Sub Heading

Category: Provision Newsletter Articles

Downsizing is not always the answer

Date: Nov 13th, 2017

If you’re pinning your financial hopes on the ability to downsize your home in retirement, you may need to think twice.

Many Australians don’t have enough in super to fund a quality retirement, but if you’re pinning your hopes on the value of the family home, it could pay to think again. Downsizing to a smaller place may not be a quick-fix solution for having insufficient super savings.

I’ve come across research showing one in three people think they’ll sell the family home – often their largest asset, to see them through their later years.

Downsizing is good in theory, and under new rules announced in the Federal Budget, from 1 July 2018 home owners aged 65 and over will be able to contribute up to $300,000 to super from the proceeds of selling their home.

This sort of contribution won’t count towards the before-tax or after-tax super contribution limits. The key test is that you must have owned your home for the past ten or more years.

Despite this new initiative, downsizing is not always the answer.

Firstly, do you really want to find yourself at retirement with no option but to sell a home you’re perfectly happy living in?

And after you’ve sold and put aside some proceeds into super or whatever investment you choose, you could be faced with taking a substantial downgrade in the type of housing or location you can afford.

A study by National Seniors Australia found that while the idea of downsizing can appeal to retirees, many still want to live close to transport and amenities, have a small garden and the opportunity to own a pet. There may not be many such options available, and the same research found that even if seniors can find an affordable alternative, the personal and financial ramifications of downsizingcan be a significant deterrent.

Many respondents to the survey said they didn’t know where to begin, that the process was too confusing, and that it simply wasn’t worth the cost and upheaval of downsizing.

Add to this the potential for baby boomers to still have adult kids living at home, and it’s easy to understand why many are staying in their bigger homes longer than they planned to.

This highlights how, while it works for some, downsizing your home can be an unreliable strategy for retirement funding.

If you’re pinning your financial hopes on downsizing, be sure to plan early – certainly in pre-retirement. Take a look at the market to see what properties appeal to you, check out the pricing, and be realistic about what your house might sell for.

For those of us still in the workforce, a strategy of steadily adding to your super may be more of a sure-thing to pay for a decent retirement. It could also be the clincher that lets you enjoy your family home for longer.

If you seek further assistance or information please contact us on |PHONE|

 Source: AMP 2 November 2017 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

What do Aussies do with their super?

Date: Nov 02nd, 2017

Find out where and what retirees are investing in and spending their superannuation money on.

A significant number of Aussies are now entering retirement with substantial superannuation balances, after compulsory super contributions for most employees were introduced a quarter of a century ago1.

But what are retirees doing with their super money? Are they putting it toward big-ticket items, paying off debts or investing it into retirement products that provide them with a regular income when they finish working?

We look at the figures from The Household, Income and Labour Dynamics in Australia (HILDA) Statistical Report2, released this year, which follows the lives of more than 17,000 Australians.

Who has super and how much?

  • Over a four-year period (2011 to 2015), 69.2% of men and 71.4% of women said they had super at the point of their retirement. 

  • The average super balance upon retirement was $454,221 for men and $230,907 for women.

What do people do with their super money?

  • 52.1% of men and 67.7% of women converted at least some of their super money into a product that provided them with a regular income in retirement (such as an account-based pension or annuity), with an account-based pension the most commonly used.

  • Those that converted super into an income-stream product tended to have larger super balances than other retirees (the average balance $677,442 for men and $353,485 for women). 

  • Meanwhile, 47.9% of men and 32.3% of women didn’t convert any super into an income-stream product and these retirees generally had relatively lower super balances.

  • Typically, retirees who didn’t convert any (or all of their) super into an income-stream product simply left super savings in their account, invested money elsewhere, paid off existing debts, chose to assist family members, and put money toward large expenditure items, such as renovations, holidays, and motor vehicles.

What you should know about your options

If you’re in or nearing retirement and wondering what you might do with your super money when you do access it, remember there will be a number of things to weigh up and look into.

Taking super as a lump sum

A lump sum could help you to pay off your home loan or other outstanding debts, but there may be tax implications to consider and you should think about what you’ll live on if you have no super left.

The government’s Age Pension could be one option, although if you’re pinning your hopes entirely on government support, you should consider the sort of lifestyle it might fund.

June 2017 figures show a 65-year-old retiring today needs an annual income of $43,695 to fund a ‘comfortable’ lifestyle in retirement, assuming they are relatively healthy and own their home outright3.

