Rewarding Retirement Advice

Retirement is more than quitting our jobs. Early retirement advice helps making that transition as smooth an experience as possible. It is affecting us on a social, emotional as well as on a financial level.

As a financial planner, I start working with clients several years before they retire. That gives us enough time to successfully structure, build and optimize retirement wealth for that big change. We discuss goals and neeeds for retirement and address all the important questions and scenarios in the years leading up to retirement.

Pre-retirees want to get a list of key questions answered:

• When can I retire?
• How much money can we retire on?
• What if I get retrenched earlier?
• How much wealth do we need for retirement?
• Could I keep working if possible?

If these questions can be addressed about 5 to 10 years in advance, early retirement advice can be very rewarding. At the end of the day, we want to arrive at our destination with a retirement tank that is full so we have enough wealth for the years to come.

The overall goal is clear:

We must prepare for retirement years with no or little personal income from work!

We want to be able to rely on passive income from wealth and maybe on pension income from the government (if really required).

We'll address the importance of financial planning for pre-retirees on this retirement advice page and explore the different financial areas that help us preparing for a good life in retirement.

The social side

Retirement is a big lifestyle change. It is a change of our social life. We've known many people from work and will keep contact with only a few of them. There is time to make new friends too.

The social aspects of retiring are as important as the financial ones. Healthy finances will certainly help but retirees may consider seeking retirement advice from a retirement planner for:

• their emotional wellbeing and happiness;
• their physical health and capabilities;
• their interests, hobbies and casual work;
• a possible community involvement and belonging to like-minded groups;
• a change of place of residence, sea change or travelling;
• helping their children and grandchildren;
• their finances and having enough reserves for non-working years;
• potential legal issues and estate planning.

Many pre-retirees have some kind of idea what they'd like to do once they retire. Some have even put together a social plan and know exactly what they are going to do. Others may just cruise into retirement without much thought until they find themselves in an empty space that needs to be filled.

There are many organisations and clubs that provide retirement advice in the social side of things. If you're stuck for ideas that might be a source of knowledge to turn to.

The financial side

Whatever our social capabilities and aspirations in retirement are, it is most likely that we will need money to pay for them. We'll now be focusing on the financial health required for retirement. Without having sufficient finances a retiree's social life will be affected.

A couple needs about $50,000 per year to comfortably retire in Australia. You'd require about $600,000 to $700,000 of financial wealth to provide you with that type of income. - March 2009

These are only averages and a retiree's situation may differ significantly. In fact, when you take into account that people live longer and longer ...

$1,000,000 to retire on is no longer a luxury but a necessity!

This must be analysed carefully in a personal financial planning assessment. Every person's financial situation is individual and goals for retirement can differ widely, even between husband and wife. In financial planning for retirement these can be identified and used to optimize for the best financial outcome in retirement.

Financial retirement advice will address the basic financial planning needs and then filters down into the following key areas:

1. the building of retirement wealth through superannuation
2. the building of personal wealth for retirement outside of superannuation
3. the level of income required and achievable for retirement years
4. the optimization and access to social security entitlements
5. the minimization of tax in retirement
6. the most effective way to pass on assets and income to beneficiaries

Financial retirement advice cannot be given in isolation of the social aspects. Personally, I'm not retired yet but if I were, I would do like some of my clients. First, I'd go travelling and explore the world. Then, maybe it's time for a sea change. I might even sell my home before I go travelling and when back I'd buy a new smaller one at a more quite and beautiful place near the Australian shoreline.

It is obvious that retirement triggers change. These changes can be quite significant and in turn also cause costs that you wouldn't have had if you remained in your job.

Fast forwarding a few years, you might find that you've done all the exciting travelling and prefer a more relaxed lifestyle at home, go bowling or golfing with new friends you've found from the local clubs and enjoy your grandchildren when they're visiting.

Eventually, our health starts deteriorating and we need support by our family, need mobility equipment and increasingly more assistance with running our own household.

Unfortunately, life doesn't go on forever. Naturally, we'd want to make it as comfortable as possible no matter what the circumstances will be.

Retirement wealth from superannuation

Financial planning for retirement and retirement advice start many years before the actual retirement date. Nowadays, young employees have a superannuation fund right from day one when starting their first job.

Superannuation in Australia has been refined over many years and basically offers a long-term investment vehicle for retirement savings in a tax concessional environment.

