Does your retirement super need to be ‘Zengosaidan’?

I often like to read ‘peculiar’ books that give me some insights into different ways of thinking. I recently came across a book review in The Monocle Minute. It inspired me to buy the book: A Monk’s Guide to a Clean House and Mind by Shoukei Matsumoto (Penguin Books 2018). Now, I am not Buddhist, but I did find this little book an interesting read. In particular, it spoke about the concept of Zengosaidan, which is defined as ‘… a Zen expression meaning that we must put all our efforts into each day so we have no regrets, and that we must not grieve for the past or worry about the future … Don’t put it off till tomorrow …’

I found this idea thought-provoking – particularly when I consider my daily work, which is retirement planning. Because at some point, most people in Australia will stop working and retire. For a lot of them, they will need an asset base to fund this stage of their life. Best-case scenario, they will be 100 per cent reliant, or partially reliant, upon these funds.

However, despite this reality many people drift through life without placing much emphasis on, or at least paying attention to, the preparation required for saving for later life.

Now, I am not saying everybody needs to become an expert in retirement planning. I think the important distinction is we should become engaged with our impending retirement and ensure that when the day arrives, we have no regrets.

We often take a ‘no regrets’ approach to life experiences such as holidays, ticking off the bucket list or achieving other major lifetime goals. However, shouldn’t we be turning our attention towards what steps might need to be taken to ensure that our retirement savings are maximised during our career and particularly in the lead-up to retirement?

Today, the only discussion we often hear about retirement is having ‘no regrets’ about spending the kids’ inheritance and driving off into the distance.

It’s probably time this conversation matured.

I think this philosophy of ‘no regrets’, or Zengosaidan, needs to be front of mind as we approach retirement. For example, consider the following mental checklist:

  • Do you have enough to live on in retirement – for the whole of your retirement?
  • Have you maximised all possible options within your retirement strategy to ensure that you are well placed when you retire?
  • Looking at your retirement picture, what are the financial trade-offs if you make particular financial decisions today?

Believe it or not, virtual reality can make this process a lot easier. In a few years’ time I will be able to sit with a client, get them to put on a virtual reality headset, and then pull up a picture of what they might look like at retirement age. This might help them appreciate what they need to do to help the older-looking them in retirement. Potentially, we can create a real-live model of what retirement will look like if they do nothing, compared with what it will look like if they put into action the recommended steps to maximise their financial position opportunities.

Until this technology catches up with us, though, we will need to use our own imagination for the time being. I think, however, it is important that you keep in mind the following: When you stand at the threshold, about to take the leap from your working life into retirement, and reflect on what you have achieved, you want to be confident that you have optimised your financial situation, so the next chapter of your life can be everything you wished for and more.

Like all great ideas, it’s important that when you think about retirement planning, you don’t go it alone and seek advice from a practising and suitably qualified financial planner and, of course, I recommend AJ Financial Planning.

Is it better to retire on a $350k super fund, or a $900k super fund balance?

When it comes to retirement most people believe more is best, but is this always the case? Have the Centrelink changes that came into effect last year distorted reality; has the $350k super fund become the new $900k – without all the extra effort of squirrelling away so much for retirement?

Let’s assume we know two couples who are about to retire. One couple has a balance of $350k; the other has $900k. Both couples want a modest living standard in retirement, with an income stream of around $50k p.a.

The first couple with a combined balance of $350k can expect to receive an income stream of around $21,000 p.a. Potentially, they might also receive the Age Pension if their combined assets – excluding their home – sits under the threshold of $380,500. The projected Age Pension is likely to pay them a combined income of $35,573. Thus, they will end up with a total combined income of $56,573. It is likely that at a 6% drawdown rate, their superannuation will not be eroded too fast, so it should be possible for them to keep pace with inflation during their remaining lifetime.

In addition to receiving the Aged Pension, this couple will also receive all the benefits and concessions that normally come with it, such as discounts on utilities, medicines, etc.

The second couple has a combined super balance of $900k. Like the first couple, they own their own home. But as their combined asset balance exceeds the maximum Centrelink threshold of $837,000, they are not eligible for the Age Pension.

