Plan to live the retirement you deserve

Transcription

1 LifeGuides Setting your target Understand your investment horizon Superannuation Giving to charity Getting help Plan to live the retirement you deserve A service brought to you by ANZ

2 LifeGuides Plan to live the retirement you deserve We all want to live a long and happy retirement. Being healthy and happy is often a priority, as is having the funds to ensure we can live the retirement we deserve. As of 20 September 2009 the maximum age pension for a single person was $ per fortnight. That s around $48.00 per day. Could you maintain your ideal lifestyle on less than $50.00 a day? It often pays to ensure you take the right steps to secure your retirement lifestyle. Setting your target When thinking about retirement, the hardest question of all may be this: how much money do I need when I retire, to live the life I want? The answer will often depend on the lifestyle you desire and how long you expect to live in retirement. So how do you estimate a target for your retirement lump sum? An example What follows is an example that uses a basic framework that you may want to adapt for your individual situation. However, we stress that retirement planning is complex. This simple example is meant only as a guide and to provide an overview for how you may start thinking about an appropriate retirement target. Please note: Each person s tax situation will be different. The following example ignores any possible tax implications. For the minute, let s assume future inflation is 0% and things will cost about the same when you retire as they do today. Obviously they won t necessarily cost the same, but for the moment assume they will and we ll take inflation into account later. Step 1 What might it cost you to live for one year in retirement? Start by listing what you currently spend. Step 2 From your list of current expenses, remove any expenses that won t apply during retirement e.g. home loan repayments, school fees, work commuting costs. Step 3 Now add to the list any foreseeable new or increased retirement expenses e.g. travel, holidays, health care. Step 4 Identify any potential one-off retirement expenses, especially those that will occur in the first years of retirement e.g. car changeover, house renovations, major holiday. Step 5 Estimate, as best you can, how long you re likely to live in retirement. Factors to consider include your retirement age and health. Step 6 Calculate the estimated amount you ll require. Let s work through an example to see how this may be done.

3 Example Steps 1 3 Identify ongoing annual expenses to maintain retirement lifestyle: $20,000 Step 4 One-off expenses: $50,000 Step 5 Estimated time to live after retirement: 20 Years As a general rule of thumb, for every $1,000 of annual expenses you need during retirement, you should need a retirement lump sum of $12,500. This assumes a real rate of return (i.e. adjusting for inflation each year) on your retirement lump sum of around 5% p.a. over 20 years. So, taking our example the next step Steps 6 Ongoing expenses to maintain lifestyle: $ 20,000 Number of years to live after retirement: 20 Years $12,500 in lump sum required for every $1,000 in expenses required 20 x $12,500 makes a total of: $250,000 Plus any one-off expenses: $50,000 dollars a retirement lump sum of $300,000 is needed in the example we re using. To better ensure that today s $300,000 will be worth roughly the same in 20 years time, we have to increase it to take into account inflation. You can use the table below to estimate a ballpark future value of today s dollar. Years to retirement If the inflation rate average 4% each year If the inflation rate average 6% each year The above table shows that assuming an average inflation rate each year of 4%, in 20 years time you may need $2.20 for every $1.00 you have today. Therefore, in 20 years time you may need $660,000 to buy what you can today for $300,000. ($300,000 multiplied by 2.2). Before we explain how you can calculate how much you would need to contribute each year to generate the $660,000 identified above, one point needs to be emphasised. The majority of your retirement income is likely to come from any age pension, your savings and any investments. Some income may come from the real rate of return you earn on your investments (i.e. your return after taking account of inflation) and some may come from withdrawing amounts from your capital Total estimated lump sum required by the time you retire: $300,000 However, we are not finished yet. Now, we have to take into account the effect of inflation between now and when you expect to retire. Let s assume you are currently 45 years old and you want to retire at age 65. You have 20 years of your working life remaining. We have just estimated that in today s How much should you save each year? Once you have estimated how much money you may need in retirement, it is recommended that you look at how much extra you should begin to invest each year (we will look at investment options in a moment).

