Approximately 65% of Australians will start their retirement journey at least partly supported by the government Age Pension. The remaining 35% are usually referred to as self-funded retirees, meaning that they are covering their retirement with their own savings, superannuation, share or property investments. They are totally self-sufficient.
But the name ‘self-funded retiree’ can be misleading as it is often conflated with ‘high net worth individuals’ which can bring on a debate about tax concessions on super, franking credits, intergenerational wealth – even the so-called ‘greediness’ of the boomer generation.
These allegations are far from accurate – merely a cliched way to refer to a large cohort of older Australians who often have very little in common, including their net wealth. A recent example of this debate is the ‘argy-bargy’ about the proposed additional 15% tax on super balances over $3-million. It’s easy to believe that this amount is the common balance for those who are self-funded. It’s not – it’s way above the reality for most people. Fewer than half of one per cent of retirees (80,000) will be affected by the new $3-million threshold. Most other self-funded retirees typically have super and investment assets worth about one third of this amount. They, too, need to plan ahead and make informed choices to live the retirement they envisage. Today we shine a light on the five most important actions which can help self-funded retirees to ensure they enjoy the retirement that they have saved for.
Five actions to improve your financial outlook:
Action 1: Recognise that ignorance is never bliss
Ignorance is a very strong term for simply ‘not knowing’ what we don’t know, but as harsh as it sounds, it’s also true. Many of us spend a lot of time ‘getting around to’ things, and being financially literate about retirement income is one such thing. But as you approach or enter retirement there are some non-negotiables that you will need to have addressed. The first is how much it costs to run your household on a monthly and annual basis. You should also know the basic rules about changing your super from the saving (accumulation) phase to the spending (decumulation) phase. This includes rules on Preservation Age, options for making contributions after age 60, and your potential longer term Age Pension eligibility.
What adviser Andrew Dunkerley says:
“There is nothing simple about super, and failing to navigate the minefield of rules can severely jeopardise your retirement savings and financial security.”
Action 2: Understand the way that specific investment decisions can make such a difference
Because you will not initially be receiving any extra income in the form of government support, you really do need to make the smartest investment decisions possible. These decisions tend to fall into two different categories. The first are those which guide your super fund performance. You really need to know how you are invested. Are you in a balanced portfolio? A growth one? Some super funds have up to 13 or more investment options. Which one is determining your likely asset growth within your fund? And is it the best one for your current age and stage? It’s well worth understanding how this works.
What adviser Nicole Bell says:
“There can be as much risk in being too cautious as there is in having too much growth – the right option will look different for everyone. That’s why it’s so important to understand the answer to the biggest question – how much risk do you need to take to have what you will need throughout your retirement?
Often it can be tough to start spending money in retirement – we have focused so much during our working lives on trying to save money that letting go can be harder than you think. Understanding how you are invested, and whether this is likely to provide the returns you need in retirement can really help you to feel confident to buy the new car, go on the holiday, and spoil the grandkids as much as your kids will let you. Such treats are often a lot less risky than you think.”
And just maybe understanding your risk profile and super settings early enough can allow compound interest to work its magic?
3. Seeking financial advice can save you heaps
These savings might be financial – or could come in the form of a reduction in financial stress. How so? Given the absence of government benefits, one of the first steps for those who expect to be self-funded for their first few years of retirement is to understand the role of their different assets. And next to restructure them to ensure each asset is working as hard as possible to contribute to your total (combined) retirement income. Advice might help you to:
- evaluate the pros and cons of using super to reduce a mortgage,
- learn the likely returns from different asset classes over a long retirement journey and
- understand how realistic it is to spend at your preferred level across the years
Knowing when benefits are likely to kick in will enable you to ensure that decisions you take are not going to spoil chances of the earliest possible Centrelink eligibility. What does this mean, exactly? Centrelink applies certain rules to gifting or lending money. These gifts or loans are assessed years before you eventually receive the Age Pension, so knowing the limits up front can prevent negative retrospective rulings. Similarly, those with younger spouses who are just missing out on Age Pension entitlements are often surprised to learn that their younger partner is able to roll super savings back to ‘accumulation’ phase. This means that the older partner’s assets could then fit within the asset or income limits, with a higher fortnightly payment the outcome.
What adviser Andrew Dunkerley says:
“Timely financial advice can help you to optimise your investments, minimise tax burdens, and avoid any costly mistakes.”
4. At some stage, you, too, could receive government support
Many retirees believe that the way they start retirement is the way that they will finish it. This is rarely the case. Just because you start as a self-funded retiree does not mean you’ll never receive the Age Pension. In fact, the likelihood that you will is very high – an 80% likelihood for those living through their 80s. Understanding that your ‘self-funded’ status is possibly going to change is really helpful. That’s because, by anticipating a possible entitlement, you can make sure to check when you are most likely to become eligible. You might then adjust your spending to match changed income combinations. You’ll also be less likely to inadvertently ‘break’ future Centrelink rules. You can use the free Retirement Essentials Age Pension Entitlement Calculator at any time to see how far away you are from any such entitlements – and ensure you apply early (13-weeks beforehand) so you don’t miss any income at all. By using the Age Pension Entitlement Calculator, you will automatically learn about your eligibility for a Commonwealth Seniors Health Card (CSHC). It pays to be aware of state or territory seniors card benefits as well – many can help you to save valuable dollars on rates, transport and leisure activities.
What adviser Nicole Bell says:
‘The entitlements and concessions you’re eligible for in retirement are constantly reassessed as your situation changes. What you are eligible for when you first retire often changes over time, so just because you aren’t eligible yet, doesn’t mean you never will be. The Age Pension can still play a big role in funding your retirement over time.’
5. Underspending can pose the greatest risk to your retirement contentment levels
Apart from the obvious importance of enhancing your mental and physical health, being able to maintain choice and independence by having some buffer income is one of the best ways to enjoy your post-work life. There are a couple of important things to remember here. Firstly,
the minimum drawdown amounts are not the mandated amounts. They are, as the name says, minimums! So you are entitled to draw down as much as you want – assuming you have done the sums. One of the major findings in the Treasury’s landmark Retirement Income Review (2020) underscored the fact that many retirees passed away with more in super than when they first retired. Some of these people had lived frugal lives believing their money wouldn’t last. That’s why it’s really helpful to run your own specific scenario using the Retirement Essentials Safe Spending Simulator. The good news is that it is possible to project more and more accurately how your money will last the distance.
What adviser Amanda Hardy Lei says:
“Clients often worry if they’ll be financially secure. I find a clear forecast helps clients feel confident and calm about their retirement spending. Knowing safe spending limits lets them plan with certainty and adjust as needed.”
In short, underspending no longer needs to occur!
What next?
The above list of five checkpoints for self-funded retirees is by no means prescriptive. It offers a quick and easy way to encourage you to review your current retirement income settings and to make changes if necessary. It’s also a prompt to learn more about any aspect of retirement income that wasn’t clear before (just follow the linked text). This knowledge leads to greater control. It’s usually the ‘not knowing what we don’t know’ that can trip us up.
Are you self-funded?
If so, have you tried the free Age Pension Entitlement Calculator to see if you will qualify for benefits anytime soon?
If that’s unlikely, do you have any wisdom to share with other members on how you keep on top of information relevant to your circumstances?
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