This couple will commence an income stream from their superannuation balance and, assuming a similar 6% drawdown limit, they will be eligible to draw a combined retirement income of $54,000 p.a. If their super fund’s performance remains reasonable, this should also last them until life expectancy and keep pace with inflation.

However, being over the Centrelink threshold means that this couple is not eligible for any of the discounts and benefits that normally accompany the Age Pension, although they will also not be affected by any government changes that might occur in the future to Centrelink thresholds.

They could also draw down a higher income stream earlier in their retirement, to enjoy travel and entertainment, etc. Then as they age their need for cashflow might not be as great, so they can gradually ‘ease off the throttle’ and reduce their balance to the $350k mark, and be in a similar situation to the first couple.

So the next time you are feeling a little underwhelmed about your retirement picture, it’s important to give consideration to all options that might be available to you. Sometimes, bigger may not be better. Or, you might be better off sitting at the $900k balance, possibly spending the difference on home improvements, travel, a new car etc. Later you could drop to the Age Pension limit, and even if you receive just $1 from the Age Pension, it still means you qualify to enjoy the other benefits that come with this government offering.

Before delving into a retirement strategy, it’s important you take your personal situation into account and seek advice from a qualified financial planning professional. Of course, we recommend AJ Financial Planning.

AJ Radio – Episode ​15 (Recorded 17th October 2017)

In this 15th Episode of AJ Radio we discuss retirement. Specifically, we explore what you should do if you don’t have enough money for retirement, and what are the steps you could consider taking to handle this situation. We also give a quick update on the speculative and very interesting cryptocurrency market.


Navigating retirement funding: Is superannuation such a great idea?

Superannuation and retirement have always gone hand in hand. Yet recent budget announcements around taxation, contribution caps and other proposed changes have caused a stir and understandably, some Australians may be reconsidering the merits of superannuation.

Presently, retiree couples with a low income or seniors tax offset can each earn around $74,000–$83,580 p.a. before they start paying any taxation on income outside of their superannuation environment.

Let’s say, for example, that a couple’s capital was all invested in a term deposit. Based on today’s interest rates, they could each have around $2.7 million in a term deposit before paying any taxation.

Alternatively, if they invested their money in a share portfolio, each portfolio would have to be worth around $1.67 million before they had to pay any taxation.

So the question is, with all the confounding complexities around super; is it really worth the headache?

The other question is, will the proposed changes have much of an impact on the general retirement population? The budget announced a $1.67 million cap per person on a superannuation fund (combined $3,340,000 per couple) before any taxation comes into play. Anything above this may be subject to a 15% accumulation taxation on earnings.

For most Australians, this excess will likely move from their superannuation into their personal names once the measures are potentially introduced.

As you can see by these limits, for most retirees around Australia, taxation will only start to be a factor if they hold more than $4.94 million in combined assets, excluding their own home (both inside and outside of super).

On the other hand, if you only have a couple of hundred thousand in superannuation at retirement, does it make sense to have a superannuation fund with all the hassle of fees, regulation changes and complexities, etc., or are you better off just having the money invested in your own name?

Part of this answer will depend on the capital gains element of your portfolio, i.e., how much is generated on an ongoing or a forecasted basis in the future. The biggest benefit for superannuation is that if it is in pension phase, under the proposed limits from a capital gains standpoint it will be 100% tax-free.

Moving forward, I suspect that most people will look to manage their legislation risk—the risk of the government changing their mind—by holding some assets inside of superannuation, and some outside of superannuation.

This will also assist with distributing the tax base across both structures, and keeping a foot in both camps should there be any changes.

However, like most strategic financial planning, you have to consider all the above factors in context to your personal situation. You will also need to consider the benefits of salary sacrifice contribution into superannuation, or deductible contributions, as well as a whole range of other factors in determining which path is best.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.

Budget opportunities… How to take advantage of doors that may close.

As most people in Australia know, the Federal Budget was announced last week and as usual, the media has been all over the proposed changes. One of the most contentious issues concerns superannuation and the impact some of the proposed changes will have on retirees.

