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.

Australian indexes: a safe bet for retirees?

Every day when we turn on the TV, radio, or read the newspaper, we are told whether the share market in Australia has increased or decreased. The Australian stock market is often referred to as the ASX 200, which is the 200 largest companies listed on the stock exchange in Australia.

One approach you might take to investing is index investing. The main benefit of this strategy is that you are investing in a wide basket of investments that tracks an index such as the ASX 200. This centres around the notion of diversifying and spreading your risk. It also ensures that you achieve market returns, although these returns may be positive or negative depending on what happens during the course of the year with the respective chosen index.

If you’re a retiree, however, it’s important to consider how appropriate this investment strategy is for you and, in particular, the risks associated with it.

One risk that is often overlooked by retirees is the safety of their income stream. In Australia, just six stocks account for half the dividends paid out in market capitalisation  terms. They are:

  1. Commonwealth Bank
  2. ANZ Bank
  3. National Australia Bank
  4. Westpac Bank
  5. Telstra
  6. BHP Billiton

Over the past 12 months, BHP Billiton has slashed its dividend payouts, a classic example of what happens when one of these behemoths suffers losses. Of course, this has a flow on effect on retirees with BHP Billiton in their portfolio, reducing the income they receive to fund their periodical pension payments.

So with the Australian marketplace being so concentrated, it raises the question whether investing in an index such as the ASX 200 can provide you with a sufficient level of diversification.

Consider what might happen if other members of the top six or other banks and resource companies in the ASX 200 reduced their dividend payouts simultaneously. What impact would this have on a retiree’s income stream? If this transpired, it would have a rather large impact on most index-based portfolios.

By contrast if you look at the global market, the top six dividend payers represent less than 20% of global dividends being paid out, so this market is far less concentrated in terms of dividend payouts.

This is not to say you shouldn’t invest in index tracking. For some retirees there is merit in owning this type of investment. But it is important to understand the risks as well as the benefits associated with these types of investments.

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

What age is the correct age to retire?

Two weeks ago, I attended a medicate specialist appointment with a neurologist to discuss a CT scan of my brain and check everything was ok.
 
Despite his enormous IQ, his bedside manner certainly needed some improving. Lets just say my 4 year old son had better social skills than this medical genius! As I walked into his consulting suite, his opening remarks were a smart statement and question around why was I not retired if I was a financial planner? I looked at him a little surprised as I was there to speak to him about my health rather than discuss financial planning matters. However, I pushed aside my urge for normal pleasantries, as I could tell quickly that he was wanting to engage in some type of banter. So I replied…. …..If I was to retire at my current age, then I would look to sit on the couch for the next 49 years based on my current life expectancy…..that’s a lot of TV watching don’t you think?….I think I might get bored! Thankfully the neurologist didn’t have another smart comment to reply, but it certainly raised an interesting question when it is time to retire?
 
In a couple of weeks time I head off to the annual general meeting at Berkshire Hathaway to hear Warren Buffet speak and provide some valuable insights about the economy and the markets etc. The interesting thing about Warren Buffet’s board of directors is that of the 13 board members Warren is 83, Charlie is 90, David Gotesman is 87, Donald Keough is 87, Thomas Murphy is 88, Ronald Olson is 72, Walther Scott is 82, and the rest are aged between 50 and 60 years of age. Even if I look at the next generation of successful entrepreneurs like Eton Musk who is aged 43 and has a net worth of $8.2 billion, why does he not throw it all away and sit on a couch and watch TV for the next 44 years? The names I have listed above in the eyes of this medical specialist would each have sufficient resources to buy any island in the south pacific and live out their remaining years basking in the sun….so what really causes these people to work when financially they don’t need to?
 
The answer is simple – they enjoy their work! Buffet often remarks that he feels 20 years younger than what is stamped on his drivers license and he skips to work each day!  In other words one could say that he truly enjoys his life’s purpose and has so much more to give! If you are not into the high powered executive life, you only need to travel 10 hours to Japan for another example.
 
The community called the Okinawans are a rare group of Japanese people with more people aged over 100 years than anywhere else in the world. The fascinating finding here is that most of the Okinawans work well into their 90’s doing traditional work like fishing and faring etc. Retirement can be defined (yes I actually looked it up) as to ‘remove’ or ‘withdraw’. As such, is it possible that one might just not want to remove or withdraw from what they do? What if one was enjoying the ride of life and work and didn’t want to get off? Similarly, what if we put this in the perspective of a musician that never wants to stop playing their music and the thought of never playing agin would bring them great sorrow. Are musicians meant to stop once they are at a certain point or certain age? No, its a part of them. Equally for those listed above, working is exactly the same as it is their passion.
 
So next time you are thinking about retirement, you may start to think differently now to the opinion of my neurologist as its only time to retire when you feel its time to withdraw from what you are doing. If you need help too in defining what the next phase of your life might look like, feel free to contact AJ Financial Planning. Oh….by the way, my results came back all clear  – just a false alarm!