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Possible Struggle for Self Funded Retirees

Self-funded retirees, both present and prospective, are speaking up and taking charge of their own lives.

They are a group that hardly ever receives the respect they merit.

They've been used far too frequently in political games as a demographic football.

The exciting part is that they are multiplying and raising their voices.

If ever there was evidence, go no further than the 2019 federal election, where a debate about "us vs. them" resulted in this silent group speaking out.

I'm referring to retirees who are self-funding now and in the future.

More than at any other point in our nation's history, people who want to take charge of their financial destiny are finding a voice right now, and I for one salute them for doing so.

Superannuation, the Age Pension, and other savings have historically been seen as the three pillars of Australia's retirement income strategy. For the first time, the Australian government's third pillar of the Retirement Income Review's terms of reference included home equity. The current economic climate has negatively impacted many self-funded retirees' main sources of income, including dividends, rental income from homes or businesses, and cash.

Meanwhile, the majority of super funds ended the 2020 fiscal year unchanged. In this situation, increasing drawdowns aren't ideal since it will take time and growth to recover, and it's much tougher to obtain a boost from a pool of capital that is being depleted to make up for lost retirement income.

One approach to increase retirement funding while allowing super accounts to recover is through home equity. There are other factors to take into account as well. With millions of baby boomers approaching retirement, Australia is going through a significant sociological transition. Long-term support will be required for over 5.5 million persons who were born between 1946 and 1964. Even though we are living longer than ever, this is a serious issue because many people lack the assets necessary to support a pleasant retirement for the duration of their expected lifespan.

In the wake of COVID-19, the federal government has implemented a wide range of stimulus measures, but self-funded pensioners seem to have been forgotten about. There is still one tactic that may be worthwhile to pursue if they are aware of how the system functions. Applying for a Commonwealth Seniors Health Card is what it is (CSHC).

Simple requirements apply. You must pass an income test, and be of pensionable age but ineligible for an age pension. No asset test is conducted. The annual income threshold is $55,808 for a single person and $89,290 for a couple. The income used consists of considered income from financial assets in addition to adjusted taxable income (ATI). A couple with approximately $4 million in financial support may qualify for the CSHC and all of its advantages according to the modifications in the deeming rates that went into effect last month.

The last ten years have seen a great deal of change in the world, and technology has been a major factor.

Whether someone is young, middle-aged, or a little older, aspiration is what drives ambition, and technology is what satisfies those needs.

The emergence of social media and the e-tech industry has created a larger audience with whom everyone to share their accomplishments. Society has become much more transparent about what it wants to accomplish.

Many people are thinking they want a piece of the action since we live in a society where it is simple to see what gems are out there in the globe.

Technology also provides a means of igniting our entrepreneurial spirit. A fantastic idea and an online presence can be all it takes.

You can sell your service to a niche local market or effectively market your goods across oceans.

We are noticing an increase in the number of people in this setting who are eager to take charge of their future.

Self-funding is becoming more commonplace for another reason.

We are living longer and are more strong in our latter years thanks to health and longevity. After retirement, we want to plan for decades—not years—of excellent life.

Living longer is not always better

Due to improved lifestyles and medical advancements over the past 150 years, the life expectancy of Australians in retirement has nearly doubled. Australians now live longer in retirement because of the 1992 implementation of mandatory superannuation, which comes with a new decade to fund. According to existing hypotheses, Figure 1 depicts the range of projected increases in longevity for Australian men and women following retirement. Men and women who are 65 years old and retired are predicted to live an average of 84 and 87 years, respectively.

The benefit of long life is a new and longer stage of life that many people will experience well past the age of 90. Your clients' need to prepare for 25–30 years of retirement is a curse.

Family residence versus super

Figure 5 compares the overall average superannuation to home equity for Australian households both while they are working and when they are retired. Superannuation savings are largely spent down ten years after retirement.

At retirement, the average home equity of Australian homeowners is often nearly twice as much as their superannuation. When prior cohorts are 75 years old or older, their home equity savings will be worth more than six times as much as their superannuation.

Australians' superannuation typically lasts for 10 to 15 years, after which many retirees can anticipate another 10 to 15 years of inadequate or underfunded retirement supported by the Age Pension.

