Over the past few months, we’ve shared a set of 10 principles of retirement, designed to help you grasp the key topics in planning your retirement financing. Here’s a case study of how a client couple went about getting their retirement sorted…and how they used our services to make it much easier.
Introducing Mary and Fred, both 66, who are just about to retire and are trying to work out how they’re going to get by once the salaries stop. They’re a little bit worried about it. They’re not “finance types” and haven’t spent a huge amount of time planning for retirement.
Where should they start?
A stocktake is always a good starting point. Our first principle is “The greater your retirement resources, the more you can afford to spend in retirement.” So, what are their retirement resources?
There are five main retirement resources: They have a pretty decent retirement nest egg in super (1) – about $650,000 between them. They own their own home (2) and have only modest savings (3) outside of super. Fortunately, they’ve paid off most of their mortgage, but still have $40,000 to pay down. The other key resource available to them is the Age Pension (4), which they haven’t applied for yet. And they could choose to keep working (5) part-time.
Their questions are “how do we make a retirement funding plan out of all that? How much can we afford to spend and how long will it last?”
What they really need is a realistic retirement forecast, one that takes into account the ups and downs of investing and of life in general. Personally, I think everyone going into retirement needs a retirement income forecast to help them understand how they can use those varied resources to build a retirement spending plan over a long term future. That’s something we can help you with as we’ve developed market leading tools to do just that.
Fred and Mary set up a forecasting appointment with one of our advisers. The adviser was able to show them how much they were likely to be able to spend and how long it might last – even under a wide range of financial market scenarios.
The forecasting appointment brought out some of the key principles of retirement and the choices they had to make. Principle #2 “The longer you need to plan for, the less you can spend each year” came through loud and clear. Fred and Mary had to make a tradeoff of what retirement horizon to plan for. The Retirement Essentials life expectancy calculator can help with this.
The range of outcomes depending on the investment choices Mary and Fred could make talked to Principle 3#: The more you earn on your investments, the longer your savings will last and the more you can spend. Better outcomes might be likely from higher returning investments and better market scenarios, but going for more growth also increased short term investment risk. Fred and Mary found the projection tools helped them understand what might happen.
In the end, it all came down to the couple making a choice about how much to spend and what investment options to go for. Their decisions were guided by Principle #4, the all-important Don’t spend more than you can afford to spend.
We were able to make them comfortable that they understood what the future might hold. We demonstrated the importance of Principle #6: You need to be prepared for a range of outcomes. They came out of their session with the Adviser reassured that their spending plan would hold up in a wide variety of circumstances and knew they could come back and check their forecast with an adviser on a regular basis throughout their retirement.
What about the Age Pension?
At the start, Mary and Fred didn’t know much about the Age Pension. They’d first learned about Retirement Essentials when they heard about our free Age Pension Eligibility calculator and had used that to get an estimate. Reading our newsletter, they appreciated the importance of Principle #5 Pay attention to your Age Pension and other government entitlements.
But like most people they had some questions about the complexities of the Pension. They didn’t understand about deeming, about how Centrelink counted Personal Assets, nor how residency requirements worked, or exactly when they could apply. They set up an Entitlements Consultation with Retirement Essentials to get their questions answered.
It turns out the Age Pension is going to provide some 50% of their retirement income over their lifetime. So, it pays to get it right. And apply on time. Mary and Fred used our Age Pension Application Concierge service to ensure they got their Application right the first time and didn’t have to deal directly with Centrelink.
Being tax savvy
One of the real secrets to successful planning for retirement is taking advantage of the tax breaks offered by the superannuation system. The recognition of taxes as a cost that’s best avoided is captured in our Principle #7:Costs and taxes matter. It’s generally better to have less of them.
Mary and Fred found they had some serious choices to make regarding super. First, they wanted to know whether it would be smart to make more contributions before they retired as super contributions get favourable tax treatment and building super through contributions is often a great way to boost retirement spending.
Second, now they were moving into the phase when they’d draw down their super to fund their lifestyle, they had the choice to make the move into a tax-free pension account, usually called an Account Based Pension. A pension account pays no tax on investment earnings, while a regular “accumulation” account still has to pay up to 15% on investment earnings.
About 30% of people over 65 haven’t moved into a pension account and end up paying thousands of dollars in unnecessary taxes. This topic came up in Mary and Fred’s understanding super in retirement discussion with their adviser … and they decided to make the smart move and ask their super fund to switch them into the Account Based Pension, starting a drawdown plan to make up for their lost salary income.
While they were talking super, the Adviser reminded them of Principle #8 We all die at some point. Make sure your estate is ready. They reconsidered their beneficiary set-up for their super and contacted their funds to make a change.
Other sources of income
Mary and Fred still had some questions about making the most out of their retirement, recognising their resources also included housing and potential part time work.
We encourage people to think about what should they do about their house. Principle #9 is Think about your house as a part of your retirement strategy as well as a nice place to live.
Should they pay off their mortgage? Might they be able to get a bit more Age Pension if they do that? Should they downsize and move some additional money into super? That might also have Age Pension implications. Or should they one day think about getting a reverse mortgage to allow them to draw down some of the equity in their home?
Then there was the question of part-time work. Principle #10: Working during retirement can add to your retirement income…but you need to understand the interactions with the Age Pension. Mary and Fred wanted to understand how much they could earn before it reduced their Age Pension. How did the Work Bonus work? That was so confusing. Again an appointment with our Adviser helped them work out a plan. They decided the Work Wonus meant working a little bit more made a lot of sense and really boosted their income. But once the bonus was used up they started to lose too much of their Age Pension so they didn’t see the benefit of working more than a day or so a week.
Now, of course, Mary and Fred aren’t a real couple. But they illustrate the real choices and decisions our clients have to make as they move into retirement and how understanding the key principles can help. The fact is that most people don’t want to deal with all their decisions at once but have questions they want answered – from time to time. Our advisers and the tools we provide are designed to help solve those questions in an affordable and understandable way. We get a great deal of satisfaction helping clients get more comfortable with their retirement readiness and getting better outcomes.