The government has made it mandatory that every Australian gets at least 9% of their gross incomes paid into a superannuation fund for later use in retirement. Income tax in a superannuation fund is only 15% and capital gains tax may be as low as 10% in the accumulation phase (during working years) or nil for both in pension phase (during retirement).

There are also ways how individuals can put more money into their superannuation and by doing so save tax on their incomes.

The disadvantage is that superannuation moneys cannot normally be accessed until retirement age which has just been officially increased to 67 years of age in the May budget 2009.

This same disadvantage is also a huge potential for success. Here's a free piece of retirement advice for the young.

Looking after your superannuation from an early age (teens, twenties) can significantly improve your chances of having enough wealth available in retirement.

For example, if a teenager aged 16 makes the effort of putting $1,000 per year into superannuation until he graduates from university at age 22, he'll be able to increase his super by $15,500. This is based on the government co-contribution of $1,500 but excluding interest growth. Projecting this to retirement age 67 with an average growth rate of 7% he'll be about $325,000 better off. Just what we need to get to that $1m mark.

Good retirement advice for superannuation will take into account in which structure of superannuation to invest. There are the increasingly popular self managed superannuation funds but also retail funds, industry funds, employer funds, defined benefit funds and several more that can be used for different reasons.

One of the most flexible funds surely is the self managed superannuation fund (SMSF or DIY). This type of structure opens up the opportunity to invest, for example, in direct property or structured products that are not accessible by other funds.

There are many types of different funds and thousands of individual super funds. Considering how often we change jobs it's no surprise that many Australians have lost track of their superannuation over time. The government has made efforts to clean up lost super accounts but money in many of these funds still remains unclaimed. Only $500 extra could grow to $10,000 by retirement age. If left in a lost super account it might be eaten up by fees altogether.

What a wasted opportunity! - Why would you want to let your own money fall off the truck?

In financial planning and when giving retirement advice, we always check on lost super accounts. If they exist we then consolidate these abandoned moneys with a person's current super fund. There we make it work harder and faster until retirement.

Retirement wealth outside of superannuation

Just because superannuation is the tax haven of Australia it doesn't mean we should put everything into super when building retirement wealth.

In fact, if we build wealth outside of the superannuation system too we'll be able to get the best of both worlds. And again, it depends on your personal financial situation how much super and non-super investing you can do.

From my retirement advice work I collected a few typical reasons to show you why people want to invest in non-super assets too.

• easier access to invested moneys when required
• broader choice with fewer restrictions on what you can invest in
• easier access to borrowing for investment purposes
• tax optimization during working years through negative gearing
• passive income during retirement can make use of low income tax brackets

Wealth creation outside super has its own merits. It is one of the most flexible ways to invest with the most products available in the market. There are investments such as buying property off the plan or margin loans for share investing that are not available to super funds but are widely used by non-super investors.

In retirement financial planning, we combine the two areas of non-super and super investing. They can work hand in hand in the years to retirement and can be a potent strategy to fast track your finances towards financial freedom.

In retirement advice, we're adding to this the use transition to retirement pension strategies that are available to all Australians aged 55 and over. This will put everyone without any doubt on the express train.

Income sources during retirement

The key difference between your working life and retirement is that you will stop earning an income during retirement because you'll stop working eventually. This is like going on a long unpaid holiday with no money coming in, only going out!

Pre-retirees often underestimate how much they need in retirement which can leave them short changed or they'll have to do with the government pension. In retirement, we use existing wealth to produce passive income or retirement income streams.

Remember, $1m for a couple is a necessity to retire comfortably nowadays.

For example, we could allocate some assets into an allocated pension that is linked to investment markets and pays a set income every month for as long as the investments exist, or, we could buy a lifetime annuity that keeps paying you a pre-calculated income for as long as you live.

When giving retirement advice there are a few important financial cornerstones I'm usually looking for.

1. paying off as much debt as possible before retiring, preferably all loans paid off
2. building as much wealth for retirement as possible (super and non-super)
3. ways to preserve wealth and make it last for as long as possible during retirement
4. realistic retirement budgets, savings options and alternate income sources

"Savings in retirement?" - "Funny that", you might think. However, this is a very important aspect for all people from a young age through all life stages to retirees.

When retiring you have a choice. You can either:

• withdraw all your super and spend it like a lottery win; or
• manage it wisely and only withdraw what you need.