By comparison, the maximum Age Pension rate for a single person is around $23,254 annually4.

For more information, check out our article – Should I take my super as a lump sum.

Moving it into an account-based pension

If you’re thinking that you’d like to receive a regular income in retirement, an account-based pension (or allocated pension) could be a tax-effective option.

While the most you’ll be able to transfer into these pension accounts is $1.6 million, you won’t be limited in what you can take out, but each year, you will need to withdraw at least a minimum amount.

For more information, check out our article – Making sense of account-based pensions.

Purchasing an annuity with your super

An annuity provides a series of regular payments over a set number of years, or for the remainder of your life, depending on whether you opt for a fixed-term or lifetime annuity.

You will however be sacrificing some flexibility as you cannot easily make lump sum withdrawals and life expectancy is also a major consideration.

To determine what will work best for you please contact us on |PHONE| to discuss .

 Source : AMP 30 October 2017

 This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

1, 2 The Household, Income and Labour Dynamics in Australia (HILDA) Statistical Report 2017 page 72, 73
ASFA retirement standard – June 2017 quarter table 1
Department of Human Services – Age Pension payment rates table 1

Technology: An adversary in the fight for 2% inflation

Date: Oct 30th, 2017

It’s been a generation since inflation last ravaged Australia, with costs for ordinary consumer goods rising on a seemingly daily basis. Indeed, in the wake of the global financial crisis, inflation in many countries has been lower than policymakers would like.

Low inflation, it turns out, can be a problem too.

Over time, declining or stagnant prices can strangle economic growth, depress workers’ earnings and erode standards of living. That’s why central banks here and in the US, Japan and Europe have tried to nudge inflation upwards to 2% or so – a rate thought sufficient to keep prices and wages rising without causing consumers too much pain.

The causes of low inflation range from globalisation, sluggish economic growth around the world (including a slowdown in China), and “transitory” factors” such as cheaper mobile phone plans.

But they’re not the whole story, according to Joe Davis, Vanguard’s global chief economist.

“Technology is an important, and often overlooked, challenge that central banks face in sustainably meeting their inflation targets,” said Mr Davis. “Our calculations reveal that technology’s role in the economy is growing exponentially. And, of course, technology’s reach extends well beyond Silicon Valley.”

Moore’s Law: A high-tech drag on inflation

You may not have heard of Moore’s Law, but you’ve been affected by it.

Coined by Gordon Moore, founder of the US tech giant Intel, Moore’s Law began as a way of explaining the swift improvement in computers’ processing abilities. Lately it’s become shorthand for the spread of ever more powerful – and cheaper – technologies. We see it in consumer electronics: the mobile phone that’s twice as powerful and half as expensive as the one you replace, or the new TV that is flatter, sharper, and cheaper than last year’s model. These direct effects drag down measures of inflation for those products.

“Moore’s Law is about more than mobiles, TVs and Amazon Prime,” Mr Davis said. “Its knock-on effects restrain the need for higher prices in every corner of the economy, not just in high-tech products. In an increasingly digitised world, the cost of producing many goods and services keeps inching lower and lower.”

By analysing detailed industry data from the US Bureau of Labour Statistics and Bureau of Economic Analysis, Vanguard found that improvements in technology reduced annualised inflation in the US by half a percentage point. Without Moore’s Law, in other words, that elusive 2% inflation target would have been achieved years ago. Interest rates would be higher.

“The impact is most pronounced in technology-intensive industries,” Mr Davis said. “Moore’s Law helps explain how investment managers like Vanguard can serve clients at ever-lower cost. It’s key to the lower-cost electric cars rolling off assembly lines in Silicon Valley and Detroit. And it helps explain the slowing rates of inflation in fields like education and retailing.”

The inflation debate

So far, there’s little sign that policymakers at the US Federal Reserve are factoring Moore’s Law into their discussions about why their 2% inflation target keeps slipping into the future.

“Moore’s Law deserves a seat at the table,” Mr Davis said. “It provides a more complete and accurate picture of the forces that shape monetary policy and inflation. And it bolsters Vanguard’s long-held view that lower unemployment is less likely to set off the kind of inflation rises that it did before Moore’s Law was in full effect.

“We live in a digital world that makes 2% inflation harder to achieve,” he added. “To ensure a victory in their fight, policymakers need to better appreciate this new technological challenger in the ring.”

Source : Vanguard October 2017 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance. 

