told the lower house.

But Treasurer Josh Frydenberg said it would give Australians confidence their future pay rises were protected from bracket creep.

"This bill lowers taxes for hard working Australians, it puts more money in their pockets."

Centre Alliance MP Rebekha Sharkie supported the bill on her understanding the minor party would reach an outcome with the government on ways to bring down gas prices.

But Ms Sharkie noted her two Senate colleagues were still continuing negotiations with the government.

Labor will now try to convince Senate crossbenchers to support the amendment on Thursday, but the government appears to be moving closer to a deal to get the whole package passed before parliament rises.

The coalition needs the support of four out of six crossbenchers to succeed.

The two Centre Alliance senators are likely to back it, with leader Rex Patrick saying they were working through the final details of a deal to make sure the extra money in taxpayers' pockets doesn't get gobbled up by higher power bills.

Former Liberal Cory Bernardi also backs the tax relief package, leaving the government just one vote short.

This means returning Tasmanian senator Jacqui Lambie is likely to be the deal maker or breaker, but she's yet to declare her hand.

She is working with Centre Alliance in a very loose alignment, with the three senators meeting several times over the last 24 hours since arriving in Canberra.

Senator Patrick said part of the deal was that he and colleague Stirling Griff don't talk about Senator Lambie's position.

Senator Lambie told reporters she hadn't come to a position yet, saying her staff only started work on Monday and she hadn't had enough information from the government.

Senator Griff argues there's no use entertaining Labor's position, given the government has refused to budge on its three-stage plan, describing it as an all-or-nothing proposition.

Some opposition MPs have urged the party to back the full tax relief package.

The Greens implored Labor and the crossbench to stand firm if the Senate was forced to vote on the entire package.

"We don't need to be giving tax cuts to millionaires, to CEOs, to politicians; we need to be funding essential services," leader Richard Di Natale told reporters.

The first stage of the plan will deliver up to $1080 to low and middle-income earners when they lodge their tax returns in coming months.

The second stage will top up a low-income tax offset, which means more people earning up to $45,000 instead of $41,000 will get a 19 per cent tax rate.

The final stage flattens the tax rate from 32.5 per cent to 30 per cent for people earning between $45,000 and $200,000 from mid-2024.


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Treasurer nixes regular deeming rate check

Posted on 15 July 2019
Treasurer nixes regular deeming rate check

Katina Curtis and Marnie Banger
(Australian Associated Press)

Hundreds of thousands of pensioners will soon discover how much extra money they will receive each fortnight, with the Morrison government weighing imminent changes to the income test.

But Treasurer Josh Frydenberg has nixed suggestions the system could soon be kept at arm's length of politicians.

Cabinet's expenditure review committee is now weighing up whether to lower deeming rates, which are used to estimate how much some pensioners are earning on their financial investments.

But Mr Frydenberg rejected calls from peak seniors bodies and MPs to take that process out of the hands of ministers.

"We believe we've got a proper process in place and the minister continues to review it as appropriate," the treasurer told Sky News on Tuesday.

Council on the Ageing chief executive Ian Yates argues the rates should be reviewed every six months against a pre-determined set of benchmarks, similar to how the pension is indexed.

"Why is it that this one component of the pension system, which is deeming rates, is not related to an objective basket of measures that gives us a benchmark to adjust it on?" Mr Yates told AAP.

"It would take the uncertainty for a part-pensioner out of what they're going to earn."

Labor says it's long past time the government acted.

"Scott Morrison and Josh Frydenberg don't deserve a pat on the back for looking into deeming rates, they deserve a kick in the backside," shadow treasurer Jim Chalmers told reporters in Brisbane.

He said the too-high rate had "smashed the household budgets of thousands of Australian pensioners".

The deeming rates were last dropped in 2015 and are as high as 3.25 per cent, depending on individual circumstances.

For those with smaller financial holdings, the rate is 1.75 per cent.

Those changes were worth about $83 a year to more than 770,000 part-pensioners.

Since then, the Reserve Bank of Australia has cut the official cash rate five times to a new record low of one per cent, meaning savings stashed in bank accounts are earning less interest.

