RETIRE ON A YEAR. I Ill ' SMART STRATEGIES. FOR 20st 30st ~Ost 50s

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1 RETIRE ON A YEAR ' SMART STRATEGIES FOR 20st 30st ~Ost 50s en GROWTH STOCKS: 36 COMPANIES SET TO DELIVER ~ TAX & SUPER: WHAT THE BUDGET DIDN'T SAY - CUT ENERGY BILLS: HOW TO SAVE UP TO 20 /o SMSF TAX STRATEGY: REDUCING ~DEATH DUTY' PRINT POST APPROVED PP I Ill

2 ETIRE N 6SK YEAR F EAR OF RUNNING short of money during old age haunts 70% of retired Australians. Many live frugally in an effort to make their money last longer-whether they need to or not-because they worry about outliving their savings, a 2014 Mercer survey reports. Australia has one of the best retirement systems in the world, with compulsory super at a healthy 9.5% of salary. And while the proportion of self-funded retirees is steadily growing, it won't be until 2040 that most retiring Australians will have contributed to super over their whole working lives. This month Money presents a set offinancial plans of attack that will deliver retirement incomes of $65,000 a year, whatever your age group. For people who have low super balances, particularly those in older age groups, there are tax-effective strategies that can rev up their rate of saving. Advice from a good financial planner can mean the difference between a poor and rich retirement. Here a panel of independent financial planners has addressed the challenges at different ages: Leapfrog Financial's Dominique Bergel-Grant for the 20 to 30 age group; Quantum Financial's Claire Mackay for 30 to 40; HLB Mann Judd's Jonathan Philpot for 40 to 50; and VISIS Private Wealth's Chris Smith for 50 to 65. They crunch the numbers on the tax-advantaged strategies available in the super system, such as salary sacrifice, making the right investment choices, setting up a super-funded income stream or transition-to-retirement pension at the earliest allowable age and monitoring fees. They address how you should manage your mortgage and living expenses and, as you grow older, whether to downsize your home to unlock your capital. How much will you need? The Association of Superannuation Funds of Australia (ASFA) established its standards for retirement living and the incomes needed to support them 11 years ago and they have been updated regularly to reflect changing needs and costs. ASFA says a comfortable retirement for a couple who own their own home requires $58,444pa and a single person needs $42,569pa. It covers spending on mobile phones, broadband, private health 32 MONEY JUNE 2015

