Retirement. Whether you’re already retired, planning to retire next year or in 20 years, knowing the kind of lifestyle you want in retirement and having a sound financial plan in place will help make your retirement dreams a reality.
When will you retire? How long will you spend in retirement? How much money will you need in retirement? What will your retirement lifestyle look like? If you’re already retired, what should your budget look like and what will you need to plan for as you get older? Your financial adviser can also assist with the complexities of aged care and help you select the preferred option for your individual situation. Answering these questions now can give you real peace of mind, and lead to a satisfying, fulfilling and financially secure retirement.
Retirement lifestyles – which one suits you?
Beer or bubbly? Caviar or chips? Harbour-front mansion or sea-change shack? We all have different hopes, dreams and lifestyle requirements. Defining yours is an important step in planning your retirement.
In order to help define how much you’ll need to spend each year in retirement, now or in the future, the Association of Super Funds Australia (ASFA) releases an updated Retirement Standard1 every quarter. This Retirement Standard benchmarks how much, in today’s dollars, retired singles and couples aged around 70 need to spend each year to enjoy what ASFA define as either a ‘comfortable’ or ‘modest’ retirement lifestyle described using everyday indicators.
A ‘comfortable’ retirement is defined by ASFA as enabling an older, healthy retiree to be involved in a broad range of leisure activities and to have a good standard of living through the purchase of such things as: household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.
Funds required per year for a ‘comfortable’ retirement lifestyle
- Single: $42, 962 per year
- Couple: $58, 915 per year
A ‘modest’ retirement is defined by ASFA as better than the Age Pension, but still only able to afford fairly basic activities such as one or two short breaks in Australia closer to where you live, infrequently eating out at cheaper restaurants, owning an older car, buying reasonable clothes, haircuts at basic salons, infrequent paid leisure activities and private health cover but with little money left over for home repairs.
Funds required per year for a ‘modest’ retirement lifestyle
- Single: $23, 695 per year
- Couple: $34, 090 per year
Age Pension2 only: includes day trips in your own city, only inexpensive takeaway meals, no car, basic clothes, less frequent haircuts, very low cost leisure activities, less heating in winter, no private health insurance and no budget for home repairs.
- Single: $22, 666 per year
- Couple: $34, 169 per year
Of course, you may prefer more than a ‘comfortable’ lifestyle. But these ASFA figures provide excellent starting points for understanding the potential costs of living in retirement.
Planning for later years of retirement
Australians are living longer and spending more time in retirement than ever before. An increasing number of Australians will live to age 90 and beyond.3 This may bring a new set of challenges to retirement, which can mean it’s even more important to have a plan in place.
Last year ASFA also launched a new Retirement Standard for older retirees, Spending patterns of older retirees: New ASFA Retirement Standard,4 designed to provide a picture of how spending requirements change as people enter their late 80s and early 90s, again benchmarking both a ‘comfortable’ or ‘modest’ lifestyle. Perhaps spending more on health care and support including medical costs while spending less on leisurely activities. This information can help those who have already retired plan for later years and budget accordingly.
Funds required per year for a ‘comfortable’ retirement lifestyle for older retirees.
- Single: $38, 460 per year
- Couple: $53, 937 per year
Funds required per year for a ‘modest’ retirement lifestyle for older retirees
- Single: $23, 062 per year
- Couple: $34, 257 per year
It’s also important to discuss with your financial adviser how you can plan for aged care costs, should you eventually need it. According to ASFA5 the probability of requiring aged care is high – the likelihood that a female aged 65 will enter permanent residential aged care in her lifetime is 54 per cent and for a male this is 37 per cent.
This means aged care planning is an important part of your retirement plan, so no matter how near or far, or even if you don’t think you will need it, talking to your financial adviser about it now can help you be financially prepared for whatever the future may hold.
When can you access funds for your retirement?
Currently you must be at least 65 to be eligible for the Government Age Pension, but from 1 July 2017 the qualifying age will increase by six months. It will continue to increase by six months every two years until 1 July 2023, when the qualifying age will be 67.