Guess, which option is going to give you more for longer? Needless to say, that good retirement advice is based on detailed personal budgeting with realistic expectations. Sometimes, a retirement date can be pushed out, or, if you're self-employed, it is your own decision when exactly you want to retire. Sometimes part-time work is a solution for a smooth transition to retirement for which you can still receive a reasonable income. It could also mean that you'd have to continue working until retirement is more affordable.

Ideally, a pre-retiree wants to have reached financial freedom or, at least, financial independence when retiring.

Financial independence gives you certainty that passive income will carry you on. Financial freedom gives you financial independence plus the opportunity to spend, gift or use some of your wealth without losing your financial certainty.

This is the ultimate result financial planners are looking to achieve when giving retirement advice. They use retirement calculators to illustrate how long your wealth will last, when it runs out and when the government pension kicks in. If social security is not an issue they can project your wealth into the future and assess how much surplus wealth you have that you can use for your children or for other things.

Accessing social security benefits

Retirement advice includes the assessment of a client's situation to see if he or she is eligible for social security entitlements.

If a financial situation clearly shows that financial independence is not achievable, it becomes a matter of optimizing for social security entitlements. The same also applies when assets are diminishing too fast during retirement so that social security benefits are necessary.

Centrelink Australia is the government body that makes eligibility assessments and pays benefits to approved citizens.

Centrelink apply two main tests to determine if you are eligible and how much pension you will be getting.

• The asset test is used for determining if homeowners or non-homeowners, singles or couples qualify for a government pension. For example, a homeowner couple with assets worth less than $882,500 (20/03/2009) might be entitled to a partial age pension.
• The income test is also used for determining if a person is eligible for a government pension. For example, a single person can have up to $1,577.50 of income per fortnight (20/03/2009) before the pension entitlement stops.

If financial independence cannot be achieved retirement advice will focus on structuring your finances so that maximum government entitlements can be accessed.

Many different Centrelink benefits depend on one or both of the above tests. Some benefits have their own tests that can go further such as the family tax benefits. Generally, Centrelink benefits are categorised into pensions, allowances and payments of which we have listed a few important ones.

• age pension
• disability support pension
• new start allowance
• child care benefit
• family tax benefit
• pension supplement

There is also the Commonwealth Seniors Health Card (the card from 01/07/09) with access to concessions on prescription medicines. This card is not asset tested. There is the Health Care Card for pharmaceutical benefits for low income earners and the Pensioner Concession Card for concessions on regular expenses. We shouldn't forget to mention the Senior's Card which is a concession card from the state government.

Tax minimization and estate planning

Retirement wealth outside of superannuation and retirement wealth inside superannuation must be kept in balance so that tax of non-super wealth is not greater than in superannuation.

In some situations, it might be better to sell non-super assets and contribute them into super to avoid unnecessary income tax. However, it pays to have some non-super assets so that tax is minimized.

For example, the Senior Australian Tax Offset (2008/2009) effectively provides a tax-free threshold of $29,867 for a single income or $25,680 each for a couple. In other words, you won't have to pay any tax up to these taxable income amounts. Income splitting for couples is also a tax effective strategy.

In retirement advice, the structuring of retirement wealth combined with tax planning is absolutely essential in reducing unnecessary tax, preserving retirement wealth and increasing income opportunities.

Sooner or later retirees must address some legal requirements. In fact, a valid will is a mandatory requirement for any life stage but in retirement the chances of invalidity increase. A well drafted will can avoid lots of headaches for the family should something happen to the retiree.

The objective of retirement advice and estate planning is to make sure that financial assets are:

preserved and used in the best possible way for the benefit of the retiree and/or his/her dependants.

In retirement financial planning, we tailor and structure finances in line with estate planning goals. For example, specific superannuation products can be used as mini wills because they have a feature that allows a pension payment to continue to a spouse should the primary beneficiary die.

It's not only wills that are important but also enduring powers of attorney and guardianship that are essential if a person should become incapacitated so that someone else can make decisions for them.

Beware of the do-it-yourself will kits! They're a good source of knowledge but cannot explain all the legislation at work. You may unknowingly give away your rights if you don't know how to word things properly. Estate planning is a very specialized area and when giving retirement advice we work with solicitors to achieve your goals in the best possible way.

More information:

Superannuation Australia
Superannuation Funds
SMSF
Lost Super
Annuity
Centrelink Australia
Retirement Calculator

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