It’s important to remember that before any of these changes come into place, the Liberals must be re-elected. Assuming that happens, the next step is to get the legislation through parliament before any of this comes into play. So in essence, there’s a good while for this to play out before it finally becomes law… and things can change between now and when it takes place.

However, assuming both these events occur, what doors are closing off potential opportunities?

What steps must you consider taking to ensure you take advantage of these changes before 1 July 2017?

At AJ Financial Planning, there are a number of areas we have identified, but if I had to pick just one, it would have to be unrealised capital gains positions within super. Let me explain this a little more — I promise not to drown you in facts and figures!

From 1 July 2017, there are two potential changes that come into play:

  1. $1.6 million cap on individual super balances in pension phase. Any balances over this limit may be taxed at 15% on earnings within the super fund.
  2. For people making the transition to retirement—earnings within super may be taxed at 15%.

You might think this is great, but which door is now closing and where should you jump?

It all centres around unrealised capital gains tax.

Let’s say the value of shares or a property within your super portfolio has increased considerably. Normally if you are retired or in transition to retirement phase, there would be no tax payable on this income, as you are in a 0% tax environment.

BUT: If you fall into either of the two buckets above, this is all about to change and you may in fact be taxed on this gain if you sell it in the future!

So you might want to think of either selling this asset before 1 July 2017. If it’s a shareholding, you might consider resetting it by selling it and then buying it back at a later date, which is a fairly simple task of resetting the cost base. Property, of course, is a lot harder to sell off and re-acquire.

Of course, there are many complexities that accompany these types of numbers, but it’s important to think about the ticking time bomb: capital gains tax within super. Previously, it has never been an issue, with a 0% tax rate on earnings within super for pensioners or those in transitional retirement phase. However, this could all start to change from 1 July 2017.

Please also remember that before embarking on any investment or strategic financial planning decisions, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.

Who is wealthier?

The accumulation of wealth, and what people perceive as being wealthy, has fascinated me over the decades. Below I have provided you with 2 very stereotypical examples and as you read each one, I would like you to pick which person is the wealthier?

So lets start….

Jackson lives in a nice home in a suburb which is about 20km from the city.  He drives a european luxury car, and works in a management type role earning an income which is in excess of $100k per year.  Each year he takes regular holidays, and at least once a year travels overseas for a nice break.

Jackson is always well dressed and enjoys going out on the weekend socialising with friends, family and doing activities, There is never enough hours in the day for Jackson but in a quiet moment, he ponders about his financial position, and how it might track in the future, and whether it will be enough for retirement?

On the other side of town, Matthew lives in a modest home in an outer suburb i.e. outside the 20km bracket from the city.  He drives a locally made car, and works in a role which earns under $100k per year.

He tries to take a break at least once or twice a year with normally one being over Christmas. Most of his breaks are local, with an occasional trip overseas every couple of years.

His weekends are normally busy catching up with friends and family but generally does not spend a lot at these outings.  He is not too fussed about the latest fashions, but is always neatly dressed and presents well when he meets new people.

Over the Christmas break,  Matthew took time to reflect on the year that had been, and in a quiet moment, considered his financial position and what it might be like come retirement?  

Of these two examples, if you had to pick one, which one would you say is wealthier?

To assist you, here are a couple interesting insights which I have found over the time:

1. Income is not necessary the sole determinant of wealth.  

We meet people regularly who haven’t earned large sums, but with a strong robust investment strategy and a well thought out retirement plan, have subsequently built up a large amount of capital over time.  It is just being smart with what you have and putting it to work.

The other element is living costs. Sometimes a person who has a higher income also spends a lot more.  This places enormous pressure on the amount of capital which they might need in retirement.  Therefore, when reviewing one’s income, it is important to note that your capital base is actually linked more to your spending level than what you earn.

2. Nice cars and houses don’t necessarily indicate that you are wealthy.

Whilst fancy cars and houses are normally associated with wealth, but it isn’t necessarily the case. These days you can easily lease or finance a car, or rent a nice house thus not really owning these assets.  Advertisers and marketing people have done a wonderful job trying to confuse society on this very point.

We regard assets as having ownership or control in something that appreciates in value, or generates an income. 