How they are in charge

There are many good reasons to take charge of your financial destiny, but I think these three are particularly sound recommendations.

First of all, nothing compares to being the master of your own destiny.

When you develop plans, adhere to a strategy, follow through on the steps, and monitor the process with an eye on the end results, you will feel accomplished.

You get to decide on your own terms and not let other people decide for you.

Additionally, as a retired person who has self-funded your retirement, you are not subject to political changes in welfare.

You are unaffected whether the government decides to reduce or alter the pension or if the department of social services begins stringently vetting retirees' eligibility for payments.

You are not a part of any of those motions.

Having qualified advisors who are familiar with all the factors affecting your investing program is undoubtedly an essential safety net.

Second, those who make sound retirement plans are almost guaranteed to live better than pensioners.

You put in a lot of effort and give up a lot of things throughout your time at work.

You ought to be able to enjoy the time after work, right?

The beautiful thing is that even those who believe they are living on a meagre income can nonetheless retire in great luxury.

The secret is to get going as soon as possible and make it a long-term plan.

People do not want to retire only to have to switch off the heat and lights at 8 o'clock every night due to their inability to pay the electricity bills.

Finally, because they are not a financial strain on social services, self-funded retirees are unusually generous donors to the public coffers. According to projections from the Australian government, the yearly cost of the age pension to the country will be $53.8 billion by the years 2020–2021. That is actual cash that may be used for healthcare, education, or a variety of other services. We need less financial help as we accrue more self-funded retirees on our books.

I don't for a second believe that retirees shouldn't be allowed to recline. They have long made societal contributions through their labour and tax payments. They have a right to take a break from work and receive assistance if necessary. However, it is encouraging for all of us that there is a growing number of people who have had the good fortune to obtain a sound financial education and make arrangements for a pleasant retirement.

In fact, we ought to all be motivated to pursue it.

The biggest financial threats to self-funded retirees

In a letter to the Treasurer, the Alliance for a Fairer Retirement System (AFRS) lists a number of retiree issues that have been made worse by the present COVID-19 crisis.

According to Alliance spokesperson Ian Henschke, "retirees with market investments are being penalised financially, diminishing their capacity to contribute to the economic recovery." As a result, the Alliance has warned that Australia's economic recovery is at risk.

With around 3.8 million Australians aged 66 and older, it's critical to recognize the significant impact this demographic has on the nation's economy.

"Retirees are the single most important contributor to discretionary spending," claims Mr. Henschke.

He said, "Retirees invest in their community as well as the stock market."

According to Challenger's most recent statistics, older Australians are already reducing their spending owing to the COVID-19 situation by 27% on food and 37% on apparel.

Australia's retirement income scheme is a problem.

But the AFRS letter pointed out that the root of the issue is a number of systemic flaws in the retirement system that existed even before the COVID-19 crisis started.

Australia's retirement income system has issues that "are exacerbated during financial crises."

The letter said that because the system "is not able to properly adjust for fast changes in investment outcomes," incomes are "either mediocre at best, or at worst, catastrophic."

According to the AFRS, it should come as "little surprise" that retirees are working to build up their savings because many of them want to avoid the hassles associated with any interactions with the welfare system because many people believe the age pension does not provide an adequate level of income to support retirement.

But retirees who opt to do so face a "multitude of hazards."

The four risks that the AFRS believes older Australians should be most concerned about are as follows:

Lifespan risk

The likelihood that retirement funds won't last as long as the person holding the money is rising as a result of Australians living longer.

Planning to live to a specific age is a risky endeavour, especially in light of the ambiguity surrounding the need for further care and support in the event of a loss of capacity or the need to account for unforeseen health difficulties.

In addition to coping with life's ups and downs, retirees must make sure their money will endure until an unknowable death date, according to the letter.

Expenditure risk

This is a reference to how inflation will cause money's purchasing power to decrease.

The fact that even low-interest rates can substantially harm a retired person's financial security, particularly if that person lives on a fixed income, is of great worry to retirees.

Retirement investors have reduced this risk by making investments in growth-oriented assets, but doing so exposes people to further risk.

The AFRS noted, citing Dr Doug Tarek, that retirees now need to hold significantly more savings to achieve the same level of income due to inflation and declining interest rates.