The ‘preservation age’, or the age at which you can access your super, ranges from 55 to 60, depending on when you were born. Accessing your super when you retire, assumes you have reached the preservation age or some other condition of release. If you are not permanently retired then you may still be able to access part of your super under a transition to retirement pension. Whether you’re working or not, once you’re over 65 you can access your super.
What does retirement look like for Australians?
The Australian Bureau of Statistics (ABS) Retirement and Retirement Intentions, Australia6 (July 2012 to June 2013) says the average age for recent retirees, or those that had retired in the five years prior, was 63.3 years for men and 59.6 years for women.
The main reasons for retirement, the ABS report says, were ‘reached retirement age/eligible for superannuation/pension’ and ‘sickness, injury or disability’.
Of the 4.7 million people in the workforce and over the age of 45, 3.7 million people unsurprisingly said they intend to retire sometime in the future. Far more interesting is the fact that 605,400 people said they never intend to retire, and 385,500 did not know whether they intend to retire.
Around 40% of full-time workers said they intend to work parttime before retirement, to phase in the retirement lifestyle. And 54% of this group said they intend to change to a different line of work during their transition to retirement.
Finally, of the people intending to retire, the ABS states:
- 17% intend to retire at 70 or older
- 49% intend to retire between 65 and 69
- 25% intend to retire between 60 and 64 a 9% intend to retire between 45 and 59.
This makes the average age of intended retirement 63.4 years. More importantly, the figures indicate the broad range of options available. No longer is a full-time worker offered a gold watch and shown the door at a certain age. There are many choices around retirement, particularly for those that have achieved their financial goals.
If you haven’t already, when will you retire?
The figures from the ASFA Retirement Standard assume the retiree age of 65. If you plan to leave work five years earlier, that is five more years of income you’ll require. But if you’re one of the 17% of full-time workers that plans to stay in the workplace until you’re 70 or older, the opposite is true.
Putting a date on your retirement, whether it is likely to change or not, is important in terms of planning. Knowing your time left in the job market helps you to figure out your risk profile and investment mix. And knowledge of the number of years you’re likely to be retired for helps you to understand how much you’ll need in retirement.
Being in control of your retirement timeline and familiar with all of the relevant facts means you’re able to make changes along the way, and can be confident in the end result. But you don’t need to do it on your own. Your financial adviser will continue to walk you through your retirement planning process – whether it’s near, far or you are already enjoying it.
Your financial adviser can recommend the financial strategies that can assist you in reaching your retirement goals, such as salary sacrificing, concessional and non-concessional contributions, transition to retirement, spouse contributions and also help you with aged care planning. Starting to take charge and plan now can only help your retirement plans.
Gifts That May Not Keep on Giving
If you have planned well and feel financially secure for the years ahead, gifting money or assets to family members can be a kind and compelling idea. Just make sure you know how the rules might affect your wealth.
Whether it’s transferring a holiday house to your children or giving money to pay for your grandchild’s education, gifting can be a rewarding experience for both the giver and the recipient.
However, what seems like a simple gesture sometimes comes with a catch. This generous act may be subject to Centrelink rules that can have an impact on your pension and allowance entitlements.
The rules of gifting
Centrelink gifting rules apply to any gifts made in the five years before receiving a government pension or allowance, such as the Age Pension. If you are a self-funded retiree, it may be the case that no rules apply to how you gift your money or assets. But from the point at which you are five years from potentially receiving a pension, gifting must comply with Centrelink rules.
You can gift up to $10,000 each financial year, and up to a maximum of $30,000 over five years, and gifting within these limits could reduce your total assets and therefore potentially increase your Age Pension payments. You are required to inform Centrelink about any gifts or transfers within 14 days of when they have occurred. If you exceed this maximum amount, it will affect the calculation of your pension entitlements.