4 LifeGuides Plan to live the retirement you deserve The amount you need to set aside each year depends on a number of factors including: the number of years until you retire the level of savings and investments you have now the return you may expect to make on your current savings and investments between now and your retirement. Example: Let s continue our example. Assume you already have $30,000 in superannuation and other investments. Over 20 years, the $30,000 may grow into a much larger amount, depending on the after tax rate of return the investments attract. Let s say this rate of return averages 9% p.a. in total. This means that each year the $30,000 increases by 9%. The amount of accumulated growth also increases by 9% an effect known as compound interest, or earning interest on your interest. Rate of return Using the table (next column, top), the current amount of $30,000 invested for the next 20 years and earning a rate of return of 9% each year would grow to an amount of around $168,000 ($30,000 x 5.6). Years 7% p.a 8% p.a 9% p.a Let s recap: Your total lump sum target is $660,000 and your current investments may possibly grow to $168,000 (please note assumptions above) over the next 20 years. Therefore for the purposes of this example we need to accumulate approximately an extra $500,000 by retirement. The table below can help us to estimate how much we may need to save each year to accumulate this shortfall. It shows the required annual contribution to generate $10,000 of retirement lump sum, based on various rates of return and time frames to retirement. Years to retirement Rate of return 7% p.a 5% p.a 9% p.a 10 $676 $639 $604 (Please note: Examples do not take tax into account, assume all income is reinvested and assume a fixed rate of interest). 15 $372 $341 $ $223 $202 $179

5 Assuming a rate of return (ignoring inflation) of 9% p.a. and a time frame of 20 years until retirement, the table illustrates that for every $10,000 of lump sum you should save around $179 per year (in advance). For the purposes of this example, we have estimated that we need approximately $500,000, or 50 x $10,000, thus we need to contribute around 50 x $179 or $8,950 each year to reach this target figure. Understand your investment horizon Once you have estimated your retirement target, and have estimated how much you need to set aside to reach it, the next question is: where to invest? This is a critical decision. Your investment choices may include: investing in various asset classes, such as property, shares, fixed interest, cash or a combination of them all taking advantage of superannuation (which we will examine in a moment). You may also like to read our LifeGuide to Investing for your future. It contains useful information about various investment options, and looks at the importance of diversity and how you may develop a strategy that s right for you. If retirement is a long way off (more than five years away) If your investment time frame is more than five years, you may wish to consider investments in areas of higher volatility such as the stock market. There are several strategies for investing in the stock market. The right one for you will depend on your investment time frame, your available funds, your knowledge and the level of risk with which you are comfortable. For example, you may choose shares yourself or invest in a managed fund which may provide greater diversity. If retirement is three to five years away If your investment time frame is between three and five years, then you may wish to consider a managed fund with an appropriate mix of local and overseas shares, property, fixed interest and cash. The shares may expose you to growth investments while the fixed interest and cash investments are generally more secure. If you are over 50 you may also wish to consider taking advantage of making extra payments into superannuation which we will discuss in a moment. If you are about to retire If your retirement has almost arrived, you may wish to consider more stable options such as cash and fixed interest investments. If you invest through a major financial institution, your capital is relatively secure and you ll receive an agreed rate of return. However, don t dismiss growth investments. You will hopefully live a long and happy retirement and you need to ensure your income keeps pace with inflation. So you may need to consider the fees and charges and the likely rate of inflation to estimate your eventual return. There are also some specific superannuation strategies that you may like to consider