3 AGE P3.f:t insurance, running a car, upgrading a computer, belonging to the gym or a social club, a nearby annual holiday and an occasional international holiday. "Adequacy is subjective -what is adequate to one person can seem either luxurious or paltry to others," points out Mercer's 2015 report on retirement income. Money's experts unanimously recommend a higher goal than ASFA's "comfortable" income. Most don't have enough The planners say many people will need more than the ASFA amounts because of the 50% risk of living longer than average life expectancies - 87 for women and 84 for men. About 40% of women and 26% of men live to 90. Also people can face unexpected health costs or changes to the age pension. To fund its standard incomes, ASF A calculates lump sums of $510,000 for a couple and $430,000 for a single will be needed. Researchers estimated these some time ago and assumed a 7%pa return, so the savings won't support a "comfortable" lifestyle if conservatively invested. And don't expect to keep the capital and live off the income. ASFA factors in that the capital will be drawn down as you age and that you will also rely on the age pension (or part-pension) - currently a maximum of $430 a week for a single. The reality is that most Australians don't have super assets close to the amount ASFA says is needed for a comfortable retirement. At retirement, men have an average of $200,000 and women have $112,000. Account balances are rising as more people have benefited for longer from continuous compulsory saving of part of their salary through the super guarantee (SG). After all, compulsory super was introduced in 1992 and it was a slow climb from 3% of salary to reach the current 9.5%. As the system matures and the SG contribution is increased to 12% by July 1, 2025, balances at retirement will be higher and fewer retirees will need, even in part, the age pension. ASFA estimates that, at present, about 32% of retirees aged 65 have accumulated enough super and private savings to be fully self-funded. As the system matures, the number should rise to 40% by It should be noted that although there is access to a part-pension for people retiring now at age 65, this age requirement will soon rise gradually to 67 (for anyone born in 1957 or later) and the Coalition government has foreshadowed it is likely to rise further to 70. Bergel-Grant says people often need about 25% less to live on than they did when working. But, as Smith points out, once the nest egg target is reached, only half the job is done. "Making that capital last over your lifetime is the next great challenge." Super's strong returns While cash and fixed interest rates are at an all-time low, the median return over the past 10 years for a balanced fund in the accumulation phase was a solid 6.9%pa (7.7% in the pension phase, where earnings are tax free), estimates SuperRatings. These include the big negative returns of the GFC. Over the three years to the end offebruary 2015, funds in the accumulation phase had returned 12.4%pa and in the pension phase, 13.7%pa. The problem is that safe assets have low yields, whereas more volatile assets such as shares and property provide a relatively healthy income. If retirees are overly concerned about their nest egg's value jumping around and invest conservatively, they will sacrifice significant income and chew through their capital more quickly. The paradox is that tolerating some volatility in the short term, so as to generate higher yield, is also likely to preserve capital in the long term. While it is important to maximise the tax benefits of super, you can also build up assets outside the system in vehicles such as a family trust or in the lower income earner's name, says Philpot. And there are plenty of challenges to throw your plans off course. Philpot recommends estimating your financial position under a worst-case scenario as a reality check. What can go wrong Divorce can devastate savings. Claire Mackay says the sad reality is that a third of all marriages end in divorce after 12 years and it's a speedy way reduce your combined wealth. Unforeseen events such as retrenchment and time spent out of the workforce can derail savings plans. Also a volatile investment climate can mean that the assumed 7% earnings could be as low as zero for a 10-year period, which would have a significant impact on the final super balance, says Philpot. Legislation changes are likely in the next 20 years, particularly for super and the age pension - and ones unfavourable for retirees. "However, this should not stop people from adding to super - there will still be significant tax advantages ofhaving accumulated wealth in super rather than personally," says Philpot. MONEY JUNE 2015 :S:S

4 COVER STORY 30 TO 40: THE AGE OF OPPORTUNITY PROFILE 35-year-old couple who want to retire at 67 on $65,000 in today's dollars or $147,000 in 2047 dollars. Average super balances: $52,700 for a 35-year-old man, $39,600 for a woman (Rice Warner estimates). SAVINGS NEEDED Based on a current super balance of $92,300 and current salaries of $79,000 and $35,000, in 32 years they would require between $1.68 million as a minimum (used up by the time they are 82 in 2062) and $2.48 million to last them until they are 94. HOW TO GET THERE You may not need a financial planner but you do need a written plan. Reduce your mortgage as quickly as possible. Use free cash flow to salary sacrifice. Make smart asset-allocation decisions within your super. Maximise your personal super contributions as retirement approaches. HOW TO MAKE IT LAST Monitor your super fees - consider an industry fund or a self-managed fund. Live to a budget now and stick to it even as you reduce your mortgage. Consider transitioning to retirement via contract or part-time roles to extend your working life. Encourage good financial habits in your older kids by charging them board. Use proceeds from downsizing to top up your retirement savings. EXPERT CLAIRE MACKAY Claire Mackay is principal and head of advice at Quantum Financial, where she specialises in SMSF and financial planning advice. She was awarded the Investment Adviser of the Year in 2014 by Independent Financial Adviser. quantumfinancial.com.au I F YOU'RE IN THIS AGE bracket you are incredibly fortunate to have time well and truly on your side. The trick is that to take advantage of this wonderful opportunity you have to act - procrastinating and doing nothing is not an option for you. Scenario 1: If our couple - let's call them James and Kate - contribute nothing personally to their super, we estimate that they should accumulate a combined super balance of just under $1.68 million by retirement at age 67 in This accumulated super will fund a pension income of $147,000 in 2047 terms (or $65,000 in today's terms) for 15 years to age 82 in 2062, by which time their super funds will be completely depleted. This depends on a 6.5% growth of investments and a CPI of2.5%. Scenario2:Altematively, ifjames and Kate lower their living standard in retirement to $60,000 in today's terms, this should mean their super funds support their lifestyle until they are 85 in 2065 (representing their average life expectancy). Quantum Financial's experience is that people are loath to lower their expected standard ofliving in retirement. They much prefer to make extra contributions over time or work a bit longer. Scenario 3: If James salary sacrifices a portion of his salary each year into his super, he can accelerate their retirement savings tax-effectively. We assume he starts salary sacrificing $100 a week and then increases this a little bit each year until he doubles it to $200pw near retirement. These additional contributions mean James and Kate's retirement savings would reach $2.36 million in 2047 terms and should last for 25 years, until they are both 92. However, when you salary sacrifice you need to consider the impact on the family's cash flow. While James and Kate's children are younger, childcare expenses may affect their ability to salary sacrifice. When the kids start primary school, they could accelerate salary sacrificing if expenses are lower, but private school fees may affect later years. How women can catch up For you ng women like Kate, maternity can have a material impact on retirement savings. The balance between paid work and motherhood (read "unpaid work") is an ongoing battle for many women. An inevitable consequence of such periods of unpaid work is the loss of employer super guarantee payments (currently 9.5% of your salary). As this typically happens earlier in a woman's life, through the impact :S&MONEY JUNE 2015