Consider the following case study. A retired couple wishes to gift $70,000 to their daughter and son-in-law for a house deposit. As this amount exceeds the annual maximum allowance by $60,000 (the gift amount of $70,000 minus the maximum annual allowance of $10,000), $60,000 will continue to be assessed as the couple’s financial asset for the next five years. It will also be deemed to earn interest at the current deeming rates, which are the assumed rates of return Centrelink applies to your financial investments. In the case of our retired couple, the $60,000 financial asset is deemed to earn income at 1.75% per annum (assuming there are no other financial investments).
Gifting bricks and mortar
With housing affordability an ongoing concern, many parents wish to help their children buy their first home, or a larger home. This may be done by gifting the deposit for a house, transferring a property to a family member or selling them a house for less than market value. It is worth noting that selling them a house for less than its market value may still be considered gifting. Furthermore it may bring other financial costs such as stamp duty and capital gains tax. Consider our retired couple again. Rather than gifting $70,000 to their daughter, they decide to sell their investment property to her for $400,000, which is $100,000 less than its market value. Because the sale price is significantly lower than the market price of the property, the couple did not receive adequate financial considerations, the deprivation has occurred and the excessive gifting amount of $90,000 (the property’s undervalue of $100,000 minus the maximum annual allowance of $10,000) will be assessed as a deprived asset for the five years from the date of the gift, and will be subject to the income deeming provisions, currently at a rate of 1.75% for the first $80,600, and 3.25% for the remaining $19,400 (assuming there are no other financial investments). As the couple bought the house after 20 September 1985 the sale is subject to capital gains tax, calculated at the property’s market value rather than sale amount. The stamp duty paid by their children will also be based on the market value of the house.
Tax on gifting
There is no specific ‘gift tax’ in Australia, but if the benefactor invests the money they receive then they will be liable for tax on any income it earns.
Suppose our generous retired couple wishes to give $30,000 over three years to their grandson to help with his education. The gift is not taxed as income, however if it is invested in their grandson’s name, any income that is generated from the investment will be taxed. Special taxation rules apply to Australian residents under the age of 18 who generate ‘unearned income’ and money generated from investments in their name may be taxed.
To avoid this, the couple may consider holding the funds in a trust for their grandson. As trustees, the couple would be responsible for the funds, which would be assessed against their Age Pension. Note that trust distribution paid to minors are still taxed at higher rates.
Securing your own financial future Passing on wealth to family members is a generous gift, however it’s important to discuss with your financial adviser your own lifestyle needs in retirement before deciding how much to gift.
The pension asset limit is currently $205,500 in assets (excluding your home) for a full Age Pension for a single person and $291,500 in assets (excluding their home) for a couple. Your pension rate reduces by $1.50 a fortnight for every $1000 over the asset limit. This reduction will double from 1 January 2017 when your pension will be reduced by $3 per fortnight for every $1000 of assets you own over the full pension limit.
Gifting is an act of goodwill that comes with limitations. It may have an impact on your quality of life after retirement, so please seek advice from your financial adviser.
1 The Association of Superannuation Funds of Australia, ASFA Retirement Standard, September 2015.
2 humanservices.gov.au/customer/services/centrelink/age pension rate current for the period from 20 September 2015 to 19 March 2016.
3 The Association of Superannuation Funds of Australia, Spending patterns of older retirees: New ASFA Retirement Standard, September 2015.
5 ASFA 2015 Media release: 26 November 2015, Superannuation well placed to play a role in health and aged care funding and advice: ASFA.
6 Creative Commons license – http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6238.0Main%20Features3July%202012%20to%20 June%202013?opendocument&tabname=Summary&prodno=6238.0&i ssue=July%202012%20to%20June%202013&num=&view
An economic update from Colonial First State Global Asset Management.
What have been the major economic events in the past few months?
1. The US
The first estimate of Q4 2015 GDP was released indicating growth was 0.7% on a seasonally-adjusted-annualised-rate, below expectations and lower than the 2% recorded in Q3 2015. Personal spending rose 2.2%, while net exports and inventories each subtracted 0.5% from GDP. Overall for 2015, the US economy grew by 2.4% for the second straight year.