But Mr Frydenberg said it didn't necessarily follow that the deeming rate should also drop by 1.25 points since it applies to a whole range of financial assets.

"It's not a straight-line equation, it's not about looking what has the interest rate done and then reducing the deeming rate the same amount," he told reporters.

"For example if you've got shareholdings I mean, the ASX 200 shares have gone up around 12 per cent over the last 12 months."

Deeming rates affect about one-in-four pensioners.

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What are the best investments for your retirement?

Posted on 27 June 2019
What are the best investments for your retirement?

Money and Life
(Financial Planning Association of Australia)

When it comes to investing for retirement, what are your options? Whether you're retired or still working, our complete guide to retirement investments will help you with making the right choices for your future in retirement.

Your investment options

In the simplest terms, investing your money means buying an asset with the expectation of earning returns from ownership of that asset. If you own an investment property, for example, you can expect to receive rent as income. But if you then sell the property for a higher price than you paid, you've increased your returns from your asset even more.  This is known as a capital gain the growth in value of an asset over time.

Different types of investments are grouped together into asset classes a group of investments with similar characteristics, such as term deposits, bonds, property or shares/equities. When it comes to choosing between different investment options, they generally fall into two broad categories, defensive and growth assets. Defensive assets offer less opportunity for growth, but more stability and security for your original investment. A term deposit is an example of a defensive asset the interest you'll earn is fixed but you're guaranteed to get your original deposit back at the end of the term. Growth assets, such as shares, carry more risk but offer more potential to grow your wealth over time.

Why diversification is important

When choosing growth assets and defensive assets to invest in you're looking at how much you can expect to earn compared with the risk of losing some of the original sum invested. Diversifying your investments can be a good way to strike a balance between risk and reward. Because different asset classes behave differently at different times, spreading your money across a number of assets can help you earn more stable investment returns overall.

Investing costs

Every type of investment comes with costs. For buying and selling shares, you'll pay brokerage fees for each transaction. When you buy and own property, there are upfront and ongoing costs such as stamp duty, agency fees and maintenance costs. Plus, you'll be liable for tax on the income from your investments and on any capital gain you earn when you sell assets. These are all things you need to take into account when looking at different investment options.

Should you invest in a super fund?

You can invest in all sorts of assets outside of super, either directly or through managed funds. Most super funds will also offer a wide range of choices for investing your money, including their own blended investment options, such as growth, conservative (defensive) or balanced.  So should you be investing your retirement savings in super or look elsewhere?

A key benefit of investing through your super fund is the potential savings on the tax on your investment income. Any investment earnings in your super fund are taxed at a maximum rate of 15%, regardless of the marginal tax rate on the rest of your income. The main drawback of investing in super is the money you invest and the investment earnings are locked away until you reach your preservation age and/or meet a condition of release. If you need access to the money you're investing in the short or medium term, then your super fund isn't the right place for it.

What about SMSFs?

If you're looking for more flexibility in your choice of investments than you can expect from a super fund, a Self Managed Super Fund (SMSF) could be the answer. However, there are significant costs involved in setting up and managing an SMSF so your freedom to invest super savings in property or collectibles, for example, comes at a price.

Your superannuation investment strategy

There's no one-size fits all when it comes to investing. Whether it's your investment strategy for retirement or another purpose, there are lots of personal circumstances and preferences to think about. Some of these include your investment timeframe, your appetite for risk and how much you already know about different types of investments. Talking with a CERTIFIED FINANCIAL PLANNER® professional can help you narrow down the options and guide you towards a blend of investments that works best for you and your goals.

Investing after retirement

An investment strategy that works well for you whilst working full-time may need to change when your goal is having an income to rely on in your retirement years. You may want to limit your investment risk to be sure of having enough money to last throughout retirement, but also earn sufficient returns so that inflation won't reduce the value of your savings over time.

This is why it's important to get the right advice about changing your blend of investments when you retire. Plus, there are new types of investment opportunities available when you retire. Annuities and account-based pensions come with pros and cons and a CERTIFIED FINANCIAL PLANNER®professional can help you understand how products like these can work with your retirement investment strategy and financial plan.

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