Article written by Noel Whittaker - Finance Expert and Author
Retirement should mean freedom. Freedom from mortgage payments; freedom from travelling to work every day; and freedom from meetings and KPIs. However, the financial side of retirement has the potential to cause great stress, because many retirees are financially unprepared for retirement, and are terrified of making a bad decision and losing the portfolio that has taken years to build. This is why forming a relationship with a good financial adviser prior to retirement is so important.
Many people conclude that the simple way to avoid financial risk is to place their money in the bank where there are no entry or exit fees, and they have a high certainty of getting it all back when they ask for it. Don’t fall into this trap! Keeping money as cash eliminates only one kind of risk – market risk – it still leaves you vulnerable to all the other risks, and comes with the guaranteed downside of your money falling in value, as interest payments are generally lower than inflation.
In fact, the simple way to handle risk is to live your life – and invest your money – on the balance of probabilities. This means you combine what you know to be true with what is likely to happen. If you apply this to investing, the conclusions are that growth investments will give the highest and most tax-effective returns, and that you will probably live to at least 85. Therefore, the least risky strategy for almost everyone is to have a substantial part of their assets in growth investments.
Many retirees are concerned that they will live longer than their money – this is why it is important to understand that once you retire the only two factors that affect how long your money will last are the amounts you draw out of it, and the rate of return you can achieve.
To get a snapshot of how long your money will last, visit the Retirement Drawdown Calculator on my website. It lets you enter your retirement portfolio sum, an estimated earning rate and your estimated drawings, then shows how long that will give you.
For example, if you are aged 65, have $1 million in superannuation, and withdraw $60,000 a year indexed at 3% per annum, your money would last till you turned 99 if your fund achieved 8%, but only till the age of 84 if it achieved just 5%. The statistics for superannuation fund returns for the 10 years ended August 2019 show that a good balanced fund achieved 8%, while a capital stable fund achieved just 5.7%.
These numbers are after fees. This is why it is critical to know what fees your fund is charging, and take advice about moving to a better performing fund with lower fees, if appropriate.
The most important factor of all is having a portfolio that lets you get a good night’s sleep. This is why it is important to understand your risk profile, and adjust your portfolio as necessary to fit both your goals and your tolerance for risk.
As a rule of thumb, I am comfortable with a retiree having a big portion of their superannuation in share-based assets provided they have at least four years’ planned expenditure in cash so they can ride out normal fluctuations in share markets.
Keep in mind that in any 10-year period, share investments can expect four negative years and six positive years. You really want to avoid being forced to dump quality assets at bargain prices when the market is having a downturn.
Many retirees ask whether they should stay in superannuation or simply withdraw the entire balance tax-free and invest outside the superannuation system. There is no easy answer.
If you keep your money in a good superannuation fund it should be expertly managed, and may well provide better returns than you could achieve if you held the money in your own name. However, the taxable component of your superannuation will be subject to a death tax of 15% plus Medicare levy if left to a non-dependent. Note that in this context, your spouse is always a dependent.
If you hold the money in your own name, on your death the funds can be bequeathed in terms of your will, and will not attract death taxes. However, you leave yourself open to the risk of bad investment decisions, and the possibility that the rate you earn would be less than could be earned by a good fund.
The bottom line is that most pensioners can have a tax-free retirement whether their financial assets are held inside or outside superannuation. Australia has a range of tax offsets. The major one for retirees is Senior Australian Pensioner Tax Offset (SAPTO). It is available to you if you’re eligible to receive the age pension.
Speak to a trusted financial advisor for more information and to work through the best options for you.
So remember: consider the balance of probabilities to help you achieve a good return within your risk tolerance; keep a cash buffer to use during market downturns; get advice on whether to stay in professionally managed super or exit the super system; and enjoy your freedom.
Noel Whittaker AM CTA FCPA is one of Australia’s leading authorities on personal finance. He has been a weekly contributor to the finance pages of some of Australia’s leading newspapers for more than 30 years and has written 22 books on personal finance. In 2011, he was made a Member of the Order of Australia for his services in education on financial literacy.
Stockland commissioned the Author to compose this article for publication by Stockland for educational purposes only as well as to give you general information and a general understanding of the topic, and not to provide specific advice for your specific circumstances. Stockland recommends you seek independent legal and financial advice before making any decision. The views, information, thoughts, and opinions expressed in the article are solely those of the Author, and are not necessarily held by Stockland.
Stockland has not contributed any of the information in the article and passes it on without endorsing or adopting its content. Stockland does not warrant or represent that the information in this article is free from errors or omissions or is suitable for your intended use. Subject to any terms implied by law and which cannot be excluded, Stockland accepts no responsibility for any loss, damage, cost or expense (whether direct or indirect) incurred by you as a result of any error, omission or misrepresentation in information. Published January, 2020.