2. Europe and the UK
The European Central Bank (ECB) met on 21 January 2016 with no changes to monetary policy announced. The ECB last made changes in December 2015 when the interest rate on the deposit facility was cut by 10 basis points to -0.30% and the asset purchase program (APP) was extended until the end of March 2017 with the ECB noting at the January meeting that the “decisions were fully appropriate. They will result in a significant addition of liquidity to the banking system and will strengthen our forward guidance on interest rates”.
The Bank of England (BoE) left policy unchanged when it announced its decision on 14 January 2016, as expected. The Bank Rate was unchanged at 0.5% and the stock of asset purchases remained at £375bn.
The Bank of Japan’s (BoJ) policy board convened on 29 January 2016 and added a new dimension to their policy armoury by lowering by 20 basis points one of its new threetiered policy rates to -0.1%. The BoJ has labelled the policy action “Quantitative and Qualitative Monetary Easing (QQE) with a Negative Interest Rate.”
The BoJ, led by Governor Kuroda, was likely prompted into action in response to the weaker inflation data, with headline inflation of just 0.2% per year recorded for December, well below its 2% inflation target. Recent Yen strength would also have been a concern for the BoJ, (signalling their unwillingness to tolerate JPY/USD below 120), as well as also wanting to break recent deflationary trends ahead of the upcoming wage negotiations.
The Reserve Bank of Australia (RBA) left the official cash rate on hold at 2% on 2 February 2016 – where it has remained since May 2015.
The unemployment rate remained at 5.8% in November, well below its most recent peak of 6.4% in January 2015.
Q4 2015 headline CPI rose by 0.4%/qtr, slightly above expectations, with the annual rate increasing to 1.7%/yr, below the RBA’s 2%-3% target range. The largest gains in inflation were in Alcohol and Tobacco (+2.7% per quarter) primarily driven by an increase in the federal excise tax on tobacco and the Clothing and Footwear group (+1.6% per quarter). Offsetting the gains were price falls telecommunication equipment and services (-2.4% per quarter) and the Transportation group (-1.4% per quarter) due to a 5.7% per quarter fall in fuel prices. The Australian dollar was mostly weaker against the major cross currencies in January. The AUD finished down 2.8% against the USD to $US0.7084. These losses occurred despite reduced expectations of the US Federal Reserve continuing to raise interest rates in 2016.
The Australian dollar fell against the euro (-2.5%) and yen (-2.1%) and rose against sterling (+0.5%) and NZ dollar (+2.5) over the month of January.
Important Information: Changes to the Age Pension Assets Test
If you are over, or close to, 65 years of age, it is important that you know about the changes the Government has introduced to the pension assets test which will come into effect 1 January 2017. These changes may affect your eligibility for the Age Pension. If this doesn’t affect you as yet, you may wish to share this news with family and friends that it might have an impact on.
What is the Age Pension assets test?
The Age Pension assets test is a means test, which helps Centrelink determine your eligibility for the age pension and other social security payments, and generally applies to assets that you hold outside the family home.
What are the changes to the Age Pension assets test that will apply from 1 January 2017?
The lower threshold is increasing. If you have assets over the lower threshold, your entitlement to the Age Pension will reduce. Those with greater assets could see a significant reduction in, or loss of, their age pension entitlement and those with lesser assets could see an increase to their entitlement. The rate at which your Age Pension reduces if your assets exceed the lower threshold is increasing from $1.50 to $3 per fortnight for every $1,000 over the threshold – this has the effect of reducing the cut-off limit where an Age Pension is no longer payable.
The table below provides a summary of the current and new Age Pension asset test thresholds. Please note that the lower thresholds have increased and the cut-off thresholds where you are not entitled to an Age Pension have been lowered.
What happens if I lose entitlement to the Age Pension?
If your Age Pension is no longer payable as a result of the changes to the asset tests effective from 1 January 2017, you will automatically be eligible for the Commonwealth Seniors Health Card which provides a range of benefits, such as discounts on certain pharmaceuticals.
We are here to help you
If you would like help in assessing the impact of these changes on your financial situation (and plan accordingly), please contact us.
Information in this web page is based on regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.
This web page may contain general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.