The following illustration was given:

"A lifetime income stream of $44,250, indexed for inflation, would have been purchased for a couple that invested $1 million in an annuity in 2019. In October 2019, the interest rate was 1.5%. With the same $1 million, they could have purchased an annuity in 2011 that would have produced a $54,300 annual stream. The interest rate is currently 0.25 percent because of the COVID-19 epidemic, making the annuity less than the Aged Pension."

Market risk

Even in the best of circumstances, political and economic developments outside an investor's control might impact the market price of assets.

Due to its high volatility and tendency to "significantly impair retirement funds," the stock market is unsafe for retirees due to its inherent liquidity.

Nevertheless, the AFRS took into account that their capacity to outperform other investments does make them highly recommended for long-term investing as a component of a balanced investment strategy.

An investor's exposure to inflation risk and longevity risk will increase as a result of reduced returns from a diversified portfolio, which does minimize volatility concerns.

As for older and more financially fragile customers who rely on savings, Canstar financial services chief Steve Mickenbecker claimed that the most recent round of cuts had put them "between a rock and a hard place."

Some self-funded retirees may be forced into the pension sooner than anticipated as a result of declining returns and the drying up of other conventional sources of income in the face of a turbulent stock market.

The New Daily was informed by Mr Mickenbecker that "in unwinding the 1.7 percent [rate], there is now a big segment of people who are back to business as usual and earning themselves 1.3 to 1.35 percent on term deposits."

"Banks have already reduced share dividends, and over the previous few years, taking those fully franked dividends has been the lucrative strategy [for self-funded retirees], so their options are looking rather slim."

According to Canstar's analysis, the best rates on 12-month term deposits are provided by Qudos Bank (1.90%) and Firstmac (1.95%).

Mr Mickenbecker explained that savers had to bear the brunt of rate reductions because banks' wholesale funding costs had decreased below the statutory cash rate (0.25 per cent).

Because it's comparably more expensive, he said it's "unsurprising" that banks are now less keen to increase their deposits.

According to Mr. Mickenbecker, "Banks do find themselves in a position where they have to keep drawing retail money to maintain their credit rating."

There are smaller players out there offering better rates, but the major providers don't have to pay as much because they have a strong brand and are well-known.

Regulatory risk

Legislative risk, which is a concern for all retirees, is the last risk factor the AFRS examined.

All citizens are subject to unfavourable legislative changes, but retirees are frequently unable to find new employment to rebuild their nest eggs in the event that unforeseen legislative changes materially reduce their anticipated retirement income.

The letter claims that the only way to manage legislative risk is through advocacy, and even then, it is not always effective.

Governments can help minimize legislative risk by providing lengthy lead-in dates for changes to take effect and by exempting or grandfathering retirees from any proposed changes, according to the advice given to the Treasury.

A Commonwealth Seniors Health Card may be available to some self-funded retirees.

Use the Deeming Calculator on my website, www.noelwhittaker.com.au, to quickly determine your eligibility. You'll see that assets of $2.5 million will give a single individual a considered income of $55,214 per year, which is just below the threshold, and that it is barely on $4 million for a couple. These are the maximum sums you are permitted to hold across all of your financial assets, including managed funds, shares, bank accounts, and superannuation.

The CSHC's value is a question that should go without saying. While it varies slightly from state to state, one advantage shared by all holders is the availability of drugs included in the Pharmaceutical Benefits Scheme (PBS) at a discounted price. You will typically receive additional PBS prescriptions without charge for the rest of the year once you have reached the PBS safety net. If your doctors are willing to bulk bill, you might be able to save money on your medical appointments. Additionally, there may be a regional travel card and an energy cost rebate available, depending on where you live.

The cherry on top is that recipients of the card before to July 10 will also receive a one-time $750 stimulus payout. There may be additional stimulus payments if the economy collapses in October, as many economists are forecasting as a result of the planned termination of JobKeeper, JobSeeker, and all the repayment holidays.

Ian Henschke, the chief advocate for National Seniors, stated this week: "It's wonderful to see that it is benefiting people, even though the deeming rate is still too high. Some people who were not qualified for a part pension may now be eligible, and some others will be able to receive a CSHC and some cash. I advise them to apply online and, while they're there, think about joining or supporting National Seniors."

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