6 LifeGuides Plan to live the retirement you deserve Superannuation Superannuation is often one of the most tax effective ways to plan for the future. There have been major changes to superannuation in recent years and you will find more information from some of the contacts listed in the Getting help section of this guide. Superannuation is paid generally on behalf of any employee aged between who earns $450 or more (before tax) in any one month (employees under age 18 must also work 30 hours a week). Where a worker qualifies, the employer must make a contribution of 9% of earnings base (as defined by the Australian Taxation Office (ATO)) to a complying super fund of your choice. Note: There are limits to the contributions made by employers for high income earners and there are some workers who don t qualify for employer superannuation contributions. You can check your eligibility at the Australian Securities and Investment Commission (ASIC) consumer website or by calling the Australian Taxation Office (ATO) Super Infoline. Superannuation co-contribution To boost the retirement earnings of low income earners the Federal Government may make a co-contribution to your superannuation. If you earn $31,920 or less per year, then for every $1.00 you contribute the government will contribute $1.00, up to a maximum of $1,000 per year. The amount of co-contribution decreases as your income increases, ceasing altogether where earnings are greater than $61,920 per year (for financial year ). You can check your eligibility with ASIC or the ATO. Making contributions before tax a 15% tax rate applies to all super contributions made by your employer as well as any contributions you make for which you are eligible to claim a tax deduction. Before tax contributions generally cannot exceed $25,000 per year (indexed), over which any amount contributed will be taxed effectively at the top marginal tax rate plus the Medicare Levy as a minimum. if you are over age 50, then the tax rate of 15% applies to all taxable super contributions up to $50,000 per year until 1 July From this date, the limit returns to $25,000 (indexed). Making contributions after tax There is also a limit on the after-tax superannuation contributions, from which no tax will be deducted in the fund. The limit is six times the annual concessional contributions cap, which means for the 2009/2010 financial year the limit on after-tax contributions will be equal to $150,000 if you are under 65, you can bring forward two years contributions. This means you can contribute currently $450,000 in one year but then you will be unable to make further after tax contributions for the next two years. This may be appropriate if you have received a lump sum. exemptions do apply for small business owners and people who may have received settlements for personal injury. You should seek advice about your particular circumstances. What happens when you retire? This issue is examined in greater detail in our LifeGuide to Living the retirement you deserve, but the basics are: if you are over 60 and you receive either a lump sum or a regular income (such as annuity or pension) from a taxed fund (e.g. a complying superannuation fund), then it is tax free.

7 Superannuation is a long term investment and you should consider how both performance and on-going fees may impact your investment over time. you cannot be forced to withdraw your money from superannuation. Previously it was compulsory to withdraw funds at 65 or 75 depending on your circumstances. if you are still working after age 65 you may be eligible to make personal or employer superannuation contributions until age 75. you are not required to include in your tax return any lump sum superannuation benefits and pensions from a taxed source paid after you reach age 60. previously, for every $1,000 in assets over the assets test threshold you would lose $3.00 a fortnight in Age pension. The reduction has now been halved to $1.50 a fortnight, meaning that you may still be entitled to receive a pension if you have more assets (such as superannuation savings). in cases of severe financial hardship or illness, you may be able to access all or part of your superannuation early. To see if this applies in your circumstances, you should call the Australian Taxation Office Super Infoline on employees and as mentioned delivers a defined benefit at the time of retirement. This could be, for example, a multiple of the employee s yearly salary. This multiple may increase on the basis of the number of years the employee has spent with the fund or company. Who is responsible? Superannuation funds are run by Trustees and are required to meet specific legislation and regulations. These funds are, in turn, heavily regulated by groups such as the ASIC, the Australian Prudential Regulation Authority (APRA) and the ATO. If you want to check if a superannuation fund complies with relevant regulations, you can access the Register of Complying Superannuation Funds. Lost superannuation If you have changed jobs regularly, you may have superannuation savings that you are unaware of. The ATO runs a Lost Members Register where you can track down any missing super. You can access this through the website or call the Super Seeker self-help phone service on Superannuation funds An accumulation fund is the most common type of superannuation fund in Australia. The money invested by employees and their employer is pooled with other investors and all share in the performance of the fund. The end result for any fund member is based on the money invested on their behalf and the overall performance of the fund. If the fund performs well then the investment will grow. Conversely, if the fund suffers losses then the size of the investment will reduce. A defined benefit fund is a scheme used by some employers to offer attractive packages to their employees whereby they are delivered a defined benefit at the time of retirement. The employer normally makes the majority of the contributions. This is usually reserved for long term

