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Possible Struggle for Self Funded Retirees

Current and future self-funded retirees are making themselves heard and taking control of the path they are on.

They are a group who rarely get the recognition they deserve.

They’ve become a demographic football that’s been kicked around politically far too often.

The exciting thing is, their numbers are growing, and they’re becoming more vocal.

If ever there were proof, take a look at the 2019 federal election where an argument about ‘us vs. them’ saw this silent cohort step up and make themselves known.

I’m talking about current and future self-funded retirees.

Now, more than just about any other time in our country’s history, those looking to take control of their financial future are finding a voice – and I, for one, applaud this.

Australia’s retirement income policy has been traditionally framed as having three pillars: superannuation, the Age Pension and other savings. For the first time, the Australian government included home equity in that third pillar in its terms of reference for its Retirement Income Review. For many self-funded retirees, the current environment has hit significant sources of income: dividends, rental income from residential or commercial properties and cash.

At the same time, most super funds finished the 2020 financial year flat. Increasing drawdowns in this environment aren’t optimal, as it will take growth and time to recover – and it’s much harder to get a boost from a diminishing pool of capital that’s being drawn down to supplement lost retirement income.

Home equity is one way to improve retirement funding while leaving super accounts to recover. It’s not only the current situation to consider – Australians are experiencing a major societal transformation with millions of baby boomers retiring. Around 5.5 million people born between 1946 and 1964, will need long term funding. While we are living longer than ever, this presents a real problem – many don’t have sufficient savings to fund a comfortable retirement for their projected lifespan.

The federal government has introduced a wide range of stimulus measures in the aftermath of COVID-19, but one group that appears to be overlooked is self-funded retirees. However, if they know the way the system works, there is still one strategy that may be well worth pursuing. That is to apply for a Commonwealth Seniors Health Card (CSHC).

The criteria are simple. You must be of age pension age but not eligible to claim an age pension, and you must pass an income test. There is no asset test. The income test is $55,808 per annum for a single and $89,290 per annum combined for a couple. The income used is Adjusted Taxable Income ( ATI) plus deemed income from financial assets. Thanks to the changes in the deeming rates, which came into effect last month, a couple with almost $4 million in financial support could be eligible for the CSHC and all the benefits that go with it.

The world has changed a lot in the last decade, and one of the key drivers has been technology.

Whether young, middle-age or a bit more advanced in years, aspiration is fuelling ambition – and technology is helping feed those desires.

Society has become far more open about what they want to achieve, and the rise of social media and the e-tech space means a broader audience for everyone to air their achievements too.

We live in a society where you can easily see what treasures are out in the world, and plenty of us are deciding we want a piece of the action.

Secondly, technology means there’s a medium for firing up our entrepreneurial spirit. It can be as simple as combining a great idea with a web presence.

You can efficiently market retail across the oceans or sell your service to a targeted local audience.

It’s within this environment that we’re seeing increasing numbers of people keen to take control of their future.

There’s another reason why self-funding is becoming increasingly mainstream.

Health and longevity mean we are living longer and are more robust in our twilight years. We want to prepare for decades, not years, of great living after we retire.

Living longer, not necessarily better

The life expectancy of Australians in retirement has almost doubled in the last 150 years, thanks to better lifestyles and medical breakthroughs. Since the introduction of compulsory superannuation in 1992, Australians at retirement have gained an extra decade of longevity – and a different decade to fund. Figure one shows the range of expected increases in longevity after retirement for Australian men and women based on current assumptions. It is estimated that retirees aged 65 now will live on average until 84 for men and 87 for women.

The blessing of longevity is a new and extended phase of life which will endure well past 90 for many people. The curse is that your clients need to plan for 25-30 years of retirement.

The family home versus super

Figure five shows the total average superannuation versus home equity for Australian households during work and retirement. Within ten years of retirement, superannuation savings are largely depleted.

For Australian homeowners at retirement, the average household home equity is typically almost twice the value of superannuation. By the time former cohorts have reached 75+ years of age, home equity savings have grown to over six times the amount of superannuation.

On average, Australians’ superannuation lasts about 10-15 years after which many Australians in retirement can expect a further 10-15 years of underfunded or inadequate retirement supported by the Age Pension.

How they have control

There are several reasons why taking control of your financial future is an excellent idea, but here are three that seem like winning ideas to me.

