14 Feb Retirement planning is a confronting conversation
Retirement is a touchy subject with many people, but unavoidable given the demographic fact of the burgeoning ranks of Australians heading into this phase of their lives. Australia’s is a much-vaunted system, but the reality is it will struggle to give every citizen an adequate retirement, because “adequate” means different things to different people.
That is the conundrum of the super system, Bryan Ashenden, head of financial literacy and advocacy at BT Financial Group told the recent The Australian/Sky News Business “Money Talks” panel: there is no “magic calculator” that tells you how much someone needs to have a really comfortable retirement — because retirement is a “highly individualised” scenario.
“Everybody’s situation is different,” Ashenden says. “It’s not just the amount of money you have in retirement, it’s how long you’re going to live, what your spending pattern is going to look like, what you actually want to do in retirement, how you invest your money, are we talking about a single person or a couple — so the equation that comes up with ‘this is how much you need’ is, unfortunately, going to be different for everybody.”
“The over-85s are the most rapidly growing cohort of the Australian population”
According to the benchmarks set by the Association of Superannuation Funds of Australia’s (ASFA’s) Retirement Standard, Australians need income of more than $25,000 a year in retirement to fund their expenses and a “modest to comfortable” lifestyle. For a “modest to comfortable” retirement lifestyle — considered by ASFA to be “better than the Age Pension, but still only able to afford fairly basic activities” — a single Australian will need $27,368 a year, while a couple needs $39,353.
For those wanting a “comfortable” lifestyle — which ASFA defines as one enabling “an older, healthy retiree to be involved in a broad range of leisure and recreational activities, and to have a good standard of living through the purchase of such things,” a single person will require income of $42,764 a year, while a couple needs $60,264.
But such projections inevitably involve generalisations — while individuals’ wants and needs are exactly that, individual.
Overall, the retirement system is dealing with two major problems. The first is that compulsory super in terms of those retiring now, is still a young policy, and the cohort of today’s retirees are nowhere near universally covered at the same rate for the same length of time — meaning that average balances and average payouts are nowhere near where they need to be for everyone.
Read more here: Women falling short on super
The second is that Australians are living longer. At present, average life expectancy is about 84 for men and 87 for women, but the over-85s are the most rapidly growing cohort of the Australian population. This exposes older Australians to “longevity risk” — the risk that a retiree’s savings run out before they die. “Those factors are certainly part of the equation, that people have to factor into their planning,” Ashenden says.
Anne Graham, financial adviser and director of Story Wealth Management, says other factors that come into play are the level of aged care for which a person is budgeting, whether they own their own home, whether they want to leave their children money. Also, she says, there is the level of Age Pension and Centrelink support they can expect. For some people, this will be important: the Age Pension acts as a guaranteed income stream, protected from inflation and investment risk.
Given all of the factors that go into it, facing the question of how much they will need in retirement “can be a really confronting conversation,” says Graham. “A lot of people don’t know how much income they want in retirement, so they look at where they are now and where they’re likely to be, and then the ‘trade-off’ conversation starts happening.
“Usually they want the income, they want holidays, but worry about house prices for their children, and they want to help the kids as well. They may start off saying, ‘I want to retire around 65 and I want this much income,’ but as the conversation progresses, they start to understand that it’s a matter of prioritising. Often the conversation becomes, ‘perhaps if you can continue working until you’re 68 instead of 65, you will save a bit more, spend less, it means you will draw down on your own money much later and so it’s preserved longer’.”
Confronting or not, “the conversation has to happen”, she says. “It’s never too late to ask the question. Obviously, the sooner you start it’s better — talking to your adviser in your 30s or 40s would be better — but it doesn’t have to be really hard. Thinking about retirement when you turn 50 is fine, you have the 10 to 15-year timeframe, and at least you can start adjusting. Usually there’s a catalyst that happens in peoples’ lives for them to get advice — it could be that the last of their kids have left home, or the mortgage has been paid off, or there’s been a change in job and they realise they’ve got to take this thing seriously. But whenever it is, don’t give up hope and despair,” she says.
What’s ‘Adequate’ for retirement means different things to different people according to Bryan Ashenden, head of financial literacy and advocacy at BT Financial Group
“Your circumstances are your own — it very much depends on when you want to retire, what lifestyle you want and how long you’re going to live. Some clients could have 100 per cent of their income replaced, with a lot of that coming from the Age Pension, and the amount they need to save is reduced. Someone else may have lifestyle expectations that are much higher.”
Even seeking advice five to 10 years before retirement can help hugely, Ashenden says. “At some stage, you’re going to have to put an age on your retirement. Is that five years away or is it 10 years away: you have to work out what it is you want to achieve, so you can then work out, ‘how realistic is that?’ From there you can start to work out whether you are on track to have the lifestyle you want, and if the answer is no, you have to start making choices — whether it’s the lifestyle, or the time period.”
Working for longer may be an option, he says. “Some people will want to do this: is that something you are OK to do, and comfortable to do? Some people might not be physically able to work for longer. If you can’t do that, can you adjust your lifestyle? Does that mean you’re not going to spend as much money now, because you’re going to start to have to put a bit more towards your retirement — or do you need to cut back a little bit on what your retirement goals are. Are there other things you should be looking at, like adding the Age Pension to the mix? These are all questions that should be part of your discussion with your adviser,” Ashenden says.
Robert Gottliebsen, business commentator at The Australian, told the panel that an important part of preparing for retirement is working out what you want to do — literally. “Obviously, it’s very important to be prepared on the money side, but retirement is actually a lifestyle. As you get closer to retirement, you have to think ‘well what am I going to do, can I just completely do nothing?’
“Some people can do that, and have a wonderful time,” says Gottliebsen, “but many cannot. I live on the beach, and I work from there, and I meet a lot of people for whom there’s only so much golf they can play. All their conversation becomes golf, and that’s a limiting factor.
“As you’re getting closer to retirement, the No 1 consideration might be money — and the No 2 — but No 3 is, ‘how am I going to fill in my day? Am I happy simply minding the grandchildren?’ That’s fine, nothing wrong with that, but that’s something you might not want to do. You have to think about these things, but I don’t think a lot of people do,” he says.
Have you considered what you will do if an unexpected event occurs?
Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.
It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF?
Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.
Death – Think about where you want your superannuation to go on your death. Given the introduction of the $1.6 million transfer balance cap which means larger sums of money may need to leave the superannuation system sooner, planning has never been more important. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.
The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member as well as how death benefits are to be handled by you and your fund.
A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.
Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.
You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming.
A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate-planning of its members.
Diminished capacity – Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF.
Member leaves – How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset, or introduce a new fund member to allow the exiting member to transfer out of the fund.
Separating couple – Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, so specialist advice may be needed.
Reviewing your insurance – SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.
In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.
Administration of your SMSF – If an unexpected event happens you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.
As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).