8 LifeGuides Plan to live the retirement you deserve Super choice In most cases you have the right to choose the superannuation fund to which your employer contributes. If you choose not to select your own fund your employer will contribute to a default fund of their choice. For more information visit Choosing a superannuation fund at In terms of which fund to use, generally when eligible for choice you would have four basic options to consider: 1. A fund run by the company you work for 2. A fund open to employees in your particular industry 3. A fund open to everyone 4. A self managed fund Choosing a fund It is often important to choose a fund that not only has a history of producing solid returns but also one that matches your own risk profile. Your risk profile is essentially your comfort level with the strategies employed and may change depending on your circumstances and the time you have to retirement. Each fund should provide what is known as a Product Disclosure Statement. This statement must clearly include but is not limited to the following: the fees and charges associated with the fund the benefits available, including things such as disability and death benefits the significant risks associated with investing in the fund how contributions will be made how the fund will be administered (this is important from your perspective as an efficient fund will save you time and money) the investment strategy employed whether individuals can choose from a range of investment strategies historical investment performance for members (e.g. over the past 5 years) any commissions or other incentives offered to the fund as a result of the investments it makes its flexibility: for example can the company make additional payments on your behalf (above the minimum 9%)? This could be important in terms of salary packaging. Comparing performance When evaluating performance it is suggested that you judge the results over the long term (at least five years) and that you are comparing apples with apples. For example, if you are considering a fund which has 75% of its portfolio in Australian shares and 25% in fixed interest, there is no point checking the returns against a fund which has 75% of its portfolio in fixed interest. First, examine what sort of investment strategy would suit your needs and then compare funds offering similar strategies. Also remember that past performance is no guarantee of future returns. Fees and charges Over time, what seems like a small amount can add up. This could severely impact your final return. So if the fees are going to be higher overall, it is important to check whether the investment returns are likely to make paying the additional fees worthwhile. The ASIC consumer website provides worksheets to help you compare the various funds and also a superannuation calculator to estimate the likely impact of fees on your eventual return.

9 08 09 Should you change funds? Changing funds may cost you money in establishment fees and possibly exit fees from your existing fund. So it is not a decision to be taken lightly. So if the fees are going to be higher overall, it is important to check whether the investment returns are likely to make paying the additional fees worthwhile. For example, you may want to consider the following types of issues when considering changing super funds: whether you want to consolidate all your super accounts in one fund, potentially making ongoing management easier the level of fees and charges that are offered by different funds and any cost savings that can be made the type of services offered by different funds, including frequency of reports and communications historical investment returns across different funds as well as the prospects for future growth the benefits and features provided by different funds, including various investment and insurance options Bad reasons to change: you are worried because your fund declared a negative return last year. Remember, it s often best to judge performance over five years or more you want to jump on the bandwagon of a top-performing fund (this can rebound on you if that fund performs poorly next year, which may happen) you are offered early access to your superannuation or other improper inducements. Self managed superannuation funds (SMSF) As the name suggests, you do have the option of starting and managing your own superannuation fund. This is an increasingly popular strategy. In fact, it s estimated that approximately 31%* of the total superannuation assets held in Australia are in SMSFs. Generally the basic structure of an SMSF is as follows: it has four members or fewer each trustee is a member and each member is a trustee no member of the fund is an employee of another member (unless they are related) no trustee receives remuneration for work involved in managing the fund the trustee can be a corporate entity like all funds, it is regulated and must report to the ATO. As a trustee you will be legally responsible for ensuring the fund complies with all of the rules and regulations. You may delegate this duty to a professional but the buck still stops with you. You should also understand that superannuation funds are for retirement benefits. They are not designed to give you early access to your superannuation for other purposes. The costs of establishing and running a SMSF can also vary greatly based on a range of factors including the type and nature of administration and professional support required as well as the size of the fund. So why establish your own fund? The Australian Securities Exchange (ASX) conducted extensive research into SMSFs in 2003, interviewing people who had established their own funds and found the key motivating factors included: being in control of your own retirement planning relatively high costs of managed superannuation funds consolidation of a number of superannuation funds greater choice and flexibility tax efficiency. *Source: APRA Quarterly Super Performance Review June 2009 As you search for the right investments, it will help to understand your time frame and your attitude to risk.