Firstly – there’s nothing quite like being the master of your own affairs.

There’s a sense of accomplishment when you make plans, stick to a strategy, work through the steps and track the process all with an eye on the end goals.

You get to make decisions on your own terms – not leave it in the hands of others.

Along with this, as a self-funded retiree, you are not at the whim of political movements in welfare.

If the government decides to cut or change the pension, or if the department of social services starts rigorously testing pensioners on their qualification for payments, it’s of no concern to you.

You are independent of all those movements.

Of course, having professional advisors who are knowledgeable about all the elements affecting your investing program is a crucial safety net.

Secondly – those who plan properly for retirement are almost certain to enjoy a better standard of living than pensioners.

You work hard and make sacrifices throughout your employment years.

Surely you deserve to enjoy the time after you stop work?

The great thing is that even those who feel they’re on a relatively small income can still enjoy a very comfortable retirement.

The key is starting early and making it a long-term strategy.

People don’t want to retire and then have to turn the lights and to heat off at 8 pm every night because they can’t afford the power bills.

Finally – self-funded retirees are extraordinarily generous contributors to the public purse because they are not a burden on social services. Australian government estimates say that by years 2020/2021, the annual cost of the age pension to the nation will be $53.8 billion per year That’s real money that could be going towards health, education or any number of other services. The more self-funded retiree we get on the books, the less we need to provide financial assistance.

Not for one minute do I think pensioners aren’t entitled to put their feet up. They’ve contributed to society for years through both productivity and paying taxes. They’ve earned the right to stop work and have support if needed. But certainly, a rise in those who’ve had the good fortune to get a decent financial education, and made plans for a comfortable retirement, bodes well for us all.

In fact, it’s something we should all be encouraged to pursue.

Most significant financial risks facing self-funded retirees

The Alliance for a Fairer Retirement System (AFRS) has penned a letter to the Treasurer pointing out several problems facing retirees that have been exacerbated by the current COVID-19 crisis.

It has warned that Australia’s economic recovery is at risk because of a severe undermining to the confidence of retired investors, with Alliance spokesperson Ian Henschke considering that “retirees with market investments are being punished financially, undermining their capacity to contribute to the economic recovery”.

“With around 3.8 million Australians aged 66 and over, it is important to understand the enormous contribution this section of society has on the overall economy.”

According to Mr Henschke, “retirees are the single most important contributor to discretionary spending.”

“Retirees don’t just invest in the share market, but also in their community,” he stated.

The latest figures from Challenger have revealed that older Australians are already cutting back their spending due to the COVID-19 crisis – by 27 per cent on food and 37 per cent on clothing.

The issue of Australia’s retirement income system

But at the heart of the problem is several systemic failures of the retirement system, present long before the COVID-19 crisis began, the AFRS letter explained.

Problems with Australia’s retirement income system “are exacerbated in times of financial crisis”.

“The system is not able to easily account for rapid changes in investment outcomes, and this results in incomes that are either subpar at best, or at worse, catastrophic,” the letter stated.

With many people believing the age pension does not provide an adequate level of income to support retirement, the AFRS considered it “little wonder” that retirees are striving to accumulate savings – with many seeking to avoid the complications of any dealings with the welfare system altogether.

But there is a “multitude of risks” facing retirees who choose to do so.

Here are the four risks the AFRS considers to be of most concern to older Australians:

Longevity risk

With Australians now living longer, there’s an increasingly higher risk that retirement savings will not last as long as the person holding the money does.

Planning to live to a certain age is risky business, especially given uncertainty around whether an individual should plan for unexpected health issues, or the need for additional care and assistance if they suffer from loss of capacity.  

“For retirees, the task is to make sure their money will last to an uncertain date of death, while also dealing with life’s vicissitudes,” the letter stated.

Inflation risk

This refers to the way that money’s purchasing power will decline due to the effects of inflation.

It’s of serious concern to retirees, where even low rates can seriously erode a retired individual’s financial wellbeing, especially where that person lives on a fixed income.

While retirees have managed this risk through investment in growth assets, this does expose people to further risk.

Citing Dr Doug Tarek, the AFRS highlighted that inflation and declining interest rates now mean retirees must hold substantially more savings to achieve the same level of income.