5 RETIRE A YEAR of compounding, this usually means women save significantly less super than men, even if they earn the same amount. Some of our client couples seek to address this potential inequality in their respective super balances by focusing any personal contributions on the woman's super account. Typically couples can't afford to spare much of their cash flow at this time in their lives and so seek to "catch up" the woman's super in later years. Scenario 4: As Kate and James get older, it is likely they will have more free cash flow which they can direct to their retirement savings. If Kate contributes $50 a week ($2600 a year) to her super from 45, she should extend their retirement savings to $2.48 million in 2047 terms for another three to four years to age Mortgage comes first If you face a trade-off between reducing the mortgage or salary sacrificing and you can't afford both, Quantum typically recommends focusing on repaying the mortgage as quickly as possible. This should put you in the great position of paying off your home well before your retire (or, in a worst-case situation, at least paying it off at retirement). You don't want the burden of mortgage repayments in retirement. If your family's cash flow can support some salary sacrificing, we highly encourage it. Regular, tax-effective contributions to your super really turbocharge your retirement savings. You will never look back in 10 to 15 years and regret having more in your retirement funds. Some people find themselves in the position where they've paid off their mortgage but they're not willing to contribute all their surplus funds to super as they cannot access it for a number of years. In this case, you may seek to create a wealth portfolio outside super, where you should consider a diversified portfolio utilising low-cost exchange traded funds (ETFs) and a core-and-satellite investing approach. Invest in yourself When it comes to key investing decisions, the best financial decisions you can ever make is to invest in yourself. If you're the entrepreneurial type, following your passion and taking a risk by investing in your own business can reap significant financial rewards. If you're not, furthering your formal education and developing your professional skills can help drive your long-term income-earning potential. But what you earn is not what will make you wealthy: the critical factor is what you keep after all your expenses. Driving a flash car may make you look wealthy but it does nothing for your personal bottom line. Divorce takes a toll "Divorce is the one human tragedy that reduces everything to cash," writes American Rita Mae Brown. Unfortunately, the sad reality is that a third of all marriages end in divorce after 12 years and it's a speedy way to reduce your combined wealth, retirement savings included. While the lawyers will always profit, the earlier you seek financial advice in the process the better off you will be. This should enable you to move forward in a positive direction and help you create and support the life you deserve. MONEY JUNE