One Little Mistake Cost A Retiree $10,000 Every Year In Retirement

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1 A Simple 3 Step System For Calculating How Much You Need To Retire Clients often say to me I am going to retire at 60. My reply is always fantastic, how much income will you have at that time and usually the client has no idea. These clients are looking at retirement planning from the wrong direction because the first question has to be how much do I need to retire?. Once that is known it is possible to work out when you can retire. So let s start with a simple system for calculating how much you need to retire. 1. The first step is to work out what your expenses are going to be in retirement. This is an easy step if you have a budget already simply review your budget and make adjustments based on whether you think each expense will increase, stay the same or decrease. For example, if you wear a suit to work every day at the moment, it is likely that you won t wear one every day in retirement and therefore the cost of purchasing suits will reduce. If you don t currently have a budget then you need to create one now! Don t delay, this is a critical step so is worth spending some time getting it right. As a guide, most people in Australia will require a minimum of 65% of their pre-retirement after-tax income to live on. 2. The second step is to estimate whether you will be entitled to a Government-funded Age Pension when you retire as this would provide valuable income and reduce the amount that you need to accumulate yourself. Copy and paste this ULR into your web browser to use the online calculator as a starting point. You should also check when you will become eligible for an Age Pension which you can check by using this URL If you have calculated that you will be eligible for an Age Pension, you can subtract the amount of the Age Pension that you will receive from the amount that you calculated in step The final step is to calculate the amount of capital that you need to accumulate before you can retire. This is a relatively straightforward calculation: take the figure that you calculated in step 1, subtract the figure you calculated in step 2 and then divide the result by You are likely to have a number that is somewhere between $400,000 and $1m. This is the amount of capital you need to accumulate! When any Age Pension is taken into account, this amount of capital will provide you with the income that you need to meet the expenses you calculated in step 1. If you need help with this then just call us and we will happily talk you through the steps. Read on to find out How To Legally Sack The Taxman Page 1 of 5

2 How to sack the tax man by legally creating a tax free income in retirement, leaving more money in your pocket Do you know what the best type of income is? *** TAX FREE INCOME *** That s right, the best type of income is when the tax man doesn t get a cent! There are only two ways that I know of to receive tax-free income. Win the lottery or receive income from a superannuation pension once you are over the age of 60. I was talking to a client the other day who had saved and invested all his life and had managed to accumulate $1.5m in assets by the time he retired at age 65. This is a great achievement but unfortunately only $200,000 of this amount was in a superannuation pension with $1.3m invested in property producing rent. The result was that this gentleman was receiving nearly $65,000 in rent but was paying $15,000 in tax. With better planning prior to his retirement all of this income could have been tax-free. So, the moral of the story, is that the superannuation system is an unbelievable way of keeping more money for yourself and paying less to the tax man. Talk to us about how we can help you to make the most of it. One Little Mistake Cost a Retiree $10,000 Every Year in Retirement If there is one thing that disappoints us here at Milestone more than anything else is missed opportunity by people not taking action. This is illustrated clearly by a couple I saw earlier this year. I first met Bob and Kate (not their real names) 10 years ago when they were both 51. They had been referred to me by some friends and were keen to receive some financial advice to improve their retirement position. They had recently paid off their mortgage and their youngest child had just left home so they finally had some surplus income. Page 2 of 5

3 I explained to Bob and Kate the benefits from contributing additional funds to superannuation and recommended that they salary sacrifice $25,000 a year into superannuation between them. Salary sacrifice is where your employer withholds an agreed amount from your pre-tax salary and contributes it to superannuation on your behalf. These contributions are taxed at 15% on their way into superannuation rather than your marginal tax rate, which could be as much as 45%, if the money was paid to you as salary. I told Bob and Kate that if they were to contribute an extra $25,000 per year into superannuation as salary sacrifice contributions between now and their intended retirement at age 65, then I projected that they would accumulate an EXTRA $386,000 1 in superannuation by the time of their retirement. Unfortunately, shortly after our meeting, work got very busy for both of them and they never implemented the advice provided. Bob and Kate did come back and see me eventually, but 8 years had passed by then. They told me all about the amazing holidays they had been on since the children had left home and the renovations they had done to their house. When I asked them whether they had saved any of the surplus income they had they looked slightly guilty and said they hadn t but assured me that they were ready to follow my advice now. I reviewed their situation and again recommended that they contribute $25,000 a year into superannuation which their budget showed they could afford given the tax effective nature of this strategy. By now they only had 6 years until their retirement so based on the projections, this strategy would give them an additional $176,000 1 in superannuation by their retirement at age 65. Whilst this is still a good outcome, it could have been so much better. Had Bob and Kate taken action when first recommended to them they could have accumulated a whopping $210,000 more in superannuation which would give them an extra $10,500 2 per year of income. The simple mistake of delaying taking action has cost Bob and Kate $10,500 per year which would have made a huge difference to their lifestyle in retirement. 1 Assumes current tax rates applying to superannuation remain constant, assumes rate of return on superannuation assets of 7.25% p.a. and superannuation fees of 0.65% p.a. 2 Based on a 5% income drawdown rate Read on to find out What You Must NEVER Do When You Retire Page 3 of 5

4 What You Must NEVER Do When You Retire Question: What do I think is the biggest mistake that retirees can make? Answer: Put all your money in term deposits and expect to live off the income for the rest of your life. Aren t term deposits safe I hear you say? Yes, they are. The value of your term deposit should never go down but your income will also stay the same because the yield on term deposits generally stays in a relatively narrow range of between 5% - 8%. For example, suppose you invested $100,000 in term deposits between 1980 and In 1980, you would have received approximately $8,000 of income that year, in 1990 you would have received close to $15,000 in that year and in 2000 and every year after that you would have received approximately $5,000 per year 3. The problem with this is the cost of living increases every year. As per the following table: Item Loaf of Bread $0.54 $1.37 $2.33 Sugar $0.90 $2.17 $2.21 See Note 4 I m sure you can think of more examples yourself. So, locking yourself into an income which is going to stay more or less the same whilst the cost of living increases year after year is locking yourself into a declining lifestyle and you will become more and more dependent on Government support. So what s the answer? The answer is to invest into a portfolio of investments which are going to provide you with an increasing income, which will come about through rising values. That s not to say that term deposits couldn t form part of the portfolio but having some exposure to growth assets, such as shares and property, is essential. Suppose that instead of investing $100,000 in term deposits from 1980 onwards, you have invested the $100,000 in Australian industrial shares. In 1980, your income would have been a little less than you would have received from the term deposit at approximately $7,000. In 1990 the income would have been approximately $33,000 in that year, in 2000 it would have been approximately $40,000 and in 2010 it would have been approximately $60, The reason that your original investment of $100,000 in 1980 can produce $60,000 of income in one year is that your investment in Australian industrial shares would have grown in value to approximately $1.3m by Page 4 of 5

5 The yield on your investment would be more or less the same as it was in 1980, at about 5%, but the actual income has grown nearly 10 times. 3 Source: MLC 4 Source: State Library of Victoria, To obtain more information or to have a Milestone Financial Planner help you with setting up your personal Retirement Freedom Plan, please contact Milestone Financial Services on or visit Darren Laudenbach is a Certified Financial Planner with over 20 years experience in assisting people to realise financial freedom. He is a Principle Planner with Milestone Financial Services ABN , an Authorised Representative of AMP Financial Planning Pty Limited, ABN AFS Licence Number , Level 8, 33 Alfred Street, Sydney NSW 2000, Australia Any information given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any information, you should consult a financial planner to consider how appropriate the information is to your particular situation. Page 5 of 5