10 LifeGuides Plan to live the retirement you deserve The full report includes views about the complexity and costs involved. It can be accessed under the Self Managed Super funds link at The ASX also provides information on the steps involved and where to find a professional who may be able to assist you. Three other areas to examine when considering setting up your own superannuation fund are: do you have the skills and time required? If you have the right skills and the time on your hands, managing your own fund may be very rewarding. However, it is a question which requires honest self analysis. don t put all your eggs in one basket. Some people take control of their own super and then place it in one investment. This can be a very risky strategy. do you have the funds? Some experts suggest you need to be investing a minimum of $200,000 to make a SMSF worthwhile. Other people suggest it can be worthwhile with as little as $20,000. As each person s circumstance is different, it often pays to do your research. To open a SMSF through ANZ, simply go to Giving to charity Along with planning their own financial future, many people wish to support worthy charities as well. There are many ways you can make a difference to your community including giving money, time and talent or even setting up a charitable foundation. Money is invested by the trustee and the investment earnings are distributed to the charitable organisations the foundation supports. This step is not difficult and an advisor or financial institution can help. Another option to consider where less money is involved is making a bequest through your Will (Is it time to up-date your Will? The LifeGuide to Protecting your family s future has a checklist that can help). If you would like more information about various charities you may like to access Australian Charities which is a gateway to the major charitable organisations in Australia. Getting help Retirement planning is complex and each individual s circumstances are unique. You should consider getting professional investment, taxation and retirement advice. You will find a list of questions to ask a potential adviser in our LifeGuide to Investing for your future. Many of the contacts below also provide information on finding the right adviser for your circumstances. The Australian Taxation Office provides a host of helpful information and free booklets concerning tax issues at For superannuation go to or call the Super Infoline The Australian Securities and Investments Commission (ASIC) consumer website is or you can call

11 Don t delay your planning. The longer you do, the greater the impact that may have on your retirement lifestyle The Australian Prudential Regulation Authority can advise on disputes between employers and employees and provide help in the need for early release of superannuation on compassionate grounds or if you suspect your money is being mismanaged. The Treasury website simplersuper.treasury.gov.au has a detailed explanation of the recent changes to superannuation. provides an overview of the choices available and the steps you need to take. The Financial Planning Association of Australia can provide advice on choosing a financial planner and has an online tool to help you find a planner in your area. The Financial Ombudsman Service Limited (FOS) can assist if you have a dispute with a planner or financial institution. CANNEX is an independent organisation providing both information and comparisons of various financial products. InfoChoice can provide unbiased information on various financial products. Centrelink provides a free financial information service, including one-on-one consultations. Consumer Affairs can provide links to the relevant department in your state or territory. The National Information Centre on Retirement Investments (NICRI) is a not for profit organisation providing free information over the phone and fact sheets. Association of Superannuation Funds of Australia (02) can provide information on choosing funds and how funds are accredited. Self Managed Super Fund Professionals Association of Australia is a body established to promote professionalism in the industry. If you are looking for assistance in establishing your own superannuation fund, the site provides a service to help you locate an accredited member in your area. The Australian Consumers Association has done a great deal of research into various financial products.

12 LifeGuides Plan to live the retirement you deserve If you are considering using an adviser, remember it s your money and your retirement, so make sure you find the person that s right for you. For more assistance Contact your local branch Phone or visit anz.com General Enquiries P INTL hrs / 7 days ANZ Investment Lending P am 6pm (AEST) Weekdays ANZ Financial Planning P am - 8pm (AEST) Weekdays ANZ Trustees P am 5:30pm (AEST) Weekdays Australia and New Zealand Banking Group Limited (ANZ) ABN ANZ s colour blue is a trade mark of ANZ. Item No W Copyright Australia and New Zealand Banking Group Limited (ANZ) Level 14,100 Queen Street, Melbourne 3000, ABN The information in this Guide is current as at October The information is in summary form and does not purport to be complete. It is intended as a general guide only and is not a substitute for professional advice. The information does not take into account your personal needs and financial circumstances and you should consider whether it is appropriate for you. When considering financial products, you should read the Product Disclosure Statement and Financial Services Guide before deciding to acquire or hold the product. anz.com