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Think ahead about smart retiree spending and investing

Date: Oct 27th, 2017

A common personal finance trap is to concentrate on saving and investing to finance our eventual retirement without thinking enough in advance about how to invest and spend that money in retirement.

Given that we have so much going on in our lives long before retirement –such as our careers, dependent children, home mortgages and trying to save – this focus on accumulation is understandable. But it’s only part of the equation.

It makes sense to begin developing smart retiree spending and investing strategies long before retiring. This should help you think about what are your personal and investment goals as a retiree and how much you need to pay for those goals.

It’s working out the destination and deciding how to get there.

Aiming to save a certain total amount before retirement is obviously valuable, but you should also think about what the capital will eventually provide in terms of retirement income and, critically, how to invest that money. In turn, this may prompt you to step-up your retirement savings.

At the beginning of their final 10 years or so in the workforce, many forward-thinking investors would begin to think more about developing thorough retirement spending and investing strategies. Importantly, they may still have the ability to boost their savings if necessary.

In turn, this count-down stage to retirement is one of the times when a skilled financial planner can be most valuable.

The combination of historically-low yields, expected muted investment returns and growing life expectancies are high among the incentives for retirees to become smarter with their drawing down, investing and spending of their retirement savings.

“The need for retirees to implement informed portfolio spending strategies is more critical, and yet more complex than ever,” comments a Vanguard research paper, From assets to income: A goals-based approach to retirement spending*.

“For retirees, the stakes are high,” the paper adds, “and the impact of subpar decisions can be severe.”

As the paper’s authors say, there is no one-size-fits-all strategy for developing and implementing a spending strategy because every retiree’s circumstances are different to varying degrees. However, a spending strategy can reduce the “anxiety and stress” regarding the ability of retirees to meet their retirement-income goals – no matter their circumstances.

Many Australian retirees will have, of course, a combination of super and non-super savings with various tax consequence, further underlining the need for good professional advice.

The goals-based spending strategy discussed in this Vanguard paper has three primary components:

Develop a prudent spending rule tailored to a retiree’s unique goals

This involves dealing with your competing goals – including differentiating between needs and wants – and planning to make your savings last given uncertainty about life expectancy and movements in investment markets, which are beyond an investor’s control.

A critical issue here is how much can retirees “safety” withdraw from their portfolios each year to finance their current spending and to generate future income for the rest of their lives, no matter how long.

Vanguard’s paper suggests a “dynamic-spending rule”. This provides for retirees to set a maximum and a minimum for their annual spending limits – in other words, a floor and a ceiling – reflecting the performance of the markets and a retiree’s unique goals.

The next Smart Investing looks closely at the dynamic spending rule with its ceiling and floor on annual spending based on percentages of a portfolio’s value.

Retirees can aim to spend a higher percentage of their portfolio’s value when markets have done well and reduce spending to a lower percentage – within these set and acceptable limits – when markets haven’t done as well.

Construct a broadly-diversified retirement portfolio

In line with Vanguard’s principles for investing success, this involves setting clear and appropriate investment goals, developing an appropriate and diversified asset allocation, minimising investment costs and maintaining a disciplined, long-term and non-emotional approach to investing.

As the paper explains, taking a total return approach to investing and spending can make much sense for retirees. This involves focuses on both the income and capital growth generated by a portfolio rather than merely on income. Total-return approach should help a retiree maintain a portfolio’s diversification, allow more control over the size and timing of portfolio withdrawals and increase a portfolio’s longevity.

Develop a tax-efficient investment and withdrawal approach

Retirees can potentially increase their spending amounts and the longevity of their portfolios by making their investing and withdrawing from super and non-super portfolios as tax efficient as possible. (A superannuation fund is not taxed on assets backing a pension, excluding a transition-to-retirement pension. Nor is the pension income taxable in a retiree’s hands.) Tax is among the areas where professional advice can be vital.

Please contact us on |PHONE| for further assistance .

From assets to income: A goals-based approach to retirement spending, September 2016, by Colleen Jaconetti, Michael DiJoseph, Zoe Odenwalder and Francis Kinniry.

 Source: Vanguard 18 October 2017 

Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.
 

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance. 

© 2017 Vanguard Investments Australia Ltd. All rights reserved.

Important: Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for their action or any service they provide. Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.


Provision Insights

Subscribe to our Quarterly e-newsletter and receive information, news and tips to help you secure your harvest.

Newsletter Powered By : XYZScripts.com