The following example was provided:

“If a couple bought an annuity of $1 million in 2019, it would have purchased an income stream of $44,250 for life, indexed to inflation. The interest rate in October 2019 was 1.5 per cent. If they had bought an annuity in 2011 with the same $1 million, it would have generated an income stream of $54,300. Today, in response to the COVID-19 pandemic, the interest rate is 0.25 per cent and so that annuity is now less than the Aged Pension.”

Market risk

At the best of times, the market price of assets can be affected by political and economic events outside of an investor’s control.

The inherent liquidity of shares makes the stock market the most volatile market, making it risky for retirees, due to their ability to “seriously reduce retirement savings”.

Despite this, their ability to outperform other investments does make them highly recommended for long-term investment as part of a balanced investment strategy, the AFRS considered.

While a diversified portfolio does reduce volatility risks, it will bring lower returns, increasing an individual’s exposure to inflation risk and longevity risk.

Meanwhile, Canstar financial services executive Steve Mickenbecker said the latest round of cuts had pushed older and more financially vulnerable customers who rely on savings “between a rock and a hard place”.

With returns decreasing and other traditional avenues of income generation drying up amid a volatile stock market, some self-funded retirees may be forced onto the pension earlier than anticipated.

“In unwinding the 1.7 per cent [rate], there’s a whole segment of people now who are back to business as usual and earning themselves 1.3 to 1.35 per cent on term deposits,” Mr Mickenbecker told The New Daily. 

“Banks have already cut share dividends, and that’s been the lucrative strategy [for self-funded retirees] over the last few years to take those fully franked dividends, so their options are looking pretty skinny.”

According to Canstar’s analysis, Qudos Bank (1.90 per cent) and Firstmac (1.95 per cent) offer the most competitive rates on 12-month term deposits.

As for why savers have borne the brunt of rate cuts, Mr Mickenbecker said it was because banks’ wholesale funding costs had fallen below the official cash rate (0.25 per cent).

He said it’s “unsurprising” banks are now less inclined to boost their deposits, as it’s comparatively more expensive.

“Banks do find themselves in a position where they have to keep attracting retail money to maintain their credit rating,” Mr Mickenbecker said.

“But the major providers don’t have to pay as much because they’ve got brand distribution and everyone knows them because of incumbency – but there are smaller players out there offering better rates.”


Legislative risk

The final risk factor explored by the AFRS relates to legislative risk, which affects all retirees:

“All citizens are exposed to adverse legislative changes, but retirees are generally not in [a] position to return to work to rebuild their nest eggs if unexpected legislative changes seriously affect their projected retirement income.”

According to the letter, the management of legislative risk is only possible through advocacy – and even then, this is not always successful.

The Treasury was advised that governments can help manage legislative risk by ensuring long lead-in times for changes to take effect, as well as through quarantining or grandfathering retirees from any proposed changes.

Some self-funded retirees may be eligible for a Commonwealth Seniors Health Card.

The easy way to check if you qualify is to go to my website and use the Deeming Calculator. You will discover that assets of $2.5 million for a single person will provide a deemed income of $55,214 a year, which is just under the cut-off point, and for a couple, it is just on $4 million. These are the amounts you can have across all your financial assets, such as superannuation, bank accounts, shares and managed funds.

The obvious question is whether the CSHC is worth having. It varies somewhat from state to state, but one benefit to all holders is that medicines listed on the Pharmaceutical Benefits Scheme (PBS) are supplied at the concessional rate. Once you reach the PBS safety net, you will usually be supplied further PBS prescriptions without charge for the remainder of the calendar year. It may also be possible to save on your medical consultations if your doctors are happy to bulk bill. And, depending on where you live, there could be a regional travel card and rebate on your energy costs.

The cream on the cake is that applicants who receive the card before July 10 will receive a one-off $750 stimulus payment. If the economy tanks in October – as many economists are predicting due to the planned cut-off of JobKeeper, JobSeeker and all the repayment holidays – there may well be more stimulus payments.

National Seniors Chief Advocate Ian Henschke said this week: “The deeming rate is still too high, but it’s so great to see it’s helping people. Some who couldn’t get a part pension might be eligible, and others will now be able to get a CSHC and a bit of cash. I urge them to go online and apply, and also while online consider becoming a National Seniors member or a supporter.”

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