When people think about wealth creation or retirement planning, they often think…. “If only I had an extra amount of income I could ….<fill in the gap>”

The reality is however both scenarios have the same chance to have a wonderful retirement and the ability to build wealth.  It is just a case of having a thoughtfully developed strategy rather than an rudderless approach to your financial position and what this position might look like tomorrow.

Like all great Financial Planning ideas, it is important to seek professional guidance and we would of course recommend the team at AJ Financial Planning.

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50’s and super – what’s important to know…..

I was recently went around the corner from my office to eat at an Italian restaurant. It was one of those restaurants where the entire menu is in Italian.  Now my Italian is sketchy at the best of times, but what was a little more tricky was the menu items.  Normally when you look at a menu you can quickly identify a couple fail safe options, this place however had me stumped. This restaurant was one of those places when I read the menu and went “Gosh! I can’t find anything!”  Then when I looked more carefully some of the items listed start out sounding really nice… but then halfway through the description they added something funky!! So what’s this got to do with super and being in your 50’s? Stay with me….. When it comes to your 50’s and superannuation you start to get access to a whole heap of options for your consideration. However, like the Italian restaurant, sometimes they all sound interesting initially but once you get into the finer detail you need to make sure that you are not getting anything unexpected. So that you don’t end up feeling stumped like I did at the Italian restaurant, I thought I would give you a couple of tips on what you should be considering: 1. If you are in your 50’s and have some debt, you may be better of salary sacrificing the income into super than paying down the debt.  The main reasons are:

  • By salary sacrificing the money into super you may be taxed less
  • At retirement you could draw a lump sum out and clear the debt out.

There are a heap of variables with this approach and it is important to crunch the numbers.  You may find that this may save you heap of tax and allow you to clear the debt too. 2. If you have reached preservation age and can access your superannuation, one thing you might question is do you either draw an income stream, a lump sum, or do nothing at all? For some it makes a lot of sense to commence a transition to retirement strategy.  This strategy is a way to reduce your overall tax position considerably.  Your super fund also becomes 100% tax free too. However if you are a high income earner, you may decide to hold off and start this until you hit age 60 years old. If you are retired you may choose to take a lump sum rather than an income stream as this may save you tax too due to a different tax treatment of lump sums over income streams. Once you reached a condition of release which for some can be as early as age 55, there are a heap of options available to you with your superannuation.  It is important to make sure you are maximising this as much as possible to reduce your tax, position yourself for retirement and maximise your capital. These points above are just a few of the things we consider when we look at your overall financial position to develop a Financial Plan. So unlike my restaurant experience, there is help available to make sure you aren’t getting anything unexpected in your financial future. Like all great ideas with Financial Planning however, it is important that you obtain professional advice before implementing any strategy – and we would of course recommend that you speak with our team at AJ Financial Planning.

Australia’s Retirement Age is headed higher

Australia is set to claim the mantle as the nation with the oldest retirement age in the developed world following Joe Hockey’s federal budget announcement on 13th May 2014. The new plan will see the retirement age for Australians born after 1966 increase from age 65 to 70 and is set to ensure that by 2035 our age pension age will have reached 70. Retirement Pic1 Australia first introduced the age pension in 1909 which was for males aged 65 years and over. At the time, the life expectancy of a male was 55.2 years making the likelihood of receiving a pension quite small. Interestingly 1909 also marked the advent of corporate income tax in Australia so where there’s a benefit payment there’s also a tax!   The qualifying age for the pension today for both men and women is 65 and the life expectancy for men is 80.6 and 84.8 for women. We are living on average 25 years longer than our ancestors of 100 years ago but the system in place & eligibility criteria is very different. Today it is possible for a couple aged 65 years and over to have assets of up $1,126,500 (excluding their family home) and be eligible to receive a part age pension.   There is a key demographic shift taking place in our economy as the baby boom generation closes in on retirement. The ratio of working-age Australians to people aged over 65 currently stands at 5:1. This ratio is expected to decline to under 3:1 by 2050 as the baby boomers reach their retirement years. To give give this some global context, in Japan, a nation widely recognised for it’s ageing population, they currently has a ratio of just under 3:1. The economic reality for Australia is a lack of tax-paying workers to support the social security needs of our baby boom generation.   In addition to our immigration policies to grow the working population, the key strategy of government has been the promotion of a semi or fully self-funded retirement using superannuation as the primary retirement funding vehicle. The tax concessions available for people accumulating wealth inside super and people drawing an income from their super (both pre & post retirement) are very attractive. The maximum rate of tax on investment earnings on assets held within the super is 15% falling to 0% when a person is aged over 60 and drawing an income.   It’s important to note the key difference between the age pension age and the age at which people can access their superannuation for retirement funding. The table below illustrates that most people can access their superannuation benefits from age which is sooner than age pension age 65 (increasing to 70) Retirement Pic 2 Your AJ Financial Planning adviser will be able to assist you to not only maximise the tax advantages of your super assets, but also structure your affairs to provide maximum lifestyle & income flexibility both while building wealth & when drawing an income in retirement.                 

How Centrelink treat Income Streams from Superannuation

Are you receiving a pension from your superannuation?  Are you planning to apply for the age pension or are already receiving the age pension? If so, there are some important changes that are taking place from 1 January 2015 that may affect you. The current Centrelink assessment works as follows: Presently, when Centrelink looks at your personal situation, they look at your personal assets and the income you receive to determine how much age pension you can get. If you have assets or income above the minimum thresholds your age pension will be reduced by a set amount, until at a certain level (depending on a variety of factors) you will have too many assets or too much income to receive the age pension. Some assets have exemptions, such as your home, which isn’t counted for the asset test. Some income also has exemptions, or different ways that it is counted, for example:

  • Financial assets outside of super such as cash and shares are ‘deemed’ to receive a certain income, rather than you actually recording the income that you physically get.
  • Pensions from income streams have a certain level called the deductible amount (similar to the tax free threshold) where only income above this deductible amount is counted for the income test.

So what will change? Pensions and income streams from superannuation that start after 1 January 2015 will no longer have a deductible amount, and instead, will instead have the income deemed in the same way as other financial assets. Pensions started before 1 January 2015 will be ‘grandfathered’ and treated by the current legislation. What does this mean in practice? With the current legislation many pensioners have only a small amount of their superannuation pension counted for the income test, or even no income counted at all if they draw a smaller income than the deductible amount. Lets put this in an example. Barry is a 67 year old man who has $300,000 in super and he starts an account based pension from super today. Based on his age his deductible amount is $17,657 so only the account based pension income that he draws above this amount will be counted for the Centrelink income test. Under the new legislation Barry’s $300,000 will be deemed to receive income according to the current deeming rules. With the current legislation, if Barry is married the first $77,400 of his financial assets are deemed to receive 2% income, and the assets above this amount are deemed to receive 3.5%. Financial assets include cash, term deposits, shares, managed funds and – with the new legislation – your superannuation funds. So if we simplify things, and say that Barry has more than $77,400 of assets elsewhere then his $300,000 in superannuation will be deemed to receive 3.5% income i.e. $10,500. So how is Barry affected? If Barry draws more than $10,500 + $17,657 = $28,157 from his super fund as a pension he will be better off under the new legislation as he will have less income counted via the Centrelink income test. If Barry draws less than $28,157 from his super fund he will be better off under the current legislation. Every situation will be different, but in many if not most cases, the new legislation will be disadvantageous for pensioners and will result in a higher amount calculated under the Centrelink income test, and a lower age pension received. What can you do now? If you are looking to apply for the age pension in a few year’s time, or if you are currently receiving the age pension, you should consider the benefits of the following strategies:

  • Move assets held outside of superannuation into superannuation if you are eligible to make contributions
  • Look at the possibility of moving some superannuation assets from one spouse to another if this will give a beneficial result under the Centrelink income test
  • Reset your superannuation income stream or be sure to start it on 1 July 2014 or at least before 1 January 2015

Given the complex nature of these Centrelink calculations, we would recommend speaking to a financial adviser before making any decision that could significantly affect your retirement income. We invite you to contact our office on 03 9077 0277 for a free initial consultation with one of our financial advisers to discuss how the new Centrelink rules will affect you.